Credit where credit is due - The Orca

Credit where credit is due

Rob Shaw 2

Rob Shaw: BC’s credit rating was downgraded – but once you factor in the reasons given why, it shouldn’t come as a surprise, or a mark against anyone but the ratings firms.

The B.C. government had its credit rating downgraded by two financial firms this week because it veered into unprecedented deficit to fund the health care to save people’s lives, and the economic aid to save people’s businesses, during the COVID-19 pandemic.

If that sounds ridiculous to you – well, that’s because it is.

The largest health crisis to grip the world in modern history has put a lot of things into perspective.

One of them should be that using credit ratings as proof of prudent fiscal management fails to show us the full picture of the budgetary choices actually made by parties in power.

Nonetheless, here we are.

Standard & Poors and Fitch both downgraded the province’s credit rating in the past week, citing the B.C. government’s decision to go into deficit to fund health care and other services during the pandemic.

For what it’s worth, Alberta and Saskatchewan also received downgrades in May – but Ontario and the federal government had their ratings re-affirmed in June and April, respectively.

The downgrade makes it marginally more expensive for the B.C. government to borrow money, thereby raising the amount of every taxpayer dollar it spends on interest.

“The COVID-19 pandemic’s blow to the provincial economy has turned after-capital results into large deficits and is elevating the burden of tax-supported debt such that the Province of British Columbia’s (B.C.) key fiscal and debt metrics are no longer comparable with those of ‘AAA’ rated peers,” wrote S&P.

“The widening of deficits is explained due to larger-than-expected pandemic-related health care spending,” the agency added in its report, while dropping B.C. to a rating of AA+.

Fitch downgraded B.C. from AAA to AA+ and its outlook from stable to “negative.”

“As with all Canadian provinces rated by Fitch, British Columbia’s debt sustainability is sharply deteriorating due to the fiscal strain caused by the pandemic at the provincial and federal levels,” it wrote.

B.C. is expecting to run an $8.1 billion deficit in the 2019-2020 fiscal year, which marked the first year of the pandemic and ended March 31. It has budgeted an almost $9.7 billion deficit for the current year.

The vast majority of this spending is going to health care, economic recovery aid and contingencies set aside in case things get worse.

But credit agencies don’t care about what the money is being used for. They simply look at cold hard numbers on a spreadsheet and shoot out an analysis that involves things like debt-to-GDP ratios and liquidity forecasts.

Those are valuable economic indicators, to be sure. But they don’t tell you about the difficult balancing act governments had across the world, trying to stay afloat when COVID forced a complete rewrite of fiscal plans.

Fitch took a larger swipe at the Canadian government, saying its deficit spending during the pandemic – which paid for things like the CERB benefit and billions of dollars of other provincial programs – also reflects negatively on B.C.’s books.

Sorry, but no.

Spending by governments to keep families and businesses afloat during an unprecedented crisis might look like red ink on a ledger to a New York ratings agency, but in the real world it saved livelihoods and lives. Record mass layoffs and people who didn’t have the money to afford rent received assistance that kept them from becoming homeless, losing their homes, or worse. Businesses that would have had to foreclose on operations were able to tough it out for a few more months with tax deferrals and grants.

Every penny was worth it.

Some would argue we didn’t go far enough in funding a proper sick pay program, or tying up certain programs, like B.C.’s $1,000 benefit recovery payment, in so much red tape that people didn’t take advantage of all the funding available.

Credit ratings have long been fodder for political parties to distort and use as weapons in their bid to paint their opponents as irresponsible fiscal managers and keepers of the public purse.

You’d hope that given the magnitude of the crisis, the Opposition BC Liberals might not rise to the bait. Alas, no.

“Governance is just like running a household,” Tweeted BC Liberal MLA and leadership candidate Ellis Ross. “Too much debt and too high credit card interest payments has a long term effect. For a government who believes in deficits, this will have consequences.”

“Seems like every mishap under the NDP is going to be blamed on the pandemic,” posted BC Liberal Mike Bernier, as he retweeted the credit rating downgrades. “Maybe it’s time they start governing.”

Despite the downgrades, both ratings companies spent most of their reports praising B.C.’s overall economic position, saying it is poised to rebound stronger than most Canadian provinces.

“Fitch views the province’s current multiyear budget plan as very conservative,” it wrote, adding it “expects British Columbia to narrow deficits faster than its Canadian peers, chiefly through spending control measures.”

S&P cited B.C.’s large resource endowments, high-ranking liveability, proximity to Asian markets, key sectors like natural gas and real estate, and the upcoming $40 billion LNG Canada project as positive signs the province will come back roaring.

“We also expect B.C.’s financial management practices will remain very strong,” it wrote.

“Although the contingencies that were embedded in the 2020 budget did not prove to be sufficient, this was the case for all provinces despite considerable unanticipated direct support from the federal government.

“The civil service remains experienced and qualified to effectively deliver fiscal policies. We believe that the province has well-defined financial policies and well-documented financial plans that provide visibility. We also believe that management of debt and liquidity is prudent.”

It may be that the current BC NDP government’s weak point is its history in the 1990s of reckless financial management of the province’s books.

But the two new credit downgrades don’t prove that.

And it may be that Premier John Horgan’s Achilles heel is the public perception that he’s ballooning government with expensive social programs.

But the reports don’t prove that either.

What we do have is an April provincial budget by the BC NDP that was modest in its new proposals – so much so that its chief praise came from the province’s business community for its continued economic aid, and its most vocal criticism from social advocates dismayed at the lack of overall new spending.

In the end, this government’s critics would be wise to find other ammunition than the two credit ratings if they hope to make a head-on attack on premier Horgan’s fiscal record.

And the credit ratings agencies themselves should rethink their approach too. Punishing governments for going into deficit to save the livelihoods of ordinary people and business owners during an unprecedented crisis includes more calculations than just the numbers on a spreadsheet.

The ratings agencies risk irrelevancy in the minds of the public if they can’t better reflect at least a smidgen of the real world outside of their financial ledgers.

Rob Shaw has spent more than 13 years covering BC politics, now reporting for CHEK News and writing for The Orca. He is the co-author of the national best-selling book A Matter of Confidence, and a regular guest on CBC Radio.