A big deficit? Not so serious, we sometimes hear.
Supporters of budgetary carelessness in Quebec should take a look at what is happening in British Columbia. The Rocky Mountain province has just been devalued by the prestigious S&P agency, a rare event.
And another agency, Moody’s, served a warning to the British Columbia government, attaching a negative outlook to its credit rating.
The discount comes a few months before the elections in this province, scheduled for October 19. Imagine the debate!
What is going on ? The provincial NDP government, on the left of the spectrum, has chosen to open the spending tap wide. It will invest heavily in health and transport infrastructure projects, in addition to financing measures to increase the supply of housing and improve their affordability.
The S&P agency does not pass judgment on the government’s choices. However, it warns lenders that the province has relaxed its budgetary discipline and that its financial situation (deficit and debt) will deteriorate considerably over the next two years.
Okay, the province is one of the most severely affected by the housing crisis, the rising cost of living and population growth. Government decisions are therefore not disconnected.
But according to the agency, other provinces are grappling with similar problems, without having increased their deficits as much. “British Columbia’s fiscal performance will be the weakest among its peers,” the agency writes.
S&P not only lowered the province’s long-term debt rating from AA to AA-, but also raised the possibility of another downgrade if things don’t change within three years.1
The province had the best credit rating of the Canadian provinces. But with this reduction, the province’s borrowing interest rates will increase, increasing interest costs. And once opened, the spending spigot will be difficult to turn off.
And Quebec?
So what ? The situation is reminiscent of that of Quebec. Quebec will have a deficit of 7.3 billion over the next year, or 6.6 billion more than expected.
By dissecting the figures, however, we see that our situation is not as dramatic as that of British Columbia, at least for the moment.
The S&P agency assesses the situation of a province by measuring its budget deficit in proportion to its revenues, but above all, the deficit which includes annual investment expenditures.2
In British Columbia, this second deficit will reach 20.1% of government revenues over the next year. It has increased fivefold over the past three years.
In Quebec, this same deficit should not be as high. Last fall, S&P projected it would reach 8.4% of revenues in 2024-25, compared to 6.2% in Ontario.
However, the S&P report on Quebec was published last November, after the CAQ government’s optimistic budget update. Since then, the deficit forecast for 2024-2025 has exploded, with the agreements reached with the unions.
And now, it is quite possible that the deficit as measured by S&P will cross the 10% of revenues barrier over the next 2 years.
Why fear the 10% threshold? Because S&P warned in its report on Quebec that “deficits of more than 10% of total revenues and significant growth in the debt burden could lead us to lower our rating.” Ouch!3
For the moment, Quebec maintains a rating of AA- at S&P, which is now the second best Canadian province after Saskatchewan (AA), and tied with Alberta (AA-). British Columbia follows, with a rating of AA-, with negative outlook. S&P reports on the new situation in Quebec and Ontario (which is at A+) should be released in June.
Over the phone, the analyst responsible for these S&P reports, Bhavini Patel, tells me it’s the growing trajectory of B.C.’s deficits and debt that is concerning. “I don’t believe that the situation in Quebec will resemble that of British Columbia,” she told me.
Why does Quebec have an identical rating to that of Alberta, whose debt is much lower? Partly because credit agencies judge that Quebec is able to finance its debt with higher tax revenues than in Alberta, whose taxpayers are allergic to taxes.
In other words, the flagship indicator of these agencies – the deficit in relation to income – is more likely to favor Quebec and its social measures, in a way. Critics of the agencies would do well to take note.
That said, Quebec, Ontario and British Columbia are far from being in situations as dramatic as Argentina (CCC rating) or Greece (BB-). S&P judges that these provinces have solid and diversified economies, overall.
Canada, for the moment, maintains its AAA rating, the best there is, as is the case for half a dozen major countries, including Germany, Australia and the Netherlands.
With its repeated large deficits, Canada is however not immune to a haircut, as we saw in British Columbia. To be followed closely after Tuesday’s federal budget…
1. In fact, the new AA rating is accompanied by a negative outlook, a sign of another possible downgrade to come.
2. Normally, the annual portion of government investments is not recorded as an expenditure, and therefore is not included in the deficit. Furthermore, S&P excludes depreciation expenses from the budget balance, in particular.
3. In March, after the Quebec budget, analysts from another agency (Moody’s) wrote that “the drop in budgetary results is a negative credit finding”, without however going so far as to attach a negative outlook to the rating of Quebec.