NB debt sparks credit rating downgrade

Blaine Higgs

New Brunswick's credit rating was lowered yesterday by Standard & Poor's Rating Services due to the high tax-supported debt and the demographic issues the province is facing in the long-term.

New Brunswick Finance Minister Blaine Higgs announced on Friday, June 8th, that the province's credit rating has been dropped from A plus to AA minus.

Despite the downgrade in the credit rating, the rating agency said that the Alward administration is on the right track to turning the province's situation around.

Minister Higgs expressed disappointment in the decreased rating.

"I am disappointed in this decision," Higgs told the provincial legislature, according to a CBC press release. "But I am not surprised."

Higgs added that the current situation is largely due to the previous Liberal administration, led by former Premier Shawn Graham.

"When you run the sort of debt [that] the previous government did, you don't just turn that around overnight, and you can't just pay that off overnight," Higgs explained. "Today, we see that years of overspending are continuing to hurt New Brunswick's future."

As a result of the downgrade, New Brunswick is regarded as a higher risk, and it could lead to an increase in the interest rate charged by banks who loan the province money, which could hurt the province further.

Higgs said that the government has consulted with many financial institutions to help determine solutions to the province's fiscal crisis.

"We've met with a number of institutions since the beginning, [and] talked to them about our programs, understanding where they're moving, and a number of initiatives we have in place," Higgs noted.

"I'm not getting any anxiety levels in that world," he added. "So I'm not looking forward for it to have an impact, but we'll have to see how the markets react to it."

Mario Angastiniotis is a credit analyst for Standard & Poor's. Angastiniotis said the province's rising debt costs have led to the downgrade.

"The downgrade reflects our opinion of the province's rapid increase in its tax-supported debt as a percent of consolidated operating revenues to a record level of more than 150 percent in the next two fiscal years and large near-term after-capital deficits that we expect to improve gradually," Angastiniotis told the CBC in a statement.

However, Angastiniotis does believe that the provincial government will accomplish its goal of delivering a balanced budget by 2014.

But Higgs informed the CBC he may need to make deeper spending cuts down the road.

"We have taken a balanced approach and tried to avoid the riots in the streets. This is a message to us and a message to the public that we may need to go farther."

Upon delivering the March 2012 provincial budget, Minister Higgs pointed out that New Brunswick's debt is expected to increase by approximately $738.9 million, bringing the current debt closer to $11 billion. The province's red ink is projected to reach $10.1 billion at the end of the 2011-12 fiscal year.

Despite the apparent need for deeper cuts, Angastiniotis warned that deeper cuts may have a negative impact on the economy.

"Effectively, what they've done to date and what they're planning to do probably will do the trick," Angastiniotis said. "Its just going to take time."

When the deficit is eliminated, Angastinotis agreed with Higgs that maintaining fiscal sustainability and paying down New Brunswick's debt will both be important.

New Brunswick Premier David Alward said at a public meeting in January 2012 that the province's financial disaster and its aging population both affect his sleep at night.

David Alward

The long-term demographic issues faced by the province also were a factor in the decision by Standard & Poor to lower New Brunswick's credit rating. The agency pointed out that "challenges stemming from long-term demographic trends that are likely to affect health care demand and revenue growth" influenced their decision.

Premier Alward announced changes to the province's pension system nearly two weeks ago, also citing an aging population as a factor in the decision.

"To put it simply, our pension system was designed in a time when people worked longer and lived shorter lives," Alward stated on May 31st, 2012.

With files from www.cbc.ca