The Manitoba government will have to borrow a record $6.7 billion in 2019-20 to maintain enough cash flow to keep the lights on, pay for expensive infrastructure and refinance old debt. It’s the most the province has ever had to borrow in a single fiscal year.
While the Pallister government expects to balance the books by 2022, soaring provincial debt will be one of its biggest challenges as it enters 2020.
According to a recently released ministerial briefing note for Finance Minister Scott Fielding (all post-election ministerial briefing binders were made public last week), the province will borrow an estimated $200 million more this year than it did in 2018-19.
Nearly half of that $6.7 billion will be used to refinance existing debt as it matures. The other $3.7 billion is needed to cover this year’s deficit and to finance new infrastructure, such as highways, bridges and health-care facilities. The figure includes new borrowing for Crown corporations, the most significant of which is Manitoba Hydro.
"Looking at this in a simplified way, the province will need to borrow approximately $550 million each month for the current fiscal year," the briefing note says.
The province is borrowing about twice as much as it did 10 years ago. That’s largely because the former NDP government posted successive years of deficits and quadrupled its capital spending to about $1.6 billion a year in its last 10 years in office, not including Manitoba Hydro.
As a result, from 2006 to 2016, the province’s net debt doubled to $21.9 billion from $10.6 billion. Debt as a percentage of GDP grew to 33.3 per cent from 21.8 per cent during that period.
That doesn’t include Manitoba Hydro’s debt ($23.5 billion), which nearly doubled over the past five years, largely to finance megaprojects such as the Keeyask hydroelectric dam and Bipole III. Both went significantly over budget.
The province’s debt servicing costs last year exceeded $1 billion for the first time — money that could otherwise be spent on front-line services such as health care and education. That figure also continues to grow.
It’s a lot of debt, and it spooked the major credit rating agencies. Manitoba suffered three credit rating downgrades between 2015 and 2017, which drove up borrowing costs.
The province is expected to balance the books by 2022 — two years ahead of schedule. But it won’t eliminate the need to borrow — not only to refinance existing debt and pay for infrastructure, but also to cover what’s expected to be a shortfall in the province’s core operations for several more years. (The province can be in balance in its summary budget, which includes outside agencies like Crown corporations, but still be in deficit in its core operations).
Meanwhile, finding lenders hasn’t been easy, the Manitoba Finance briefing note said.
That, too, could be an issue as we enter 2020.
"Manitoba, along with our provincial counterparts, is continuing to experience regular periods during the calendar year where investors chose to remain on the sidelines and aren’t interested in potential debt offerings by the province," the briefing note said.
There will be temptation once the books are balanced to start jacking up spending again, including on infrastructure projects, which are debt-financed. Opposition parties and public-sector unions will likely be first in line to demand the government open its purse strings.
Premier Brian Pallister has already spoken about a "fiscal dividend" that will be available once the books are balanced. But the Tories will have to temper that with the reality the province is still borrowing record amounts, largely for new capital spending and to refinance existing debt.
These are the long-term costs of unsustainable spending.
Governments can’t quadruple capital spending, create structural operating deficits and double the province’s net debt over 10 years without causing severe and prolonged financial hardship.
Persistent deficit financing and unsustainable borrowing is bad policy. Left unchecked, structural deficits would have led to higher taxes, higher rates of borrowing and more credit rating downgrades. The evidence on that is pretty clear.
Hopefully, parties of all political stripes have learned that hard lesson.