Politics

Vaughn Palmer: Agency stands pat on B.C.’s credit rating, for now

Opinion: The strength of the economy, the province’s fiscal record and the amounts socked away in contingency funds, persuaded Morningstar to make no change in the rating

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VICTORIA — The B.C. government’s Budget 2024 got a passing grade this week, albeit with a few caveats, from one of the big four credit rating agencies.

The analysis released Monday from Morningstar DBRS did not overlook concerns about the budget that Finance Minister Katrine Conroy presented last week — starting with the growing gap between spending and revenue.

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“The budget forecasts a deficit of $7.9 billion in 2024—25, compared with a $5.9 billion deficit now anticipated in 2023—24,” wrote the agency. “This equates to a shortfall of four per cent of gross domestic product.”

The trend line was worse than Morningstar had anticipated last year.

“British Columbia’s debt outlook has deteriorated. The debt burden is expected to rise substantially as spending ramps up for budget related investments.”

Nor did Conroy’s budget and three-year fiscal plan “present any plan for a return to balance.”

Debt is on the rise as well.

“The province projects net debt-to-GDP to reach 21 per cent in 2024—25 and anticipates that this will increase to 27.5 per cent by 2026—27.” The latter number was also higher than the agency’s expectations in 2023.

“Given the higher deficit projections and no plan to return to balance, we expect debt to gradually rise over the medium term,” concluded the analysts at Morningstar.

The growing debt will drive up the province’s interest payments.

In the last budget under Premier John Horgan, debt servicing accounted for $1.3 billion annually. In the year starting April 1, that will climb to $2 billion, more than the government currently spends on the ministries of housing, public safety, forests, attorney general or transportation. Two years hence, annual interest payments are forecast to reach $3 billion.

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Verdict: “The budget plans for substantial increases in spending on priority areas, higher deficits, and a larger borrowing program. We expect this to result in reduced flexibility over the years to come.”

Having detailed the pessimistic side of its analysis, the agency noted some reasons for optimism, too.

First, there was the resilience of the B.C. economy. Growth was slow last year and is expected to be so for the first half of 2024. Then the outlook improves.

“Growth is forecast to resume an upward momentum over the medium term as economic activity rebounds, inflation eases into the target range, and interest rates trend lower,” wrote Morningstar.

“Economic growth is also expected to be supported by strength in labour markets and export growth driven by increased liquefied natural gas production and recovery for key trading partners.”

This year the Finance Ministry took a more optimistic view of the growth prospects than did the private sector forecasters, the agency noted.

Nevertheless, “we view the forecasts as reasonable assumptions, albeit susceptible to downside risks from persistently high interest rates and commodity price volatility.

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Then there was B.C.’s comparatively good fiscal record of outperforming expectations.

“The province’s historically prudent fiscal approach, consistent track record of outperformance, and strong balance sheet continue to lend stability to its credit profile,” wrote the agency.

The Eby government this year abandoned B.C.’s long-standing practice of including a forecast allowance in the budget as an extra cushion against a sudden decline in revenues mid-year.

The last budget and fiscal plan of the John Horgan government included allowances of $1 billion in each of three years.

The departure “could at the margin, add to downside risks to fiscal performance,” Morningstar acknowledged. (The hedging had me recalling what Ernest Hemingway said about how he went bankrupt: “Two ways. Gradually, then suddenly.”)

Still, the agency noted how the latest budget and fiscal plan included another margin of safety in the form of $11 billion in unallocated contingency funds over this year and the next two.

Premier David Eby has already indicated a willingness to tap those funds to pay for everything from fighting wildfires to “supporting British Columbians” in times of crisis.

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“Contingencies enable us to respond to emergencies as well as other issues that may arise during the year,” the premier told reporters Friday.

Such as the need to construct a platform for the fall election, no doubt.

Presuming there are any contingency funds left over after that exercise, they could be used to reduce the deficit. We won’t know until long after the votes are counted when the public accounts are released in the summer of 2025.

In any event, the strength of the economy, combined with the province’s fiscal record and the amounts socked away in contingency funds, persuaded Morningstar to make no change in the provincial credit rating.

It remains “AA high with a stable trend”, where it has been throughout the NDP’s time in office.

On the day after the budget was released, Opposition leader Kevin Falcon predicted “almost certainly we’re going to see credit rating downgrades as a result of the total irresponsibility of this budget.”

He may be right about that sooner or later. The Moody’s, S&P and Fitch rating agencies are yet to be heard from.

For now, Finance Minister Katrine Conroy can treat the Morningstar rating as vindication for her budget day claim that the B.C. debt burden remains manageable.

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