As Canada gears up to ramp up spending on national defense, economic experts are weighing in on the country's financial future. Despite facing significant deficits, one economist firmly believes that Canada is not in danger of experiencing a credit downgrade.

Prime Minister Mark Carney's government is projected to borrow a staggering $612 billion during the fiscal year 2025 to 2026, a figure that surpasses even the heights of borrowing seen during the COVID-19 pandemic. So, what does this mean for Canada’s fiscal health?

Randall Bartlett, deputy chief economist at Desjardins, spoke with BNN Bloomberg, discussing the country's credit standing amidst rising debt. "While the debt-to-GDP ratio is trending in the wrong direction, Canada is starting off from a very strong fiscal position," he emphasized. He believes that, despite future fiscal challenges—largely fueled by increased defense expenditures—Canada is well-equipped to maintain its prestigious Triple AAA credit rating for the foreseeable future unless a severe economic shock occurs.

In contrast, the U.S. recently saw its debt rating downgraded from AAA to AA1 by Moody's, raising concerns in financial markets. Canada, meanwhile, remains in a relatively favorable position. In 2021, the federal government borrowed $444 billion, increasing to $593 billion in 2020. Data reveals that Canada’s net debt rose by 12.5% year-over-year in Q3 2024.

When compared with other G7 nations, Canada’s net debt is comparatively low. However, its gross debt level stands at 112.5%, eclipsing China’s 96.3% according to International Monetary Fund statistics. Bartlett pointed out that with Ottawa announcing a deficit of $61.9 billion for the 2023 to 2024 fiscal year, additional debt issuance is expected to fund this growing deficit.

The government is responding to international obligations by committing to boost defense spending to 2% of GDP, which translates to an extra $9.3 billion beyond existing budget plans. This marks a significant commitment to NATO, with a long-term goal of spending 5% of GDP on defense by 2035—the largest increase since World War II.

Bartlett notes the broader context: "We’re expecting to see bigger budget deficits as advanced economies are compelled to issue more debt to address defense needs they hadn’t previously anticipated. A credit rating is always both absolute and relative," he added.

Additionally, Canada is exploring joining the U.S. military defense network, which would involve a jaw-dropping expenditure of $71 billion. As the fall budget approaches, the government is expected to unveil strategies to manage debt while navigating increased spending priorities.

In the face of these fiscal dynamics, the question remains: Can Canada maintain its esteemed credit rating amidst these challenges?