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���������ֳ�-London/New York-29 April 2025: Canada’s incoming Liberal government has promised considerable fiscal loosening that would exacerbate already expanding fiscal deficits, ���������ֳ� says. Canada’s credit strengths offer significant headroom to weather a fiscal or economic shock, but increased structural deficits would pressure its credit profile.

The Liberals, led by former Bank of Canada Governor Mark Carney, won their fourth consecutive federal election victory on Monday. Carney succeeded Justin Trudeau as party leader and Prime Minister in March. Carney will head another minority Liberal government after the party fell short of the 172 seats needed for a majority.

���������ֳ� estimates that if the Liberal policy platform is enacted, it would increase the 2025 and 2026 general government (GG) deficits by 0.4pp of GDP and 0.8pp, respectively. This compares to our GG deficit projections under current policy of 2.7% of GDP in 2025 and 2.4% in 2026. These projections incorporate federal deficits of 1.7% of GDP (CAD54.6 billion) this year and 1.3% (CAD43.4 billion) next year.

As a minority government, the Liberals will have to compromise with other parties to pass legislation, increasing the likelihood that enacted policies will differ from the platform. Nonetheless, further fiscal loosening seems inevitable, as the platform proposes CAD35 billion (1.1% of GDP) of new expenditures in the fiscal year ending March 2026 (FY25) and CAD33 billion (1.0%) in FY26, spread across dozens of new and expanded programs. The Liberal Party and the Parliamentary Budget Office (PBO) estimate these policies would increase the federal deficit by CAD15.2 billion in FY25 and CAD26.2 billion in FY26, to around 2.2% and 2.1% of GDP, respectively.



Canada has experienced rapid and steep fiscal deterioration, driven by a sharply weaker economic outlook and increased government spending during this electoral cycle. (Disagreement over policy differences in last year’s Fall Economic Statement even led to the resignation of Finance Minister Chrystia Freeland). In December 2024, we forecast a GG deficit of 1.1% in 2025 and 0.7% in 2026, but the deficits are now approaching levels that have only been surpassed during the pandemic in 2020 (10.9%) and after the Great Recession in 2009 to 2011 (3.3% to 4.7%).

In the two decades prior to the pandemic, GG deficits averaged 0.4% of GDP. Excluding the three outlier years, the average GG balance was a small surplus 0.3% of GDP. Implementing the Liberal platform would increase GG deficits to 3.1% in FY25 and 3.2% in FY26.

If the Liberal program is implemented, higher deficits are likely to increase GG gross debt (GGGD, which includes federal, provincial and local debt) to above 90% of GDP, although the platform commits to a reduction in debt-to-GDP over the budget horizon. Economic weakness and prior fiscal loosening have already shifted our prior baseline forecast upward from 82% to just under 90% for 2025, nearly double the ‘AA’ median of 50.6%



New revenues would modestly offset higher spending in the Liberal party program, covering around 57% and 20% of new expenditures in FY25 and FY26, respectively. However, estimates for new revenues may be optimistic, as they largely depend on savings from increased government productivity and uncertain revenues from retaliatory tariffs. The PBO’s cost estimates are built on an older economic forecast that excludes tariff impacts but includes heightened uncertainty.

Additionally, the expected deterioration in GG deficits does not incorporate likely fiscal stimulus at the provincial and local levels or the impact of declining asset prices, which may negatively affect pension fund’s fiscal surpluses. Unpredictable U.S. trade policy creates unusual economic forecast uncertainty, and further weakening beyond our baseline – we forecast real GDP growth of 0.1% in 2025 and 0.5% in 2026 – also poses a downside risk.

Contacts:

Joshua Grundleger
Director, Sovereigns
+1 646 582 4462
joshua.grundleger@fitchratings.com
���������ֳ�, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019

Mark Brown
Senior Director, Credit Commentary & Research
+44 20 3530 1588
mark.brown@fitchratings.com


Media Relations: Eleis Brennan, New York, Tel: +1 646 582 3666, Email: eleis.brennan@thefitchgroup.com