The Fitch Ratings agency says the latest federal budget underscores the “erosion” of Canada’s finances, and increasing debt levels could put “pressure” on its current ‘AA+’ credit rating.
“While Canada’s rating is broadly stable, persistent fiscal expansion and a rising debt burden have weakened its credit profile and could increase rating pressure over the medium term,” the credit rating agency said in a Nov. 6 statement.
Fitch says Budget 2025 “substantially” increases capital expenditure while slowing the growth of operating expenditures and delivering “modest” savings. The agency noted that the budget deficit for the 2024-25 fiscal year rose to $78.3 billion, which is up from Fitch’s prior estimate that it would be $70.4 billion.
The agency said this translates into a general government deficit of 3.3 percent of GDP, which is higher than the median of 2.3 percent required for the ‘AA’ rating. It projects that Canada’s general deficit will improve to 2.2 percent of GDP by 2027, “assuming a partially successful execution” of Ottawa’s planned reduction in program expenses.
The agency acknowledged that the budget outlines new fiscal rules that promise to balance the operating budget by the 2028-29 fiscal year and maintain a declining deficit-to-GDP ratio, but noted that Ottawa has a “track record of upward deficit revisions, with subsequent budget updates consistently worse than prior projections.”
It also said these fiscal anchors are non-binding, and previous versions included in prior budgets have been ignored, such as Ottawa’s Budget 2024 guideposts of capping the federal deficit at $40.1 billion in 2023-24, maintaining a declining debt-to-GDP ratio, and shrinking deficits.
Fitch had previously downgraded Canada’s credit rating from ‘AAA’ back in July 2020, citing the effects of the pandemic on government finances. The agency said the decision reflected that Canada was likely to run a higher deficit in 2020, as the government spent more to counteract a reduction in economic activity….