Will Canada Stay Triple A, Eh?

With new spending promises and tax cuts being announced at a torrid pace, investors are rightly asking: what would this substantial increase in borrowing mean for the Government of Canada’s credit rating?

To answer that question, in this note we dig into the sovereign credit rating methodologies of the big three rating agencies. In this context, Canada’s gross general government debt is currently middle of the pack among comparable advanced economies and is forecast to stay there. So is net general government debt when public pension assets are removed, and it’s best in class when they aren’t. Meaningfully higher defence spending may erode this advantage, but not as much as it would if other countries weren’t also massively expanding their defence budgets. Of course, a broad‑based expansion in public borrowing risks raising global interest rates more generally. Fortunately, Canada’s external risks—current account balance and international investment position—are also currently central among similar countries and are projected to remain so. And Canadian institutional quality remains high, even if it has slipped modestly by some metrics in recent years. Bank of Canada independence further boosts this institutional strength.

We conclude that the likely substantial increase in borrowing ahead probably doesn’t mean much for the Government of Canada’s top‑notch credit rating, at least in the near term.