Credit rating agency questions province's ability to control debt

New Brunswick could soon be hit with higher interest payments on its debt after a major Canadian credit-rating agency said the province's economic trends are heading in a "negative" direction.

That's a change from the Dominion Bond Rating Service's earlier assessment of "stable."

The agency said in a press release that last month's budget, which raised spending, increased the deficit, and put off a balanced budget until 2022, calls into question the province's ability to control its debt.

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"DBRS questions the credibility of the current fiscal plan, given the lack of flexibility to respond to unforeseen pressures or fund new programs that are likely to arise as a result of campaign commitments in the upcoming fall election," the agency said in a release.

"There is limited capacity to raise taxes or further constrain spending, meaning that any deterioration in the economic outlook or new spending commitments will result in higher debt."

That's a stinging rebuke to Finance Minister Cathy Rogers' assertion in her budget speech last month that the Liberals had "restored fiscal order" to New Brunswick.

The Jan. 30 budget projected an accumulated provincial debt of $14.4 billion by the end of April 2019.

Credit rating not lowered at this time

DBRS says postponing the balanced-budget target to 2022, a year later than what the Gallant Liberals were projecting, is a sign of "the weakening of fiscal resolve."

The agency is not actually lowering the province's credit rating yet, but it warns that it will lower it if there isn't "a significant improvement in the fiscal and economic outlook that is viewed as sustainable" by the time of its next review.

At the same time, it says to win back its "stable" trend rating, the province must show "meaningful improvement in the fiscal and debt outlook combined with an increased comfort that there is greater ability to absorb unforeseen shocks."

And the agency warns that's unlikely, given the province has already raised taxes and restrained spending — and, it says, has little room to do more.

"This is what we've all been afraid of," Progressive Conservative MLA Dorothy Shephard said on Twitter.

The agency says the province's real deficit in the current 2017-18 fiscal year is not the $115.2 million contained in provincial budget documents but $240 million.

Debt-servicing charges shrinking

That represents "negligible improvement" over 2016-17, the agency says, with the province's debt-to-gross-domestic-product ratio actually growing slightly.

Credit ratings affect the interest rate that the province must pay when it borrows money to sustain government spending. A lower rating can lead to lenders charging a higher rate, which in turn makes it harder to achieve a balanced budget.

New Brunswick's debt-servicing charges — the amount the province must spend on interest each year — has been shrinking as the Gallant Liberals have slowly lowered the deficit since taking office.

The amount is forecast to go from $683 million this year to $675 million next year.

Wrong direction

But this month's budget, which forecasts a higher deficit of $189 million next year, prompted Dominion Bond Rating to conclude the province's finances are heading in the wrong direction.

The release says the province's long-term financial challenges, including the possible withdrawal from NAFTA by the United States and an aging population that will be more expensive to care for, likely mean slow economic growth.

Some of the Jan. 30 budget's revenue projections are already in jeopardy. Rogers estimated $7.2 million from legalized cannabis taxes and retail sales, but that assumed government-run stores would open July 1.

Since then, the federal government has said a delay to let the Senate study the issue further will mean legalization won't happen until sometime in August.