Fitch Ratings says Canada's debt could make it more vulnerable during a recession (Getty)

Fitch Ratings is showing concern over Canada’s balance sheet.

“Canada's gross general government debt, combining federal and provincial fiscal accounts, is higher than other 'AAA' rated sovereigns, excepting the U.S, and remains close to a level that is incompatible with 'AAA' status.”

“We continue to forecast the general government debt ratio to fall toward 85 per cent of GDP over the medium term.”

The credit rating agency says it is encouraged by efforts in the latest federal budget to reduce the debt burden.

“However, modest fiscal loosening and sustained deficits will increase the economy's exposure to a downturn,” said Fitch Ratings in a research note.

Fitch Ratings says it’s not sure Ottawa's plan to tighten the purse strings will work.

“Non-interest spending is now programmed at 14.6 per cent of GDP in 2018-2019 but is supposed to fall over the medium term to 13.8 per cent by 2023-2024, an assumption that may not bear out,” said Fitch Ratings.

“The additional spending under the budget plan forecasts the federal deficit to return to close to $20 billion over the next two years with no plan to balance it.”

Fitch Ratings says its growth expectations are broadly in line with the federal government’s. The Liberals revised GDP down to 1.8 per cent this year and 1.6 per cent the year after. Fitch Ratings forecasts 1.6 per cent this year, and 1.7 per cent in 2020.

The credit rating agency isn’t sounding the alarm just yet, but there could be trouble ahead.

“While the budget is broadly in line with earlier trends, the preference for continued deficits and increased program spending over fiscal consolidation could increase the vulnerability of public finances to a faster economic slowdown or sudden shock,’ said Fitch Ratings.

“This is not our base case, but disappointing 4Q18 growth numbers and weakening macroeconomic outlooks in major global economies including Europe, China and other major emerging markets point to downside risks for the Canadian economy.”

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