B.C.’s credit downgrades reflect government’s spending and debt binge

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Appeared in Business in Vancouver, April 15, 2024
B.C.’s credit downgrades reflect government’s spending and debt binge

This week, just over one month after the Eby government tabled its 2024 budget, S&P Global Ratings, one of the world’s preeminent credit-rating agencies, downgraded British Columbia’s credit rating (its third downgrade in three years) while warning about future downgrades if the province doesn’t change its fiscal trajectory.

In short, this latest downgrade may increase the cost of borrowing for the government. Which is bad news for B.C. taxpayers.

According to the budget, the B.C. government will run huge deficits in each of the next three fiscal years, including a $7.9 billion deficit in 2024/25. For perspective, these deficits are larger (in nominal terms) than B.C.’s deficits at the height of the pandemic in 2020.

And this is just the tip of the iceberg. After accounting for long-term spending on capital projects (e.g. schools and highways), the province’s net debt (total debt minus financial assets) will reach a projected $128.8 billion by 2026/27—nearly triple the pre-pandemic level in 2019/20.

This debt explosion is the result of increased government spending. In its 2023 budget, the Eby government planned to spend $79.3 billion in 2024/25 and $80.6 billion in 2025/26. Now, it plans to spend $85.3 billion in 2024/25 and almost $85.8 billion in 2025/26. Put differently, the government plans to overspend by $11.2 billion relative to its 2023 budget plan.

According to some analysts, such spending increases are warranted given current levels of inflation and population growth. But in fact, spending growth far outpaces increases in inflation and population.

Between 2019 and the 2024, the province’s population will grow by a projected 11.0 per cent and prices (i.e. inflation) have increased by 18.2 per cent. So, to keep pace with these trends, the government would have had to increase program spending by 29.2 per cent. But from 2019/20 to 2024/25, the government increased program spending by 51.6 per cent, resulting in a marked increase in per-person inflation-adjusted spending.

Of course, British Columbians must pay for this high spending, deficits and subsequent borrowing (i.e. debt accumulation) through debt interest payments. And in the current interest rate environment, interest payments have become more expensive. According to the government, debt interest payments will reach nearly $1,000 per British Columbian by 2026/27, siphoning off taxpayer money that could have been used for important services or to reduce taxes.

Which brings us back to the B.C. government’s latest credit downgrade. A downgraded credit status can increase the cost of borrowing money for the government in international markets by raising the interest rates it must pay. In other words, the Eby government’s projected debt interest costs for this year and beyond may rise.

According to S&P Global, the province is “at a turning point with respect to the management of its finances” and “B.C.’s budgetary performance will be the weakest of its peers, both domestically and internationally.” Moody’s Investors Service this week also downgraded its outlook for B.C., noting that the “province’s willingness to allow material deficits to continue, along with rising debt levels, also points to weaker governance risk controls and financial management.”

B.C.’s credit downgrades indicate more troubles ahead. On its current trajectory, the provincial government will saddle British Columbians today and in the future with enormous levels of debt, which comes at a significant cost.