Canada’s financial profile continues to strengthen according to a new report by bond rating agency Standard & Poor’s.

“Impressive debt reduction and successful inflation targeting give Canada fiscal and monetary flexibility to cope with downturns in the business cycle. A strong public sector balance sheet, and policy stability based upon wide political consensus, augur well for Canada’s long-term growth prospects,” it notes

“The stable outlook incorporates the expectation that fiscal policy will continue to be prudent after the 2004 federal elections despite growing political pressure to increase spending on health care and on urban development,” S&P says. “Adherence to current macroeconomic policies should keep Canada on a virtuous cycle of moderately declining debt and interest payments.”

S&P explains that budget surpluses and continued economic growth have reduced the federal government’s debt burden, placing Canada in a better position to meet the fiscal challenges of an aging population than many other OECD countries. Gross federal government debt (including all market debt, accrued pension, and other liabilities) is projected to decline to 54% of GDP at fiscal year-end 2005 (ending March 31, 2005) from 77% a decade earlier.

Excluding pension and other accrued liabilities, the federal debt is likely to approach 34% of GDP at fiscal year-end 2005 from 58% a decade earlier, it says. The public sector’s net external debt may reach 40% of current account receipts from nearly 70% six years earlier.

It predicts that trend GDP growth is likely to exceed 3% in the medium term, thanks to stronger public finances, lower taxes, renewed public spending on education, and growing economic integration with the U.S. “Inflation will likely be 2%, similar to the level in rated peers, thanks to stable monetary policy.”

The report also notes that the banks have gotten stronger over recent years in terms of capital, reserves, and risk management and are supervised by a strong regulatory system. “The financial sector is likely to strengthen gradually in coming years as foreign banks gain better access to the payments system and customers get more protection from a new consumer protection agency,” it says. “More importantly, growing pressure from the securities industry against the currently fragmented provincial regulation of securities markets may lead to regulatory harmonization.”