British Columbia's Credit Downgrade

Provinces' Finances On Shaky Ground
Credit Rating Downgrade

British Columbia, like most of Canada, is experiencing economic turmoil that seems to worsen by the day. The recent credit rating downgrade is yet another challenge to this government's ability to keep our fiscal house in order.

The recent downgrade of British Columbia's credit rating by S&P Global Ratings from 'AA' to 'AA-' is expected to have significant implications for the province's debt servicing costs.

The downgrade reflects concerns over British Columbia's persistent and substantial deficits, with operating deficits projected to be about 10% of operating revenues and after-capital deficits exceeding 20% of total revenues. 

These fiscal challenges contribute to a steep increase in debt, with tax-supported debt (paid from general tax revenues) expected to reach 228% of operating revenue by the end of fiscal 2028. This means for every $1.00 in provincial revenue, there will be $2.28 in debt that must eventually be repaid from those same revenues.

In summary, the credit rating downgrade is likely to result in increased debt servicing costs for British Columbia, reducing fiscal flexibility and potentially impacting funding for public services. Addressing the underlying fiscal challenges will be crucial to mitigate further financial strain.

British Columbia's dangerous reliance on debt

Until recent years, British Columbia had run a pretty tight fiscal ship, so to speak. The current administration seems unwilling or unable to get its affairs in order.

Historically, British Columbia has maintained a relatively moderate debt-to-revenue ratio compared to other provinces. In the fiscal year 2014/15, taxpayer-supported debt-to-GDP ratio was approximately 18.5%, which was lower than many other Canadian provinces at that time. However, recent forecasts indicate a significant increase. The debt-to-GDP ratio is expected to climb from 22.9% in FY 2025/26 to nearly 35% in subsequent years, reflecting a substantial rise in debt levels relative to the province's economic output.

The Provinces' deficit financing hazards.

The province on course to having tax supported debt equal to 228% of tax revenue is a red flag that should not be ignored. It is of concern for many reasons :

• This level of debt relative to income is seen as 'less resilient' to economic shocks (e.g. recession, trade downturns, disasters).
• More tax revenue has to go toward interest and repayments, leaving fewer funds for education, healthcare, infrastructure, etc.
• Rating agencies penalize this kind of metric by downgrading credit ratings (which BC just experienced). That results in rising interest rates on future borrowing, increasing debt servicing costs.
• Governments may become trapped in a cycle : cut services, raise taxes, or borrow more — all of which have political and economic downsides.

Imagine a household earning $100,000 per year. If that household had $228,000 in non-mortgage debt (e.g. credit cards, personal loans), you'd say:

“Whoa — you’re very over-leveraged. I better have a plan to stabilize my finances before lenders get nervous.”

The same logic applies to governments.