Downgrade warnings grow louder for B.C.
Credit agencies have flagged weakening fiscal management as debt approaches 40 per cent of GDP and interest costs surge
B.C.’s fiscal position has rapidly deteriorated in recent years. While credit rating agencies have yet to render their verdict on Budget 2026, the province remains on an unsustainable path and at risk of a fifth consecutive rating downgrade in as many years. That would drive up borrowing costs and strain an already ballooning debt load.
As recently as 2021, B.C. ranked among the world’s strongest subnational jurisdictions, with near-balanced budgets, low debt and a coveted AAA credit rating. Its creditworthiness rivalled fiscally disciplined governments such as Zurich, Basel and Western Australia—indicating ample flexibility to weather recessions or pandemics. Today, B.C.’s fiscal flexibility is greatly diminished. B.C.’s credit rating sits just one notch above Prince Edward Island, and Newfoundland and Labrador, a striking reversal that signals less capacity to assist households and businesses during the next economic shock.
The warnings have been clear. Following last year’s budget, S&P Global said, “We believe the province is at a turning point with respect to the management of its finances”, and cautioned, “B.C.’s budgetary performance will be the weakest of its peers, both domestically and internationally.”
Moody's echoed that assessment. They downgraded the province, citing “a continued weakening in governance and fiscal and debt management, from high standings.” Both agencies assigned a negative credit ratings outlook, signalling that further downgrades are likely if the current path persists.
B.C.’s fiscal decline reflects that operating expenses have grown by 39 per cent since fiscal 2021-22 while revenues have grown by 18 per cent. Future revenue growth is likely to be subdued because the economy is growing between 1.3 and 1.9 per cent per annum, well below its long-term average of 2.5 per cent per annum. It doesn’t matter whether you’re running a household, a business, or a government, one cannot increase spending at twice the pace of revenue and borrow the difference for long. The laws of arithmetic inevitably take over.
Budget 2026 does not place the province on a sustainable footing. It projects a record $13.3-billion deficit in 2026-27, which is $3.1 billion higher than forecast a year ago, equivalent to 2.9 per cent of GDP, with similarly large shortfalls in subsequent years. By comparison, at the height of the COVID-19 emergency in 202-21, when unemployment exceeded 13 per cent and parts of the economy were shuttered, the deficit stood at $5.6 billion, or 1.8 per cent of GDP.
Notably, record deficits persist despite tax hikes and modest efficiency measures. Budget 2026 raises the lowest personal income tax rate, freezes the indexation of income tax brackets for inflation, expands the provincial sales tax, and increases property taxes—measures expected to generate $4.3 billion in net additional revenue over three years. The government also plans to find net savings of roughly 1.5 per cent of operating expenses, or $4.4 billion over three years, through efficiencies and modest staffing reductions. Yet despite these measures, record deficits persist.
To finance operating deficits and capital spending, B.C.’s taxpayer-supported debt-to-GDP ratio—a key measure of fiscal health—is projected to rise from 17.5 per cent in 202-22 to 37.4 per cent by 2028-29. Taxpayer-supported debt will approach $33,000 per British Columbian, nearly triple the roughly $12,000 level in 2021-22.
The province is now in a deep fiscal hole, with limited room to manoeuvre. Two factors in particular constrain its flexibility: above-inflation wage settlements for unionized public-sector workers over the next four years; and a rapidly rising interest bill. By 2028-29, debt-servicing costs will consume more than eight cents of every dollar of revenue, up from less than three cents in 2021-22. Debt servicing is the fastest-growing line item in the budget. If it were a ministry, it would rank as the third largest. The province is spending more on debt servicing than what it allocates to the Ministry of Social Development and Poverty Reduction.
Credit rating agencies are unlikely to ignore these trends. Another downgrade would compound the problem by raising borrowing costs. More broadly, B.C.’s fiscal trajectory sends a troubling signal to businesses and families considering investing, hiring or settling in the province. Unless there is a dramatic improvement in private sector economic activity, significant tax increases, spending cuts, public-sector layoffs, or asset sales may become inevitable and unavoidable to restore fiscal stability.
As Winston Churchill once observed, “Success is going from failure to failure with no loss of enthusiasm.” B.C.’s public finances offer little room for such persistence. Without a material course correction, the province risks sliding in just five years from the fiscal strength of Zurich to that of Prince Edward Island.
David Williams, DPhil, is vice-president of policy at the Business Council of British Columbia. Jairo Yunis is BCBC’s director of policy.
As published in Business in Vancouver.