Dominion Bond Rating Service reports that yesterday B.C. released its September Budget Update, which points to a notably improved financial outlook largely due to improved economic conditions, and stronger-than-expected revenues.

As a result, it notes that the province is now facing a stronger fiscal position for the years ahead, which will build upon the credit improvement seen in recent years. The rating agency says that the province boosted its outlook for B.C.’s economy, with real GDP expected to rise by 3.4% in 2005 and 3.2% in 2006, versus 3.1% and 3.0% at the time of the February budget.

Domestic demand is the key driver of the improved forecast, as solid employment growth continues to support solid gains in retail sales and the housing market, it says. Non-residential investment is also solid, driven by preparations for the 2010 Olympic Games in Vancouver, and strong commodity prices are helping the export sector weather the impacts of the rising Canadian dollar.

The revenue estimate for 2005-06 has been increased by $1.4 billion as improved economic forecasts are driving projections of personal and corporate tax collections, despite a reduction in the corporate tax rate to 12% from 13.5% effective July 1. Strong commodity prices have also supported revenues, driving up natural resource royalties, especially from the natural gas and forestry sectors. The revenue picture has also brightened for the next two years, with the province revising its total revenue projections up by just under $1 billion in each year.

DBRS says although discipline is maintained on the expenditure side, the province has taken the opportunity to use some of the incremental revenues to address pressures in a number of key areas.

The province’s surplus projection for 2005-06 has also increased to $1.3 billion from $220 million at the time of the budget, which come close to eliminating the DBRS-adjusted shortfall. DBRS notes that the surplus projections for 2006-07 and 2007-08 have also been revised upward from $200 million in each year to $600 million and $400 million, respectively, even after incorporating larger forecast allowances.

Although debt is expected to rise over the next two years due to capital spending requirements, the growth has been revised downward and the debt-to-GDP ratio is set to continue declining, DBRS notes.

DBRS adds that it believes that the end of the wage freeze is a key risk to the province’s fiscal outlook. Other key areas of concern are health care andinfrastructure.

“Like other provinces, B.C.’s health costs are rising rapidly and has considerable capital needs to rehabilitate and expand its infrastructure, with the added complications of the Olympic Games and construction cost inflation. However, the province’s demonstrated ability to manage its fiscal situation, and improved economic outlook, should help address these pressures and keep the province’s financial profile on an improving trend,” it concludes.