Global sovereign debt will climb past US$100 trillion in the year ahead, according to a forecast from Fitch Ratings. That would represent a rise of about US$7 trillion relative to year-end 2025. Much of the increase will be the result of government spending in the U.S. and China.
“A fairly high and rising debt burden in the sovereign world really means that the fiscal space is shrinking,” said Shelly Shetty, managing director, head of Americas and Asia sovereign ratings at Fitch Ratings in New York City via a webcast on Wednesday. “It gives less capacity to respond to shocks, and obviously increases risk for adverse bond reaction to fiscal slippage or political shocks.”
The global median fiscal deficit is forecast to be about 3% of GDP this year — unchanged from what Fitch expects for 2025. The U.S. and China are forecast to run fiscal deficits of more than 7% of GDP this year.
“This is despite the fact that policy rates have been coming down,” she said. “At this point in time, there is generally broad aversion to increasing taxes. In fact, in the U.S., the One Big Beautiful Bill is delivering tax cuts. And on the spending side, there are long-term pressures coming from adverse demographics, climate commitments as well as defence spending. The political environment globally is also not very conducive for making structural spending reforms.”
Richard Francis, senior director, co-head of the Americas sovereign ratings at Fitch, said Canada should expect a federal deficit at or above 3% of GDP this fiscal year, at the general government level (including all three levels of government and other government entities providing core public services).
“The [federal] budget significantly increased capital expenditures,” he said. “We estimate that debt-to-GDP reached 92% last year. And we’re expecting a pretty large acceleration through the next few years.”
Francis said Canada could see a debt-to-GDP ratio of 99% by 2027. That’s comparable to general government debt levels recorded in the mid-1990s, before then Prime Minister Jean Chrétien’s Liberal government implemented its austerity program.
“We expect some moderation over the next couple years in the deficit,” he said. “But I think there’s some risks that that won’t happen. Partly that’s just given all the uncertainties of the economy.”
The Canada-U.S.-Mexico Agreement (CUSMA) on trade is expected to be renegotiated this year. Francis said that Fitch’s “baseline is that the negotiations will go well.” Ottawa will have to make concessions though.
Francis also raised concerns about the state of U.S. politics.
“We’ve seen a steady deterioration in governance for well over a decade,” he said. “We use World Bank governance indicators in our analysis, and the U.S. has fallen from nearly the 85th percentile over a decade ago to somewhere in the mid-70th percentile. That’s well below the double-A and the triple-A medians.”
President Trump’s call for a criminal investigation of Jerome Powell, chairman of the U.S. Federal Reserve, is only the latest in a line of alarming moves that included an attempt to fire Fed board member Lisa Cook in December.
“Fitch views the Federal Reserve’s independence as extremely important,” he said.
Inflation slowing
On a more positive note, Brian Coulton, Fitch’s chief economist, forecast “the end of the global inflation shock that emerged in 2021.”
The labour market tightening that followed the Covid pandemic “is now changing quite seriously,” he said. Unemployment rates have begun to rise in Europe, at the same time that job vacancies have fallen.
“That is taking pressure off wage inflation,” he said.