DBRS Comments on Canada’s 2012 Budget: Staying the Course

DBRS notes that the budget introduced by the Government of Canada (rated AAA and R-1 (high), with a Stable trend) on March 29, 2012, points to sustained discipline and a continuation of fiscal improvement, with the return to balance still projected by 2015-16, if not earlier. As a result, Canada’s debt burden is expected to remain very manageable, which, along with a diverse and growing economy and sound financial system, adds considerable support to the credit profile.

For 2011-12, the government is forecasting a deficit of $24.9 billion, compared with a shortfall of $32.3 billion projected at the time of the June 2011 budget. This marks a notable improvement year-over-year and equates to a modest 1.5% of GDP, which compares favourably with other G7 peers. For the upcoming fiscal year, a deficit of $21.1 billion, or 1.2% of GDP, is anticipated, followed by a gradual return to balance in 2015-16. DBRS notes, however, that given the small size of the projected 2014-15 shortfall – just $1.3 billion – there is a strong possibility that Canada could return to balance a year earlier than budgeted, consistent with the government’s intentions announced in 2011. DBRS takes comfort in the demonstrated track record of exceeding fiscal targets and acknowledges that the very modest deficits envisioned make Canada a standout among its sovereign peers.

Total spending is expected to grow by 1.2% in 2012-13, followed by annual growth averaging 2.5% through to 2016-17. In 2011, the government announced its plan to identify $4 billion in ongoing annual program expense savings. The latest budget indicates that the government has exceeded this target and is expecting to achieve a total of $5.1 billion in annual program savings by 2014-15, with the largest savings coming from national defence and public safety. Transfers to individuals and other levels of government will be the key drivers of spending growth over the years to come.

Elderly benefits represent one of the largest single expenditure items for the federal government and mainly comprise Old Age Security (OAS) payments and the Guaranteed Income Supplement (GIS). To improve the long-term sustainability of these retirement income plans in the face of an aging population, the government will introduce measures to gradually extend the age of eligibility for OAS and GIS to 67 years from the current 65 years. This is not expected to begin until 2023 and will take six years to fully implement.

Only very modest revenue measures are being proposed and include actions to eliminate tax loopholes and phase out tax preferences for certain resource industries. This points to total revenue growth of 2.8% in 2012-13, followed by average annual growth of 5.2% for the remainder of the forecast horizon.

The revenue forecast assumes real GDP growth of 2.1% in 2012, followed by 2.4% in 2013. This is somewhat above the latest International Monetary Fund forecasts of 1.7% and 2.0% in 2012 and 2013, respectively, but nonetheless consistent with the latest private sector consensus. Canada’s economy continues to perform well in relation to its G7 peers, although DBRS cautions that the outlook remains exposed to significant risks, including a strong Canadian dollar, slow pace of U.S. economic recovery and potential disruptions to global growth due to lingering European sovereign debt concerns.

The budget points to a 5.4% increase in gross market debt (the measure tracked by DBRS) to $662 billion, up from an estimated $628 billion as of March 31, 2012. As a result, debt-to-GDP is expected to remain unchanged at around 37% in 2012-13 before gradually trending downward, provided economic growth and the deficit reduction targets unfold as planned. Borrowing requirements are forecast at $268 billion, relatively unchanged from 2011-12.

In summary, the measures announced in the 2012 budget are viewed as achievable and do not portend a wholesale remaking of the scale of the federal government. Given Canada’s sound fiscal and economic performance, the continuation of fiscal restraint is encouraging and remains supportive of Canada’s extremely strong credit profile.

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.