Fed fiscal consolidation plans face risks, says Fitch

The budget targets a deficit of 2% of GDP for the current fiscal year, a marked improvement from last year’s deficit of 4.6%, Fitch noted.

“Higher revenues from the economic recovery, high commodity prices and the phasing out of pandemic measures explain most of the year-over-year improvement,” he said. .

The improved revenue outlook should also lower the public deficit over the medium term, Fitch said, adding that it “contributes to a gradual decline in the public debt-to-GDP ratio in conjunction with the provinces.”

In fact, the federal debt is expected to decline to 41.5% of GDP in fiscal year 2026-27, from 46.5% in fiscal year 2021-22, he reported.

“However, looming macroeconomic risks could call into question the government’s ability to meet the targets,” the report said.

Among other things, the prospect of more rapid monetary policy tightening is rising, which would increase debt servicing costs and pose risks to economic growth.

“High consumer price inflation, double-digit house price increases, fuel and supply shocks and tight labor market conditions have accelerated policy actions,” Fitch said.

Nonetheless, the rating agency said the fiscal outlook set out in the federal budget and provincial budgets is consistent with its current “AA+” rating for Canada and its outlook for a stable rating.

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