The proposed federal budget may lead to growing pressure on Canada’s sovereign ratings, as debt rises, amid ongoing economic challenges, says Fitch Ratings in a new report.
While the rating agency’s credit rating for Canada remains stable at AA+, the latest budget highlights an erosion in federal finances that could result in growing rating pressure in the “medium term,” it said.
“Budget 2025 substantially increases capital expenditure while moderating growth in operating expenditures and delivering modest savings,” Fitch said, noting it has boosted its federal deficit forecast to $78.3 billion (2.5% of GDP) for fiscal 2026 (ending March 31, 2026), up from its previous forecast of $70.4 billion.
The general government deficit, which amounts to 3.3% of GDP, is higher than the median of 2.3% for ‘AA’ sovereigns, and is “substantially higher than Canada’s pre-pandemic deficits which averaged 0.4% in the two decades prior to 2019,” it said.
Assuming that government’s plans for cutting expenses are partially successful, the general government deficit is expected to decline to 2.2% of GDP by 2027, Fitch noted.
However, higher deficits will also boost government debt, the report said. It now forecasts that general government gross debt will come in at 91.8% of GDP in 2025, rising to 98.5% by 2027, which is nearly double the forecast median of 49.6% for AA sovereigns.
This growing pressure on government finances, and potentially the sovereign rating, “may be exacerbated by persistent economic underperformance caused by tariff risks and structural challenges, including low productivity,” it said.
Additionally, rising federal debt “could weigh on provincial debt metrics” Fitch said, “particularly if near-term economic gains fail to materialize.”
And, while the budget sets out a new approach that promises to balance the operating budget by fiscal 2029, leading to a declining federal deficit-to-GDP ratio, Fitch said that the federal government has a track record of upward deficit revisions, and of ignoring planned fiscal constraints.
“Given that these rules are non-binding and prior versions have been ignored, federal finances run a high risk of further deterioration,” it said.