Feds’ fiscal consolidation plans face risks, Fitch says

The vision of shrinking deficits and debt set out in the latest federal budget is welcome, but the outlook faces challenges, says Fitch Ratings.

In a new report, the rating agency said the federal budget sees improving deficits and debt ratios in the years ahead.

The budget targets a deficit that represents 2% of GDP in the current fiscal year, which is a stark improvement over last year’s 4.6% deficit, Fitch noted.

“Stronger revenues from the economic recovery and high commodity prices and phaseout of pandemic measures account for most of the year-over-year improvement,” it said.

The improved revenue outlook is also expected to drive the government deficit down over the medium term, Fitch said, adding that this “contributes to a gradually falling general government debt to GDP ratio in conjunction with the provinces.”

In fact, federal debt is seen declining to 41.5% of GDP in fiscal 2026-2027 from 46.5% in fiscal 2021-2022, it reported.

“However, looming macroeconomic risks could challenge the government’s ability to meet the targets,” the report said.

Among other things, the prospect of faster monetary policy tightening is growing, which would increase debt service costs and pose risks to economic growth.

“High consumer price inflation, double-digit housing price escalation, fuel and supply shocks and tight labor market conditions have expedited policy actions,” Fitch said.

Nevertheless, the rating agency said that the fiscal vision set out in the federal budget, and the provincial budgets, are consistent with its current “AA+” rating on Canada, and its stable rating outlook.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.