Fitch Ratings has affirmed its ‘AAA’ sovereign rating for Canada, noting that the government has demonstrated fiscal responsibility and has a plan to further reduce debt.

The rating agency affirmed its ratings on Canada with a stable outlook, saying that the ratings are supported by Canada’s institutional and structural strengths, which are, in turn, underpinned by effective policies and a history of macroeconomic and social stability.

Fitch says that the latest federal budget bolsters the country’s fiscal position by delivering on commitments to rein in spending and withdraw fiscal stimuli. It also addresses fiscal pressures stemming from the aging population, which is a key credit risk in the medium term, Fitch notes.

Given the Conservative majority, which was awarded to a government running on a platform of fiscal austerity, Fitch expects Canada’s fiscal conservatism to continue. It also says that gross general government debt is expected to decline as fiscal consolidation proceeds and GDP growth remains steady.

The main risk to the economy is the high level of household debt, Fitch notes. But, its base case scenario assumes a soft-landing in the housing market, as growth in household indebtedness slows in response to more stringent credit conditions. Fitch expects economic growth to average 2.2% between 2012 and 2014 amid external uncertainty.

“Excessive borrowing by individuals is, to a great extent, a by-product of low interest rates, a legacy of the monetary response to the financial crisis. Yet, an imminent normalization of monetary conditions seems unlikely as long as global uncertainty continues, the [US Federal Reserve Board] is on hold and inflation is well behaved,” it says. In the meantime, it expects that efforts to slow household indebtedness growth should reduce the pressure on Bank of Canada to tighten monetary policy.

The ratings could come under pressure, it suggests, if a persistent and significant increase in the government debt burden were to occur; or, if an acute increase in the imbalances of the household sector emerged, heightening the risk of an economic hard-landing and significantly derailing fiscal consolidation.