DBRS Comments on Canada’s 2011 Budget: Well-Balanced but Possibly Short-Lived

DBRS notes that the 2011 budget of the Government of Canada was tabled on March 22, 2011, in the House of Commons and shows that Canada (rated AAA and R-1 (high)) remains on sound footing, including sustained expenditure control and a lower-than-projected deficit of $40.5 billion for 2010-11, down from the previous estimate of $45.4 billion. For the fiscal year 2011-12, the government is expecting a deficit of $29.6 billion, or less than 2% of GDP, and a gradual return to fiscal balance by 2015-16, which is the most favourable outlook among G-7 countries.

“In contrast to past fiscal plans that contained sizeable stimulus measures,” says Travis Shaw, DBRS Assistant Vice President, “this year’s budget is characterized by fiscal restraint, with only modest new spending measures foreseen and no tax increases.” In 2011-12, total spending growth of 1.0% is projected, followed by average annual growth of less than 2.0% over the planning horizon. In DBRS’s view, achieving these fiscal targets will require a concerted effort to slow total spending growth, which has averaged close to 6% during the last five years.

Economic conditions are expected to remain supportive of the fiscal plan, with projections for real growth at 2.9% in 2011, followed by growth of 2.8% in 2012 based on the private-sector consensus. This forecast marks a slight improvement from what was expected at the time of the government’s fall update and compares to the latest IMF forecasts of 2.3% and 2.7% for 2011 and 2012, respectively. DBRS notes that the budget incorporates prudence through the use of below-average nominal GDP forecasts upon which fiscal targets are based.

Financing requirements are forecast at $34 billion for 2011-12, which will lead to an increase in gross market debt (the measure tracked by DBRS) to $633 billion, up from an estimated $596 billion at March 31, 2011. As a result, debt-to-GDP is expected to remain relatively unchanged, at around 36% in 2011-12. Although debt-to-GDP is up notably from a low of 26% as recently as 2007-08, it remains well below the peak reached following the recession of the early 1990s.

As proposed, the 2011 budget remains supportive of Canada’s strong credit profile. “However,” says Mr. Shaw, “the budget’s future is fraught with considerable uncertainty as its passage and the fate of the minority government depend on the support of an opposition with diverging interests.”

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.