Ratings Agency Warns of ‘Erosion’ of Canada’s Finances After Budget Release

The Fitch Ratings agency says the latest federal budget underscores the “erosion” of Canada’s finances, and increasing debt levels could put “pressure” on its current AA+ credit rating.

“While Canada’s rating is broadly stable, persistent fiscal expansion and a rising debt burden have weakened its credit profile and could increase rating pressure over the medium term,” the credit rating agency said in a Nov. 6 statement.

Fitch says Budget 2025 “substantially” increases capital expenditure while slowing the growth of operating expenditures and delivering “modest” savings. The agency noted that the budget deficit for the 2024-25 fiscal year rose to $78.3 billion, which is up from Fitch’s prior estimate that it would be $70.4 billion.

The agency said this translates into a general government deficit of 3.3 percent of GDP, which is higher than the median of 2.3 percent required for the ‘AA’ rating. It projects that Canada’s general deficit will improve to 2.2 percent of GDP by 2027, “assuming a partially successful execution” of Ottawa’s planned reduction in program expenses.

The agency acknowledged that the budget outlines new fiscal rules that promise to balance the operating budget by the 2028-29 fiscal year and maintain a declining deficit-to-GDP ratio, but noted that Ottawa has a “track record of upward deficit revisions, with subsequent budget updates consistently worse than prior projections.”

It also said these fiscal anchors are non-binding, and previous versions included in prior budgets have been ignored, such as Ottawa’s Budget 2024 guideposts of capping the federal deficit at $40.1 billion in 2023-24, maintaining a declining debt-to-GDP ratio, and shrinking deficits.

Fitch had previously downgraded Canada’s credit rating from ‘AAA’ back in July 2020, citing the effects of the pandemic on government finances. The agency said the decision reflected that Canada was likely to run a higher deficit in 2020, as the government spent more to counteract a reduction in economic activity.

Soon after the Liberal government won another minority government in April 2025, the agency announced that Ottawa’s plans outlined during the election campaign would put pressure on the country’s credit profile. It said that the government’s plans for $129 billion in new spending over the next four years would result in “considerable fiscal loosening that would exacerbate already expanding fiscal deficits.”

While Fitch has downgraded Canada’s credit rating, other agencies like Moody’s, Morningstar DBRS, and S&P Global Ratings have kept its rating at the highest score of AAA. By comparison, Fitch and S&P Global Ratings give the United States a rating of AA+, Moody’s has given it a rating of AA1, and Morningstar DBRS has given it a ranking of AAA.

In the House of Commons on Nov. 5, Conservative MP Michael Chong noted that Fitch had also warned back in July 2024 that Canada’s rising debt-to-GDP ratio and a rise in its deficit could lead to a credit downgrade.

“Will the government acknowledge that it is putting this country’s credit rating at risk, not to mention that it is saddling younger Canadians with a mountain of national debt,” he said.

International Trade Minister Maninder Sidhu responded that the federal government is looking to unlock “new markets” and “generational opportunities” for young Canadians through budget initiatives like an export readiness program for young entrepreneurs. 

In response to another Tory MP’s question about Canada’s debt levels, Foreign Affairs Minister Anita Anand said that Canada enjoys a sovereign credit rating of ‘AAA’, has the lowest net debt-to-GDP ratio in the G7, and “has been world acclaimed as a home for direct foreign investment and is top of the G20.”