‘Both absolute and relative’: Economist on Canada’s AAA credit rating

Randall Bartlett, Deputy Chief Economist at Desjardins, joins BNN Bloomberg to discuss Canada's economic stance and it's chance at maintaining a AAA credit rating.

As Canada plans to increase spending on areas such as national defence while financial markets absorb the recent downgrade of U.S. Treasuries, an economist doesn’t believe Canada is at risk of a credit downgrade of its own, despite large deficits already accounted for.

Prime Minister Mark Carney‘s government plans to borrow $612 billion in gross domestic issuance during the 2025 to 2026 fiscal year, exceeding levels seen during the COVID-19 pandemic, according to a report from Finance Canada.

“While we think the debt to GDP ratio is certainly tracking in the wrong direction, Canada is starting off from a very strong fiscal position,” Randall Bartlett, deputy chief economist at Desjardins told BNN Bloomberg in a Friday interview. “Ultimately, as its fiscal position degrades along with all other major developed economies going forward, a big part of that being defence spending, Canada is well positioned to continue to maintain a Triple AAA credit rating for the foreseeable future unless something significant hits Canada as an adverse shock.”

Moody’s, a provider of credit ratings, research and risk analysis, downgraded the U.S. debt rating to AA1 from AAA in May.

Canada’s federal government borrowed $444 billion in 2021 and $593 billion in 2020. Canada’s net debt, which considers financial assets to meet debt obligations, increased by 12.5 per cent year-over-year in the third quarter of 2024.

Net debt is relatively low when compared to other G7 countries, however when gross debt is considered, Canada’s 112.5 per cent, reflecting total liabilities without accounting for financial assets, is higher than China’s 96.3 per cent, according to data from the International Monetary Fund.

Bartlett said he expects the government to issue more debt as Ottawa announced a deficit of $61.9 billion for 2023 to 2024 in its fall economic statement last December, coming in higher than expected. The government at the time said its budget was aimed at spurring investment in Canada to counter moves toward economic protectionism from the U.S.

“We’re expecting to see bigger budget deficits that were planned back at the time of the fall economic statement back in December and as a result there is going to be more debt insurance to fund larger deficits as a result of higher spending and lower taxes,” said Bartlett.

Canada announced it would boost defence spending at two per cent of GDP this fiscal year, resulting in Ottawa to spend an additional $9.3 billion beyond current defence-spending plans after years of pressure from NATO allies. The government then said it would commit to a NATO pledge to spend five per cent of GDP on defence by 2035, marking the biggest increase since the Second World War.

“This is at a time when most advance economies are going to be running larger deficits and issuing more debt as a result of a need to fund a larger defence envelope than what they previously expected. A rating is both absolute and relative,” Bartlett said.

Canada also expressed interest in the United State’s golden dome military defence network, which would require the country to spend US$71 billion.

The government plans to release a budget in the fall highlighting ways they plan to manage debt while prioritizing spending in different avenues.