DBRS Comments on Manitoba’s 2017 Budget: Aspiration without Action

DBRS Limited (DBRS) has today commented on the Province of Manitoba’s (Manitoba or the Province; rated A (high) with a Stable Trend by DBRS) 2017 budget, which was released on April 11, 2017. The Progressive Conservative (PC) government was elected last spring, and this is its first substantive budget. The government is targeting a gradual return to balance during its second mandate but has yet to articulate a clear plan or timeline to do so. The budget does not make drastic changes but rather points to a slow return to balance founded on the assumption that the government can constrain spending growth to less than revenue growth. While the pace of fiscal consolidation is slower than expected, the outlook for credit metrics remains acceptable for DBRS’s existing ratings. DBRS projects that Manitoba’s DBRS-adjusted debt burden will rise by a further 2.0 to 3.0 percentage points over the medium term to around 47% of GDP. The ratings remain supported by the Province’s diversified and steadily growing economy, favourable demographics, and prudent debt and liquidity management.

The 2017 budget is largely consistent with the direction provided at the time of the last budget. At that time, the government expressed a reluctance to raise taxes or make drastic changes to frontline services and signaled it would gradually return to balance and implement fundamental reforms to improve the efficiency and efficacy of the public sector. Since that time, the government has initiated a number of program reviews and introduced legislation to guide fiscal policy, rationalize collective bargaining and temper expectations around public sector wage growth. In the months leading up to the budget, government messaging suggested that more aggressive measures might be forthcoming, but these were largely absent from Tuesday’s budget. The budget did not include any substantive revenue measures, nor did it include any significant reductions in program spending. While the direction and intent of the program reviews is encouraging, it appears as though the reviews will have a limited impact on near-term results. In fact, the government announced new funding for programs, and ministry appropriations will generally rise. The Province has projected a deficit of $840 million ($1.6 billion on a DBRS-adjusted basis after recognizing capital as incurred or 2.4% of GDP) for 2017–2018, which is only modestly lower than those incurred in 2015–2016 and 2016–2017. Moreover, the plan relies in part on the achievement of $115 million in in-year savings or revenue.

Total revenue is projected to rise by $458 million, or 2.9%, over the prior year forecast, with gains across all revenue categories. Income tax revenue is expected to rise strongly (+6.2%) because of an improving economy and the rationalization of a number of preferential tax measures, which are expected to generate $77 million in savings. Other sources of own-source revenue will post more modest growth or remain relatively stable year over year, which will help to offset slowing growth in federal transfers stemming from some one-time money received in the prior year and more modest growth in equalization transfers.

Total expense is set to rise by $426 million, or 2.6%, over the prior year forecast, which includes the expectation of $115 million of in-year savings. Budget appropriations are set to rise for most ministries, with significant increases for health (+3.2%), education (+2.7%) and social services (+6.0%). The 2017–2018 budget outlines a number of opportunities for possible savings, which could, if all successfully implemented, generate more than $100 million savings.

Over the medium term, the Province expects a gradual improvement in operating results, driven largely by slowing expense growth through public sector reforms and tempering public sector wage growth. The gradual recovery is consistent with previous messaging, but the pace of consolidation is slower than DBRS expected. Moreover, the Province does not appear to have a clear plan: Manitoba has now provided deficit targets for the medium term that are based on simple assumptions for revenue growth (+3.0% p.a.) and expense growth (+2.0% p.a.), but it has yet to demonstrate how these targets will be achieved. Moreover, the Premier has reiterated his commitment to reducing the Provincial Sales Tax by one percentage point during the first mandate, which could reduce revenue by more than $300 million (approximately 2.0%). This appears inconsistent with the Province’s efforts to return to balance.

The Province also released revised estimates for the 2016–2017 fiscal year. The deficit came in lower than expected at $872 million, or $1.7 billion on a DBRS-adjusted basis (2.5% of GDP), with both revenue and expense up significantly over the prior year. This pushed the DBRS-adjusted debt burden to 44.7% of GDP from 42.1% the year prior. Based on the Province’s medium-term plan, DBRS estimates the debt burden will trend upward to about 47.0% of GDP by the end of the current mandate.

The Province expects the economy to continue to post stable and moderate growth over the medium term. Real GDP growth is forecast to average 2.0% in 2017 and 2018, consistent with private sector expectations.

This commentary reflects a preliminary assessment of the Province’s 2017 budget. DBRS will conduct a formal in-depth review of the Province in the coming months and will publish a report at the conclusion that process.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Provincial Governments, which can be found on dbrs.com under Methodologies.