April 26, 2024 (MLN): The small increase to Canada’s deficit resulting from the latest Federal budget will have a minimal impact on the country’s credit profile, Fitch Ratings says.
Moreover, the general government deficit is still expected to decline and the debt burden is still forecast to fall by around 2ppts through fiscal years 2026 and 2027.
Canada’s 2024 budget announced nearly CAD53 billion (1.8% of 2023 GDP) in new program spending through fiscal years 2028 and 2029.
This will expand fiscal deficits by a total of CAD10.2bn (0.4% of 2023 GDP) over this period, reflecting the government’s desire to spend an unanticipated upswing in revenue, without undermining their medium-term fiscal objectives.
The new expenditures come amid a weak economic growth outlook. We forecast Canadian real GDP growth to be below 2% for the next three years.
Furthermore, Canada’s general government debt burden is one of the highest among ‘AA’-rated sovereigns.
Out of 18 ‘AA’-rated sovereigns, only three, the United States (AA+/Stable), France (AA-/Stable) and Belgium (AA-/Negative) have higher debt-to-GDP ratios.
Indeed, at 104.1% of GDP in 2023, Canada’s general government debt was considerably higher than the ‘AA’ (50.1%) and the ‘AAA’ (36.8%) medians.
A renewed rise in the general government debt/GDP ratio over the medium term, resulting from a marked widening in the deficit or weakening in economic growth, is a rating sensitivity.
The new spending will be partially offset by CAD18bn (0.6%) in new revenue and CAD26bn (0.9%) in positive fiscal developments since November’s Fall Economic Statement (FES). Economic outperformance and a marginally rosier outlook have driven a positive bump in Federal government revenue.
Canada managed to avoid an expected recession last year, with real GDP growing by 1.1%, more than three times the expected growth rate in Budget 2023.
Since the FES, the government anticipates an extra CAD17.3 billion (0.6% of 2023 GDP) in revenues, over the three-year period between fiscal years 2024 and 2025 and fiscal years 2026 and 2027, owing to unexpected economic and fiscal developments and a further CAD8.4 billion (0.3%) in the subsequent two years.
These positive revenue developments come amid ongoing economic uncertainty, given still-high interest rates, ongoing affordability concerns and global geopolitical and economic challenges.
Had the additional revenues been used for fiscal consolidation instead of new expenditures, the annual deficit would be 0.2ppts to 0.3ppts lower per year, or 0.7ppts over the three-year period.
The proposed new revenues alone would have improved the deficit by an additional 0.3ppts.
A federal election is due in 2025 and many of the new programs aim to address high-profile concerns of voters; including ongoing challenges in the housing sector, where undersupply and high costs have become a considerable concern.
The budget includes CAD8.6bn between fiscal years 2024 and 2025 and fiscal years 2028 and 2029 for housing policy, including CAD4bn to increase the housing supply and CAD4.5 billion for affordable housing and helping the homeless.
CAD0.2bn was allocated to address higher costs of living, particularly by trying to lower grocery and banking costs.
Additionally, over the next five years, CAD7.6bn was budgeted to support the economy, research, innovation and productivity, particularly surrounding AI (CAD2.4bn) and research support (CAD1.8bn).
Another CAD10.5bn was allocated for other social programs; including disability benefits (CAD4.9bn), national Pharmacare (CAD1.5bn), national school food program (CAD1bn) and increases to student loans and grants (CAD1.2bn).
The budget also includes CAD6.4bn for environmental (including CAD1.1bn for electric vehicles), domestic security, and infrastructure programs, CAD9bn to support indigenous communities and CAD10.7bn on defense and foreign policy.
Copyright Mettis Link News
Posted on: 2024-04-26T10:59:58+05:00
