A stronger growth outlook and efforts to boost gender equality, which were outlined in last week’s federal budget, should support fiscal consolidation in Canada, bolstering its credit position, suggests a new report from Moody’s Investors Service Inc. published on Monday.
The credit-rating agency’s report notes that the federal government’s 2018 budget, “which continues the government’s commitment to gradual fiscal consolidation,” is a credit positive. Moody’s notes that the budget forecasts a marginally smaller fiscal deficit and declining debt amid a higher growth outlook than it put forth in the 2017 budget.
“We expect the government to adhere to its fiscal consolidation roadmap, supported by relatively robust growth, which will support the sovereign’s credit profile,” Moody’s report says.
The government reduced its projection for the 2018 deficit to 0.8% of gross domestic product (GDP) in its 2017 autumn update; that was down from the 1.2% of GDP forecasted in the 2017 budget. In addition, Ottawa raised its growth forecast to 3.1% annual real GDP growth from 2%.
“In the 2018 budget, the government retains its higher growth forecasts, projecting real growth of 2.2% in 2018 before growth moderates to 1.6% in 2019,” the Moody’s report notes.
In addition, the Moody’s report says that personal income taxes are expected to grow to represent 7.4% of GDP by 2021, up from 7.1% in 2017, due to expected gains in real income. “We consider these targets achievable,” it says.
Finally, Moody’s says that measures designed to facilitate greater female participation in the labour force could also help boost GDP and, ultimately, the government’s fiscal position, over time.
“Although the effects of these policy measures may take several years to materialize, our recent research indicates that higher female labour force participation mitigates demographic pressure in advanced economies by supporting economic growth, increasing tax revenue and supporting household finances,” the Moody’s report says.
“Increasing female labor force participation will broaden Canada’s economic base and contribute to increased government revenue, supporting both the economic and fiscal strength of Canada’s sovereign credit profile,” the report concludes.