Joe Barbieri
0
All posts from Joe Barbieri
Joe Barbieri in Joe the Investor,

Suddenly, Ontario’s Credit Rating Is a Big Deal

Why has Ontario’s credit rating been in the news so much lately? There are warnings about possible downgrades and issues with swelling deficits. (1)(2) The catalyst for all of this activity seems to be a recent election victory by the Liberal party and a pending budget that was not austerity friendly. (1)(2)

What are the reasons for these warnings? Ontario has had debt for years, and it has been steadily increasing for the last 6 years. (3) The federal government has had a similar debt history over the same time period, but no news has surfaced about Canadian federal government downgrades. (4)(5) The weak economy is also being blamed for fiscal targets not being met. This has been the case since at least 2008. This same truth is valid for Canada and most of the developed world – not just Ontario.

The recent Ontario budget is not favourable for balancing its deficit, as there is too much spending involved. There have been deficits for years, and these budgets rarely get balanced. This identical budget was tabled before the election and no issue was raised formally that it would lead to a credit downgrade. The current budget revised short term targets but longer term targets (3 years or longer) for paying down the deficit were not changed. Has anyone thought about what the money is being spent on and whether the return is justified in creating future prosperity? There is a saying among business people that states “you have to spend money to make money”. Does this apply here?

On the flip side, the credit agencies wanted to wait until the election was over before they formed an opinion and did not want to interfere with the election results. They also may have wanted to wait for a period of time once the spending issue became apparent before issuing any warning.

Do the credit agencies not trust the government? How did this trust shift suddenly after the last 10 years of similar fiscal management? Is there more going on to this story than “Ontario needs to reign in its spending”? The lack of originality in the reasoning and the timing are too coincidental for a shift in focus. Austerity is preferred whether it is relevant and useful or not.

Sources:

1) http://business.financialpost.com/2014/07/02/ontario-debt-rating-outlook-cut-to-negative-by-moodys/
2) http://www.cbc.ca/news/canada/toronto/moody-s-downgrades-ontario-credit-rating-1.1287800
3) http://www.ofina.on.ca/borrowing_debt/borrowhistory.htm
4) http://viableopposition.blogspot.ca/2012/03/canadas-debt-and-deficit-history.html
5) http://news.nationalpost.com/2011/03/21/graphic-50-years-of-canadian-debt/
6) http://www.theglobeandmail.com/report-on-business/economy/ontario-needs-credibility-with-ratings-agencies-economists-warn/article19439241/