Provincial governments may be focused on eliminating their deficits and consolidating their finances, but subdued economic growth in 2012 and 2013 will test their ability to meet those goals, says Moody’s Investors Service in a new report.
The rating agency’s report says that modest economic growth means that provinces generally won’t be able to grow their way out of budget gaps, and so fiscal consolidation will have to take place over many years. And, while revenues continue to grow at a moderate pace, provinces are facing expense pressures, particularly from priority programs in health and education, it notes.
“The speed and scale of adjustment will vary by province, given the different magnitudes of deterioration and economic prospects,” the report says, noting that, while growth for Canada as a whole is expected to remain moderate, it will be uneven across the provinces. Resource-rich Alberta and Saskatchewan are expected to lead the way, but the growth prospects for most other provinces remain relatively subdued, Moody’s says.
“The provinces have the fiscal flexibility to reverse the recent financial deterioration, but the task will be more challenging for some and provinces still need to clearly elaborate how they will achieve their medium-term targets,” said Jennifer Wong, associate vice president at Moody’s and author of the report. “A failure to communicate and implement clear, realistic and effective fiscal consolidation plans could lead to downward rating pressure for some of the provinces.”
That said, the rating agency adds that it does not anticipate widespread rating adjustments in 2012 because the core factors underpinning provincial ratings — including the provinces’ strong shock-absorption capacity and solid institutional framework — will not be adversely affected in the year ahead.