After the provincial government's promise to scale back public spending, the vice-president of public finance at Dominion Bond Rating Service says trimming could also hurt the New Brunswick economy.

On one hand, Travis Shaw said the decline in the capital budget will be a positive in terms of fewer cash requirements, fewer debt obligations and a slower increase in debt.

On the other, he said, reducing the level of public-sector spending will have a dampening effect on economic growth in the near future.

"It's certainly a fine balance because … the public sector does play an important role in New Brunswick," Shaw said in an interview on Information Morning Fredericton.

"Any restraints on the public-sector side, be it on the capital or on the operating side, will have a dampening effect on the economy as well."

We would see New Brunswick having a little flexibility to raise taxes if that decision were chosen. - Travis Shaw, Dominion Bond Rating Service

Shaw has been keeping a close eye on New Brunswick this week after Finance Minister Ernie Steeves delivered his capital budget.

The new Progressive Conservative government announced it would be dramatically scaling back spending on infrastructure with a capital budget almost one-third lower than what the previous Liberal government had planned.

The government is also postponing several major, high-profile projects, such as a new Centennial Building and courthouse complex in Fredericton, Route 11 upgrades between Cocagne River and Little Bouctouche River and between Glenwood and Miramichi, as well as planning for a new school in Moncton to replace Bessborough and Hillcrest schools.

Finance Minister Ernie Steeves presented a capital budget on Tuesday that derailed numerous projects set in motion by the previous government. (Michel Corriveau/Radio-Canada)

Total spending is $600.6 million in 2019-2020, far below the $865.5 million the Liberals had forecast for the same year.

"They are keen on tackling the deficit in a quicker fashion than what we may have been expecting under the previous government," Shaw said.

"The bigger underlying challenge for any government to tackle, is the economic outlook. We want to continue to see how that evolves as the months progress as we head into the upcoming budget season."

Although, it's likely not government's first choice, Shaw said the other lever would be to change the level of taxation as the deficit isn't "overly large" but has continued to linger.

"We would see New Brunswick having a little flexibility to raise taxes if that decision were chosen," he said.

An A rating

Last spring, Dominion gave the province an A rating but trending to negative, indicating the overall direction of the credit health of the province was trending down, potentially resulting in a "one-notch downgrade."

"We continue to see the province spending more than what they're bringing in terms of overall revenues," Shaw said.

"That has been leading to an ever-so-gradual but steady increase in their debt burden."

The credit-rating agency said the outlook for the New Brunswick economy is weak with "limited capacity and willingness to increase revenues or further constrain spending."

B.C. has highest rating

Shaw said the province still got a strong credit rating, "but it is lower than where we have some of the larger provinces, such as Ontario, British Columbia being our highest rating at AA high."

Shaw said New Brunswick's economic outlook has been relatively weak for a number of years, reflecting the aging population of Atlantic Canada in general.

But there doesn't appear to be anything on the horizon that will change the outlook, including private-sector investments, that would stimulate the economy, he said.

"That's having just a bearing on the overall outlook for the economy and potential economic growth," he said.

Worried about new shock

Shaw said forecasters are concerned the region could see an extra shock that "triggers the next downturn."

"That can have material impact on government finances, just by virtue of slower economic growth, potential increase in unemployment," he said.

He said his agency speaks with the New Brunswick government on a regular basis and gets fiscal updates.

"We are in regular contact, we also look at a number of economic forecasts and certainly follow the economic performance quite closely to get an understanding of where things are trending in that regard," he said.