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Ottawa Shows Restraint Amid Elevated Inflation And A Deteriorating Economic Outlook

Canada’s federal government delivered its Fall Economic Statement yesterday amid a complicated economic outlook. Like many other economies, Canada is facing elevated inflation, rising interest rates, slowing domestic and external growth, and volatile global financial markets. Against this backdrop, the Statement shows that federal fiscal policy aims to act in coordination with the Bank of Canada, or at least not against it, and that public finances are in a stronger position than expected six months ago.

Key highlights:

-- The Statement largely holds the line on new spending initiatives to order to ensure that federal fiscal policy does not counteract monetary policy tightening.
-- The Statement highlights that federal fiscal accounts have markedly improved relative to expectations six months ago. In the Statement’s baseline scenario, federal debt-to-GDP is expected to decline gradually over the projected horizon, reaching 39% in FY26-27, which is 3 percentage points lower than previously projected.
-- While Ottawa refrained from big spending measures in this Statement, the Liberal government faces no shortage of spending pressures. We expect the government’s commitment to sustainable fiscal policy will continue to act as a soft constraint and force it to prioritize among competing demands.

“The Statement’s fiscal restraint, even as the odds of a recession are increasing, show that supporting the effort to quell inflation is a top near-term priority for the government,” said Michael Heydt, Senior Vice President, Global Sovereign Ratings.