Fitch Ratings Inc. is warning that Canada’s finances face a potential “slippery slope,” says one economist.

“There’s a lot of concern, especially the fact that the deficit stays relatively big, the trajectory for

federal debt remains relatively high,” Charles St-Arnaud, chief economist at credit union Albert Central, said. “I think Fitch is probably more worried that it could be a slippery slope,” St-Arnaud said.

Fitch maintained its rating for Canada of AA+/stable following the budget’s release on Nov. 4, while Moody’s Ratings and S&P Global Ratings maintained the country’s AAA debt ranking. Fitch’s rating is lower because it downgraded Canada’s debt during the pandemic in 2020.

“While Canada’s rating is broadly stable, persistent fiscal expansion and a rising debt burden have weakened its credit profile and could increase rating pressure over the medium term,” Fitch said in a statement. “This may be exacerbated by persistent economic underperformance caused by tariff risks and structural challenges, including low productivity.”

However, rising deficits and a debt-to- gross-domestic-product (GDP) ratio appeared to rankle the agency. Fitch said the expected federal deficit of $78.3 billion in the 2025-26 fiscal year, or 2.5 per cent of GDP, will overshoot its prior outlook for a deficit of $70.4 billion, or 2.1 per cent of GDP.

The agency said that raises the general government deficit, which includes all levels of government, to 3.3 per cent of GDP, higher than the AA median of 2.3 per cent and “substantially higher than Canada’s pre-pandemic deficits, which averaged 0.4 per cent in the two decades prior to 2019.”

But Canada isn’t in any imminent fiscal danger, Fitch said. “Canada can withstand an economic or fiscal shock at this rating level. But that being said, there’s definitely weakness on the fiscal side, but higher, higher deficits and debt levels increasing, so that puts some downward pressure on the profile,” Joshua Grundleger, director of sovereigns at Fitch, said.

Fitch also estimated Canada’s general government-debt-to-GDP ratio will rise to 91.8 per cent in 2026 and 98.5 per cent in 2027, compared with 88.6 per cent in 2024 and nearly double the AA rating median of 49.6 per cent.

The agency expressed doubt about Canada’s ability to rein in its federal-deficit-to-GDP ratio, given that “the Canadian government has a track record of upward deficit revisions, with subsequent budget updates consistently worse than prior projections.”

For example, the federal government broke through three fiscal guardrails established in the 2024 fall economic statement (FES): capping the deficit at $40 billion, reducing deficits and reducing the debt-to-GDP ratio.

In the latest budget, the debt-to-GDP ratio is forecast to rise to 42.4 per cent and 43.1 per cent in 2026 and 2027, respectively, rather than declining to 41 per cent as laid out last year in the FES.

St-Arnaud said he would have liked to see Fitch comment on Prime Minister Mark Carney ‘s use of deficit spending to increase productivity over the long term. For example, much of the announced spending is destined for infrastructure, defence and housing, while the government is trying to spur $500 billion in private investment through the use of business tax credits.

“So, helping now to generate more potential growth later might actually improve your long-term sustainability, that being having too much restraint now and actually falling short in productivity and potential growth later,” he said.

Grundleger said Fitch recognizes the spending announced by Carney is targeted at capital projects meant to improve productivity rather than going to, say, consumption or increased wages. In that sense, the tone of the budget is distinct from the Justin Trudeau years, he said.

“That being said, the devil is always in the details,” he said, including whether the spending increases productivity, where the money goes and what it actually does.

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Parliament still has to pass Canada’s budget. “I will say that the numbers seem to be worsening with each cycle,” Grundleger said. “We don’t obviously think that this unto itself is cause for downgrade; it’s still a very strong credit profile.”