Quebec now more creditworthy than Ontario

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Appeared in the Ottawa Sun, June 22, 2017
Quebec now more creditworthy than Ontario

Standard & Poor’s decision to boost Quebec’s credit rating last week has an important symbolic consequence for neighbouring Ontario. The move, which raised Quebec’s credit rating from A+ to AA-, means that for the first time ever, Quebec’s credit rating ranks higher than Ontario’s.

For decades, Quebec held a dubious reputation for poor fiscal management, while until the early 1990s Ontario held a reputation for successful fiscal management. So again, the recent upgrade of Quebec’s credit rating—above that held by Ontario—is a remarkable development.

The simple reality is that while Ontario and Quebec are both currently highly indebted provinces, there’s a crucial difference between the two jurisdictions. Quebec has stopped adding new debt and Ontario is still piling it up, with much more new debt expected in the years ahead.

Quebec has run a series of balanced budgets since 2015/16, and, critically, has completely stopped adding to its nominal debt load. In fact, the province forecasts that at the end of its fiscal plan in 2021/22, it will carry almost exactly the same amount of debt (in nominal terms) as in 2014/15. Stopping the debt from growing has meant that population growth and economic growth are, relatively quickly, shrinking the size of the debt burden relative to those key metrics, making the burden easier for Quebecers to shoulder over time.

Compare that to Ontario, where the province just won’t stop adding debt no matter how many warnings it receives from credit rating agencies or even its own fiscal watchdog. In fact, Ontario plans to add approximately $34 billion in new debt over the next three years—barely even a slowdown from the pace of debt accumulation over the last three (approximately $35 billion).

It may be surprising to some that Ontario is still adding debt despite its announcement of a balanced budget a few months ago. But governments can (and often do) keep adding debt, even when their operating budget is balanced, due to spending on capital investments and long-term infrastructure, which aren’t fully accounted for in the government’s operating budget in the year the money is spent. This is what’s now happening in Ontario.

Since Ontario’s debt is growing almost as fast as GDP, the province expects to make very little progress in reducing the size of its debt burden relative to the size of the provincial economy in the years ahead—another sharp contrast to Quebec where significant progress is being made on this indicator every year.

Simply out, Quebec’s passing of Ontario in terms of credit rating is just the latest sign that one of these approaches is working—and the other is not. And taxpayers in Quebec are already benefitting. Consider that debt interest payments in Ontario this year will be approximately 10 per cent higher than in 2013/14. Compare that to Quebec where debt interest payments will be 7 per cent smaller this year than they were in 2013/14. In other words, while Ontarians pay more and more each year in debt service payments, Quebecers have seen their debt service payments fall in recent years. This frees up resources for other priorities including education, health care, etc.

The recent news from S&P only helps make this clearer—both of Canada’s largest provinces face severe fiscal challenges, but only one is taking active, practical steps to address those challenges in the near-medium term. And it’s not Ontario.