The federal government’s irresponsible fiscal discipline may lead to Canada losing its AAA credit rating, especially when comparing its economic policies to those of other top-rated countries.
The Royal Bank of Canada report released on Thursday, serves as a warning ahead of Finance Minister Chrystia Freeland’s new fiscal budget announcement on April 16.
The report is urging the Trudeau government to show discipline in its upcoming budget and not to take its “status as a top-rated sovereign for granted.”
RBC Economist Rachel Battaglia cautions that Canada stands to lose its AAA rating if the government continues to stray from its fiscal budget anchors, which has negatively impacted its credibility on the global stage, thus making borrowing more expensive.
“Any rise in the federal government’s funding costs will trickle down to businesses and households,” reads the report. “Recent provincial budgets have generally painted a deteriorating fiscal picture. A softer economy and rapidly increasing expenses have weighed heavily on fiscal balances and inflated government debt.”
According to Battaglia, Canada is at greater risk of losing its AAA credit rating than other top-rated countries.
“Even though deeper deficits and higher associated sovereign borrowing costs may feel like a distant problem for many Canadians, the impact has the potential to trickle down to most households and businesses,” she added.
Canada currently holds the highest credit rating possible from both S&P Global Rating and Moody’s Investors Service due to its relatively low net level of government debt, however, its household debt is severely leveraged, threatening future stability.
This is in part because of Canada’s record-high housing costs.
“The federal government plays a special role in financial markets. Its so-called sovereign rating affects borrowing rates for all subnational entities including provincial governments and large borrowers such as banks. The latter’s rates charged to customers—for mortgages and other loans—are closely correlated to the sovereign’s rating,” reads the report.
“Therefore, all Canadians have a stake in seeing the federal government meet its fiscal targets. We hope Ottawa shows fiscal discipline in next week’s budget,” it added.
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