The deficits forecast in Tuesday’s federal budget are unlikely to affect Canada’s government bond rating, Moody’s Investors Service says.

The rating agency notes that the government is in a relatively good position to face the effects of the current global recession.

Nevertheless, it says that the tax cuts included in the budget could possibly lessen the country’s future fiscal flexibility, reducing the government’s revenue base. “The question becomes how quickly the government can return to surplus. The period of deficits is a bit longer than we expected,” according to Steven Hess, Moody’s vice president and lead analyst for Canada. The government now forecasts four years of deficits, although the first two account for the bulk of the deficit spending, it says.

“Although Canada first felt some effects of the U.S. and global credit crisis, the country is now being hit by a second shock of global recession, particularly the U.S. recession,” added Hess. “Still, the government has fiscal room to deal with this situation.” Canadian real GDP may decline by about 1% in 2009, according to Moody’s report.

The government projects that Canada’s debt position will worsen in the coming couple of years. However, Moody’s says that the damage to the government’s balance sheet from the credit crisis and recession is relatively less in than other similarly-rated governments, particularly the U.S., the UK and some other Western European countries.

It cautions that a prolonged recession in the U.S. and global economies could keep Canada’s deficits larger than in the budget projections, although this is not Moody’s current expectation. “Nonetheless, with the ratio of federal revenues to GDP falling rather steeply to under 15% in the next fiscal year, compared to 18% at the beginning of the decade, room to deal with any further shocks is now more limited,” it says.

IE