The claim: “We’ll have room to manoeuvre because our plan has been rated AAA by international credit rating agencies. Only Germany and Canada have unanimous AAA credit ratings, because our plan is responsible and reasonable when it comes to our finances.”
— Liberal leader Justin Trudeau responds during Thursday’s French-language debate to a question about the national debt, deficit and Canada’s potential “wiggle room” in the event of a recession.
The facts: The government of Canada is rated AAA — the best possible grade — by all four major international credit ratings agencies, S&P, Moody’s, Fitch and DBRS.
Trudeau’s contention that only the Germans have a similarly high rating is probably a slip of the tongue: Canada and Germany are only G7 nations rated AAA. But nine other countries, including Switzerland, Sweden, Norway, Denmark, Australia and New Zealand, currently enjoy the same status.
What is more debatable is the idea that the AAA rating is a ringing endorsement of Canada’s finances, or the suggestion that it will offer some protection come the next recession.
During the 2015 election, the Liberals promised that they would run three years of “modest” deficits before balancing the books in 2019.
For the fiscal year that ended in March, the federal deficit was $14 billion. And the spring budget forecast a shortfall of $19.8 billion in 2019-20.
The current Liberal platform, which promises billions in new spending, predicts that the deficit will rise to $27.4 billion in 2020-21 and then slowly shrink to $21 billion by the end of a second mandate.
(The NDP, Conservatives and Green Party are also planning to run large deficits, should they win power.)
For months now, Trudeau has been telling voters that the country can easily afford to spend and borrow more. Canada’s net debt-to-GDP ratio is 30.9, he points out, less than half of what it was in the early 1990s. Already the lowest ratio in the G7, it is projected to continue to decline — marginally — hitting 30.2 in 2023-24.
“This question around deficits, obviously, has been one that has led to a lot of conversations, a lot of attacks or critiques from our political opponents, the legitimate questions from journalists and, quite frankly, worries from Canadians,” Trudeau told The Canadian Press last December. “Who are the experts in terms of sustainability of a fiscal plan? I’d suggest that the international bond ratings agencies – S&P, Moody’s and those folks know what they’re talking about … The fact that the international ratings agencies are giving us a thumbs up right now should reassure people.”
But the credit rating agencies aren’t quite as bullish on the Liberal plans as Trudeau suggests.
In March, Fitch issued a pointed warning about Canada’s combined level of federal and provincial debt, saying that it increases the danger of a recession and the chances of a rating downgrade.
“Canada’s gross general government debt, combining federal and provincial fiscal accounts, is higher than other ‘AAA’ rated sovereigns, excepting the U.S, and remains close to a level that is incompatible with ‘AAA’ status,” the firm noted.
And the company’s predicted growth rates for the Canadian economy — 1.3 per cent in 2019, and 1.7 per cent in 2020-21 — are modest at best.
Other ratings services like DBRS have expressed concern about the overheated housing markets in Vancouver and Toronto and the “key domestic vulnerability” of high household debt. Currently, Canadians owe $1.77 for every $1 they make — up from $1.09 in 2001. Sustainable for now, but a potentially huge problem should interest rates spike.
While it’s obviously better as a country to be rated AAA when you’re looking to borrow money, it’s not exactly a guarantee of a soft landing in a recession.
For example, Ireland and Spain were both rated AAA before the 2008-09 global banking meltdown. And while the United States managed to keep its top-tier status through that financial crisis, the country was downgraded in 2011 due to its budget fights and persistent political gridlock.
It’s also worth noting that the rating agencies are hardly infallible — the toxic mortgage securities that triggered the last global recession were almost all rated AAA until they proved to be worthless junk.
The verdict: It’s complicated. Canada is among the handful of nations that enjoy unanimous AAA status, but it’s more a case of being the best of a bad bunch than the star status that Trudeau claims.
Sources: Country credit ratings, Trading Economics; Sovereigns rating list, Country Economy; Choosing Investment Now: The Liberal Fiscal Plan and Costing, Liberal Party of Canada; Canada ends 2018-19 fiscal year with narrower budget deficit than forecast, Reuters; Federal government’s deficit to grow to $19.8B in 2019-20 fiscal year, Canadian Business; A Responsible Fiscal Plan, Liberal Party of Canada; Liberals to boost spending and extend deficits while taxing luxury goods and internet giants, CBC News; What voters need to know about deficits and the debt, CBC News; Canada’s credit rating should ease worries about federal deficits, Trudeau says, Globe and Mail; Fitch warns Canada’s debt close to level incompatible with ‘AAA’ status, Bloomberg; Fitch Affirms Canada’s Ratings at ‘AAA’; Outlook Stable, Fitch Ratings, DBRS Confirms Government of Canada at AAA Stable, DBRS; Debt-to-income picture improved slightly in 2nd quarter, CBC News, Remaining countries with AAA credit ratings, NBC News; United States loses prized AAA credit rating from S&P, Reuters, The Credit Rating Controversy, The Council on Foreign Relations.