Credit Rating Agency Warns About Ottawa’s Fiscal Plan

The Canadian flag flies atop the Peace Tower on Parliament Hill in Ottawa on Oct. 30, 2024. The Canadian Press/Sean Kilpatrick

Shortly after Liberals secured another minority government, a credit rating agency says the spending plans outlined during the campaign will put pressure on Canada’s credit profile.

The spending promises made by Prime Minister Mark Carney point to “considerable fiscal loosening that would exacerbate already expanding fiscal deficits,” Fitch Ratings said in an April 29 note.

Credit ratings are used by investors to help assess the ability of an entity, in this case a country, to repay a debt or meet a financial obligation, such a repaying holders of sovereign bonds.

The Liberals’ costed platform promises $129 billion in new spending over the next four years and consecutive deficits which would add nearly $225 billion to the federal debt.

The previous Liberal government under Prime Minister Justin Trudeau had forecasted a $42.2 billion deficit in fiscal 2025-26 in its last Fall Economic Statement. The Carney Liberals have projected a $62.3 billion deficit next year. This exceeds the Trudeau government’s fiscal anchor of maintaining the deficit below 1 percent of GDP.

“Canada’s credit strengths offer significant headroom to weather a fiscal or economic shock, but increased structural deficits would pressure its credit profile,” said Fitch.

The agency said the minority status of the government could lead to actual spending differing from the platform, while adding that “further fiscal loosening seems inevitable” given the scale of new planned expenditures.

“Canada has experienced rapid and steep fiscal deterioration, driven by a sharply weaker economic outlook and increased government spending during this electoral cycle,” said Fitch.

Carney has defended his fiscal plan, saying some of the spending should be considered investments. He has also pledged to reduce the annual growth of government spending to 2 percent, after it was 9 percent under the previous government.

“It’s an entirely new government, it’s a fundamentally different approach,” he said on April 21. He added that Canada is in the “worst crisis of our lifetimes,” alluding to U.S. tariff threats, and that his fiscal plan “meets the moment.”

Several rating agencies such as Moody’s give Canada the highest score of AAA, while Fitch gives Canada the rating immediately below that of AA+. The agency had last affirmed this score in July 2024, citing the country’s “strong governance” and macroeconomic policy framework delivering “steady growth” and “generally low inflation.”

On the flip side, Fitch had also noted a “weakened fiscal position” reflecting “rapid expenditure growth amid a stagnant economy.”

‘Top AAA-rated’

Canada’s strong credit rating had often been touted by the Trudeau government to defend against Conservative Opposition charges that it’s taking on too much debt and that the country’s economy is faltering.

“We have been there to invest for Canadians responsibly. We still have one of the top AAA-rated economies in the world. Our fiscal plan is sustainable and responsible,” Trudeau said in spring 2024 in defence of his budget.

Before the mini-budget was tabled later that fall, then-Finance Minister Chrystia Freeland was asked by reporters whether exceeding her own fiscal guardrails could risk Canada being downgraded by credit rating agencies.

“We do take Canada’s fiscal position seriously. Fiscal sustainability is really important to our government,” she said in December 2024.

A few days later, as she was scheduled to table the Fall Economic Statement (FES), Freeland resigned from cabinet. In her letter of resignation to Trudeau made public, Freeland said the prime minister had informed her he was removing her from finance. She was still expected to deliver the FES.

In her letter, Freeland also criticized Trudeau for using “costly political gimmicks” at a time when Canada should be bracing for U.S. tariffs, referring to a two-month sales tax holiday and $250 cheques to Canadians announced at the time.

Freeland’s position as finance minister appeared to be under threat shortly after Liberals lost the Toronto-St. Paul’s riding in a June 2024 byelection, with anonymous sources from the Prime Minister’s Office telling media Freeland was to blame for not effectively communicating the government’s economic agenda.

Asked by reporters at the time if she had received assurances from Trudeau that she would stay on as finance minister, she responded, “I do have the confidence that I need to do my job effectively.”

Freeland also said that as finance minister, “you have to say ‘no’ a lot of the time” to proposed spending plans. “That’s how we keep our AAA credit rating,” she said in July 2024.

Freeland lost the Liberal leadership race to her longtime friend Carney. She was appointed as transport minister in Carney’s first cabinet in March. The prime minister will be announcing his new cabinet in the coming days.