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Alberta Finance Minister Joe Ceci leaves a conference in Edmonton on June 29, 2017.JASON FRANSON/The Canadian Press

The Alberta government's fiscal philosophy – coupled with its continued reliance on the energy sector to lift its finances – is once again clashing with Bay Street's emphasis on demonstrable economic results after a credit rating agency downgraded the province's debt.

DBRS Ltd., which is based in Toronto and has offices around the globe, on Wednesday knocked its rating on Alberta's debt to double-A from double-A (high) and noted the province's fortunes continue to trend south. The firm calibrated its rating because it was unimpressed with Alberta's second-quarter fiscal update, which showed little progress in the province's effort to reduce its deficit.

Alberta's revised credit rating is still the third-strongest in the country, behind British Columbia and Saskatchewan, on DBRS's scale. But in Alberta, every credit downgrade is a psychological blow and further fuels the province's ideological debate over how to best manage its economic recovery. The New Democratic Party, sitting in government benches, is steadfast that deep cuts to services and freezing infrastructure spending would only create further turmoil. Their right-leaning challengers are appalled at the government's reluctance to change its strategy.

The provincial government on Tuesday said it expects the deficit to hit $10.31-billion in fiscal 2017/2018, compared with its original budget of $10.49-billion. This comes despite healthier energy prices and an improvement in Alberta's expectations for revenue from non-renewable resources, such as oil royalties and land leases.

"Alberta still has one of the highest credit ratings amongst all of the provinces," Paul LeBane, DBRS's assistant vice-president, public finance, said in an interview. "What is more concerning for us is this pace of deterioration in the credit profile. Debt is just climbing year after year and deficits are going to remain wide for the foreseeable future." This isn't sustainable and the NDP's strategy will not make a meaningful dent in the deficit, he said.

"Right now the plan seems to rely on a recovery in resource revenue and just constraining expense growth for the better part of a decade, which doesn't seem like a credible plan," Mr. LeBane said. "What we'd look for is more fundamental measures to deal with the deficit."

The United Conservative Party (UCP), an entity that emerged this summer when the provincial Progressive Conservative Party and Wildrose Party joined hands in an effort to unseat the government, said Alberta is sliding because of the NDP's political playbook.

"It is a trend that is clearly because of their ideology, because of their slowdown of our economy," said Drew Barnes, the UCP's finance critic. "It is clear that DBRS has said that the NDP has no credible plan, they have no intention of making any tough decisions, and all they are doing is putting the next generation deep in debt."

Joe Ceci, Alberta's Finance Minister, in a statement deflected DBRS's critique of the NDP's financial style. "Alberta's economy is growing faster than forecast, the deficit is coming down, and significant cost savings are being realized," the statement said. "The government will continue to take a steady and responsible approach that avoids extreme and risky cuts that would hurt families, cost jobs and damage our recovery."

Robert Kavcic, a senior economist at Bank of Montreal in Toronto, argues Alberta's deficit should be shrinking as the price of oil rallies. But, at the same time, he noted Alberta still has financial flexibility.

"The tax burden is still very low, net debt is still very low," he said. For years, experts have been calling on politicians to overcome their fear of a provincial sales tax to ease Alberta's reliance on oil and gas royalties.

"That's just one example of how [Alberta] can very quickly raise revenues overnight and not be at a competitive disadvantage to other provinces tomorrow," Mr. Kavcic said.

Faron Ellis, a political scientist at Lethbridge College, earlier this month said the provincial government has recognized it must take steps to bolster its credibility when it comes to fiscal responsibility in the face of the UCP's attacks but in ways it can defend to its supporters.

"The NDP has clearly decided that if they can't ignore the issue any longer, they will confront it head on with a version of 'we won't be as draconian as the other guys,'" Prof. Ellis said prior to the fiscal update.

With a file from Kelly Cryderman

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PROVINCIAL CREDIT RATINGS

The DBRS credit-rating agency has downgraded Alberta's long-term debt rating to double-A from double-A (high). Here is a look at DBRS ratings across the country.

British Columbia: double-A (high)
Alberta: double-A
Saskatchewan: double-A
Manitoba: single-A (high)
Ontario: double-A (low)
Quebec: single-A (high)
New Brunswick: single-A (high)
Nova Scotia: single-A (high)
P.E.I.: single-A (low)
N.L.: single-A (low)

Source: DBRS

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