Should we worry about the federal government’s finances as much as our own?

The personal finances of the nation would be tested in a long trade war, and the same applies to the federal government.

In its most recent economic statement, the government announced a larger-than-expected $61.9-billion deficit for the past fiscal year and forecasted a $48.3-billion shortfall for 2024-25. This history of spending consistently exceeding revenues raises questions about the government’s ability to respond to the trade war and meet other obligations like higher defence spending.

Is there a point just ahead where there will have to be cuts to spending, services and programs, or even tax hikes? Households struggling with high living costs have to wonder about this not only for themselves, but also for children who will be future taxpayers.

Recently, the bond raters at Morningstar DBRS offered some reassurance about the state of the federal government’s finances in the near term. An excerpt from a recent commentary from the company: 

“We maintain the view that Canada’s credit profile (rated AAA with a Stable trend) remains very strong despite the changing domestic political landscape and macroeconomic challenges, including the ongoing impact of U.S. tariffs. Canada’s deficit compares favourably with other G7 countries, leaving it flexibility to respond to current shocks; however, we won’t know the full impact of the fiscal response until the results of the election are known and the incoming government formalizes its fiscal plan.”

Morningstar DBRS said that neither the Conservatives nor Liberals had released a costed breakdown of their election promises when the commentary was written. Both parties have promised tax cuts, which strain federal finances, and increased defence spending.

Complicating the outlook is the likelihood of what Morningstar DBRS refers to as a mild recession in 2025. This isn’t strictly a Canadian problem – tariffs applied globally will weigh on the United States and other countries as well. 

“The outlook for federal finances is one of larger deficits and rising debt,” the Morningstar DBRS commentary said. But Canada can handle it. Deficit spending must end at some point, but there’s room in the near term for the country to respond to the trade war with supports for workers and businesses.