(Photo of Finance Minister Joe Ceci courtesy of Global News)
The NDP government of Alberta has only been in power for two years, but in those two years the credit rating of the province has dropped five times, the last time being this past May. What is most alarming about this drop is that it didn’t just go down one spot, but two and now sits at A+ which is a far cry from the AAA rating the province enjoyed not that long ago.
Once the latest news hit the proverbial fan, the opposition parties and experts about these matters alike all started to voice their opinions, and by far the most critical voices are saying that those in the Notley government are bad managers for the province.
While you may not think that an A+ rating is a bad thing– after all Ontario has that same grade too– to tumble from such a high ranking to one so low in so short a time doesn’t bode well for the province. It also doesn’t help to know that Ontario is the country’s biggest debtor, and Quebec, New Brunswick and Nova Scotia also share in that A+ rating. Another thing to think about is that both Saskatchewan and British Columbia are now ahead of Alberta in the credit game, as both provinces are AA rated.
If we as individuals want to borrow money we head to the nearest bank or other financial institution and go from there. When a government wants to borrow money however the game is a whole lot different. Government debt is in the form of a bond and investors then purchase those bonds which gives the government the money they need now. In return the investors get a promise to be paid back at a later date. The willingness of investors to buy bonds from a government then is what determines the borrowing rate for the borrowing in the first place.
The market for government bonds is quite substantial, with over $1.2 trillion worth of direct federal or provincial bonds outstanding and more are issued on a regular basis. Credit downgrades though only increase the cost for governments to borrow, and if Alberta keeps getting downgraded, it will translate to millions in debt servicing costs that will be passed onto the taxpayer.
In Canada there are three agencies that rate the provinces. They are S&P, Dominion Bond Ratings Service and Moody’s Investors Service. It was S&P who demoted Alberta to its current A+ rating, with projected deficits over the next two years combined with rapidly growing debt cited as the main reasons. What this means is that S&P have concluded that the province’s budgetary performance has significantly deteriorated and is a lot weaker now than it was comparted to that of both international and domestic peers.
Not surprisingly, the Alberta Finance Minister, Joe Ceci has defended his government’s management and said while they could have made deeper cuts that would have pleased agencies like S&P (and resulted in a longer and deeper recession) they instead decided to spend to support growth, create jobs and work to protect the families of Alberta. He went on to say that the credit rating overlooked the positive things that are happening in Alberta and that their plan was “starting to pay off” for Albertans. The economy is recovering, he says and it is supposed to grow by 2.6% this year which would be the largest increase in the country. The NDP are also happy to report that there were 40,000 new jobs created since last summer.
What the opposition parties are saying is that the economy in Alberta actually shrunk by nearly 8% since the NDP took office and the province has one of the highest unemployment rates in the country, Calgary having the highest rate in the country among major cities. They also state that 60,000 more Albertans are out of a job than when the NDP took over and that most of the growth in the economy that they like to talk about it is more to do with slightly higher oil prices, recovering export markets and the rebuilding efforts in Fort McMurray and not from NDP spending.
Members of the Wildrose Party are saying that the provincial government is imposing ‘disastrous budgets and policy’ at a time when the province can’t afford it.
Over in the PC camp, they are calling the NDP efforts ‘mismanagement’ and wonder how a party can go from a AAA rating and a $1.1 billion surplus two years ago to today where we have an A+ rating and an $11 billion deficit.
All told, the NDP deficit is projected to be $10.3 billion this year which is four times larger than the combined deficits of the other nine provinces together. S&P speculates that Alberta will be $94 billion in debt by 2020 which would be $23 billion more than the NDP wants to admit.
So are the NDP mismanaging the province? Should they show some restraint and undertake fiscal reforms and try to stimulate the economy like their critics suggest? Is everything going well in the province? Everyone has an opinion but if you put your money on the credit rating and those who crunch the numbers and come up with ratings in the first place, it looks like the province is in financial straits.