DBRS Comments on Canada 2013 Budget: Opting for Simplicity in a Soft Growth Environment

DBRS notes today that the Government of Canada (rated AAA and R-1 (high), with Stable trends) released its 2013-14 budget on March 21, 2013, marking a continuation of fiscal recovery and prudent debt management. The economic climate remains subdued but the government remains committed to restoring fiscal balance by 2015-16, unchanged from the objective stated in the previous year. A gradual improvement in fiscal performance combined with the expectation for modest debt reduction over the near term provide DBRS with considerable comfort that Canada will maintain its strong credit profile.

For 2012-13, a deficit of $25.9 billion, or 1.4% of GDP, is anticipated. This is somewhat weaker than the $21.1 billion shortfall forecast in last year’s budget yet consistent with the government’s revised outlook presented last fall and viewed by DBRS as reasonable, given the deterioration in economic growth conditions. The budgetary deficit is expected to resume its downward trend in 2013-14, with a projected deficit of $18.7 billion, or just 1.0% of GDP, and a return to balance is foreseen in 2015-16. In short, Canada is expected to remain in an enviable position in relation to other G7 peers.

The budget proposes refinements to the exercise in expenditure growth curtailment initiated last year. The government plans to introduce measures to help modernize the public service by targeting efficiency and productivity improvements. New spending initiatives, although a focal point of the budget, are relatively modest and include funding for skills training and apprenticeships to help match qualified workers with vacant jobs, a renewal of economic development funding and extension of tax relief for the manufacturing sector. In addition, federal infrastructure investment is expected to total $70 billion over the next ten years and includes a renewal of the Building Canada plan, which was previously scheduled to expire in 2014. Overall, spending growth is projected to be limited to less than 1.0% in 2013-14 – a challenging target should economic growth remain weak – followed by average increases of 2.7% between 2014-15 and 2017-18.

Total revenues are forecast to grow by 3.8% in 2013-14, rising to an average of 4.9% between 2014-15 and 2017-18. Revenue measures are also relatively modest and include steps to close tax loopholes and modernize certain tariffs. This will help to mitigate the impact of a slower economic growth outlook on revenues. Real GDP is assumed to grow by just 1.6% in 2013, followed by 2.5% in 2014. It should also be noted that the government has prudently adjusted downward the private sector average nominal GDP used to forecast revenues. This results in a revenue forecast with a $3.0 billion cushion in each year of the fiscal plan. Although somewhat muted as compared with previous years, key external risks include uncertainty regarding U.S. fiscal policy and European sovereign debt concerns.

Gross market debt (the measure tracked by DBRS) is projected to reach $665 billion by March 31, 2013, roughly in line with expectations, resulting in a debt-to-GDP ratio of around 37%. This is expected to mark an inflection point for Canada’s debt burden as assets purchased in 2008 and 2009 under the Insured Mortgage Purchase Program (IMPP) will begin to mature, helping to reduce debt by almost 3% in 2013-14. As a result, debt-to-GDP is forecast to fall to 34%, which is below the level seen a decade ago. Total borrowing requirements are estimated at $242 billion in 2013-14. Of note, a combination of lower expected Treasury bill issuance and longer-term bond issuance should lengthen the average term to maturity of the debt portfolio, as the government is considering the issuance of 40-year or longer bonds. This should help to gradually reduce refinancing risk – a risk highlighted in DBRS’s last annual review of Canada.

In summary, the steady path toward fiscal balance outlined in the latest budget, and the expected reversal in debt-to-GDP, reaffirms Canada’s solid credit position in relation to sovereign peers and provides flexibility should growth continue to disappoint.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.