Higgs budget critiqued by credit agency as leaving ‘little room’ for error

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The Higgs government’s new budget leaves “little room” to absorb the pressures of a slowing economy, says a credit rating agency that had been praising New Brunswick for its fiscal prowess through the pandemic.

Moody’s says it means that this budget could be different than the last ones that resulted in strong surpluses.

“New Brunswick is the only Canadian province to consistently post balanced budgets since 2018, including during the volatile and uncertain years of the pandemic,” Moody’s associate managing director Michael Yake writes in a new report on the budget.

“This track record was achieved by controlling spending growth which was below revenue growth.

“However, this relationship of growth rates seems to be diverging in the current budget where spending is growing faster than revenue. This exposes the province to two key risks for 2024, namely a slowing economy and increased demand for spending on social programs.”

While both of these pressures are present every year, Moody’s states “they are heightened in 2024.”

Budget math

The Higgs government’s budget projects roughly $600 million in new revenue in the year ahead.

It’s a significant figure highlighting a major amount of fiscal room when considered on top of the $247.4 million surplus in the fiscal year that just ended.

It means that if the government was to hold the line on spending, it would have more than three quarters of a billion dollars as a fiscal cushion.

But the new budget also forecasts an added $800 million in expenses that is also above the $300 million it ran over budget last year.

It’s a formula the credit agency doesn’t like.

The result is the projection of a narrow $40.9 million surplus, a figure in the ballpark of what the Higgs government has pitched in the past, and then dramatically outperformed.

But Moody’s argues that, this time, there’s less of an opportunity to see extra revenue growth, and a greater risk that expenses will balloon.

That’s as the new budget forecasts economic growth to slow to just 0.7 per cent in the year ahead.

Following three consecutive years of robust expansion, employment growth is expected to moderate to 1.2 per cent in 2024.

Wages and salary growth are expected to decelerate in step.

Growth in household disposable income is projected to slow to 3.1 per cent in the year ahead from highs of 5.5 and 4.9 per cent over the last two years.

Additional revenue

Nearly half of the extra $600 million revenue in the new budget is coming from additional federal transfers, dollars Moody’s says is “reliable.”

That includes a massive $2.897 billion equalization transfer that the feds told New Brunswick would flow in the fiscal year ahead, a figure that’s up another $266 million from last year.

But the Higgs government is also counting on more than $300 million in new own-source tax revenue, predicting an additional $133 million in HST revenue, an extra $120 million from personal income tax, $83 million in corporate income tax, and $42 million in new property tax revenue.

In doing so, the Department of Finance is forecasting that the real estate market in New Brunswick will again heat up and population growth will continue paying dividends.

The government is projecting that New Brunswick’s population will grow another two per cent in the year ahead “driven primarily by rises in net international migration,” according to an economic outlook document accompanying the budget.

It means roughly an additional 20,000 people in the province by the end of 2024.

Finance then predicts that it will spur on housing prices, and the revenue that comes with it.

“New Brunswick’s housing resale activity is forecasted to gradually rise in 2024,” reads the economic outlook document.

“The increase in housing demand will be driven by population growth, diminishing impacts of previous interest rate hikes, and a gradual improvement in financial conditions.”

In 2023, provincial home sales amounted to 9,083 units, marking a decrease of 13.6 per cent compared to 2022. The outcome was the result of homebuyers continuing to adapt to interest rate increases, reduced savings and limited supply.

Home prices peaked in July 2023.

Meanwhile, Finance also suggests labour shortages could aid household income and spending power.

“Wages and salaries growth is expected to decelerate in 2024, primarily due to the slower pace of employment growth,” reads the economic outlook. “Nevertheless, the rise in the province’s minimum wage and the persistent pressure on wages stemming from ongoing labour market shortages could partially mitigate the slowdown in income growth.

“Consequently, primary household income is forecasted to increase by 4.2 per cent in 2024.”

Risky forecast

Moody’s comments come after Yake told Brunswick News just last week that New Brunswick could be on the verge of a credit rating upgrade due to the province’s recent fiscal management.

“The track record of surpluses is quite good,” Yake said. “We have provinces that have deficits and consecutive deficits over the same period.

“New Brunswick is the only AA2 (credit rating) with a positive outlook, so it’s performing the best among the broad majority of Canadian provinces.”

But the new report states that the 2024-25 Higgs government budget leads to “only a minimal positive impact on our forecast of the province’s debt burden relative to our previous forecasts.”

“In our opinion, the province is nonetheless exposed to risks should any aspect of their economic forecast be affected by unforeseen challenges – either through lower immigration levels, weaker employment levels, lower household spending or private investment,” reads the report.

“The strong population growth and affordability concerns are also adding to spending pressures, particularly those that are closely related to social and well-being programs.

“Should economic activity be slower than planned, demand for services that support households, and in particular support to address affordability concerns, will increase adding to budget pressure.”