Moody’s Investors Service says that the Canadian federal budget presented on Tuesday, despite some lower tax and higher spending initiatives, still shows declining debt ratios over the medium term, although the decline is less than the government had projected earlier. Nonetheless, the rating agency says that this trend, together with Canada’s overall economic and institutional strengths, is compatible with the country’s Aaa rating and stable outlook. Although the rating stance remains unchanged, Moody’s says that slower economic growth this year, together with the tax and spending initiatives, means that the budget surplus is lower than the government had earlier estimated, even though the headline figure is higher. The assumptions for real GDP growth in 2015 included in the budget was moved down to 2.0% compared with a 2.6% figure included in November’s Fiscal Update. A drop in investment in the energy sector is a major factor in the lower growth figure. However, more significant for government finance, according to Moody’s, is the downward revision in nominal GDP growth from 4.3% earlier to 1.6% in the budget. Lower nominal GDP growth is largely due to the much lower oil price. The lower nominal GDP will have an effect on government revenues and, therefore, also on the budget balance. The combination of lower economic growth and the tax and spending measures has affected the federal budget balance this year but particularly over the medium term. Whereas in the fiscal update the government had projected a surplus of CAD1.9 billion, equivalent to 0.1% of GDP, in the 2015-16 fiscal year, it is now projecting a surplus of CAD1.4 billion, also equivalent to 0.1%. The budget projects gradually increasing surpluses over the period through 2019-20, but the surpluses are smaller than they were in the fiscal update. Whereas the fiscal update projected that the ratio of federal debt to GDP would decline to 24.3% in 2019-20 from its estimated level of 31.5% at the end of 2014-15, the new projections show the ratio falling to 25.5%. Despite the less favourable figures, the overall trend over the medium term still indicates federal government finances are improving. However, the budget surpluses are quite small, and any further slowing of the economy would likely return the budget to deficit even in the later years. Moody’s says that Canada’s federal debt remains relatively low, allowing for some fiscal flexibility in future years should it be required. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
The material has been provided by InstaForex Company – www.instaforex.com