Citing Ontario’s “sizable” structural deficit, Dominion Bond Rating Service has downgraded the trend on the province’s long-term credit rating to negative from stable.

The rating agency said Friday that the trend change primarily reflects:

  • the sizable structural deficit faced by the province;
  • the rather limited actions taken so far to contain expenditures and address the imbalance as highlighted by the 7.5% spending increase delivered in this year’s budget;
  • the province’s rapidly rising debt burden, and;
  • the uncertainty surrounding the ability of the province to implement the reforms necessary to restore spending discipline and fiscal soundness.

    However, the credit ratings themselves are confirmed, and the short-term trend remains stable.

    Earlier Friday, Moody’s Investors Service also issued a report on Ontario. It said the province’s current Aa2 ratings and stable outlook continue to be supported by a large and diverse economy, and a manageable debt burden.

    DBRS noted that in 2003-04,the province closed the year with a DBRS-adjusted deficit of $6.9 billion, more than three times the original forecast. Total debt, as measured by DBRS, jumped by $8.4 billion to $131.6 billion. This added nearly 1% to the debt-to-GDP ratio, which nonetheless remains relatively low at 26.7%. It notes that, according to budget estimates, the province is facing a large shortfall of $6.0 billion in 2004-05.

    Sizable spending increases are budgeted for most major spending areas, especially in education. “Total spending is slated to rise by 7.5%, which appears rather generous in the current fiscal situation,” says DBRS. However, revenue is expected to grow by 9.7%, supported primarily by the impact of a new health care premium and accelerating economic growth on tax revenues and higher federal transfers.

    “Reflecting the weak fiscal balance, debt is projected to grow by $8.4 billion in 2004-05, bringing the burden to $139.9 billion or 27.3% of GDP,” DBRS says. It notes that the province plans to gradually restore fiscal balance by 2007-08 with the help of a new four-year results-based planning approach, which focuses on fiscal accountability, efficient service delivery, and improved asset management. Expense growth is projected to be limited to 2% annually over the next three years, allowing for gradual fiscal improvement. “However, the details of the plan have yet to be fully developed, leaving some uncertainty in the provincial fiscal outlook.”

    “The province maintains a relatively low debt burden, which provides flexibility to take on the new debt anticipated this year without unduly eroding its credit profile. As a result, DBRS could remove the negative trend if tangible progress is made towards closing the structural imbalance as outlined in the fiscal plan,” it says.