Dominion Bond Rating Service has upgraded the trend on the long-term debt rating of the province of Ontario to stable from negative.

The rating agency says that the trend change reflects Ontario’s progress in restoring fiscal soundness, which was faster than originally anticipated by DBRS, and the increased confidence that the fiscal recovery plan can be implemented successfully by the province without unduly eroding its financial profile.

“While the province continues to face sizeable fiscal shortfalls, appreciable progress has been made at reducing spending growth and re-introducing prudence in the budgeting process. Therefore, while fiscal surpluses are unlikely to be seen for some time, DBRS is now more confident that the province will be able to stay the course with its fiscal agenda and that the deficits foreseen for the 2005-06 and 2007-08 period, although sizeable, are manageable,” it says.

It reports that the province ended the 2004-05 fiscal year with a DBRS-adjusted deficit of $3.8 billion, which was markedly better than the original forecast of $6 billion, largely because of stronger-than-expected federal transfers and corporate tax collection. Excluding the pre-financing conducted during the year, total debt as measured by DBRS rose 2.4% to $134.8 billion, driven by the deficit and capital investments. Relative to the province’s GDP, however, indebtedness fell by 0.6 percentage points to 26%, helped by healthy economic growth.

“Fiscal improvement is expected to continue in 2005-06, with the budget pointing to a lower DBRS-adjusted shortfall of $2.8 billion for the year. Spending growth will remain robust in priority areas like health care, education, and social services, but restraint in most other spending areas should limit overall expenditure increase to 4.3%, the slowest increase in four years,” DBRS adds. “Despite improving results, debt should grow by 5% to $141.5 billion, pushing the debt-to-GDP ratio up modestly.”

DBRS notes that fiscal equilibrium is expected to be gradually restored by 2008-09. “The province’s revised fiscal plan is based on prudent revenue forecasts, but calls for an average annual spending growth of 2.8% over the next three years. While achievable, this will likely be challenging to implement given contractual labour cost adjustments and, more importantly, the intense pressures developing in provincial health care systems,” it notes. “As such, DBRS believes fiscal recovery will likely hinge heavily on the province’s yet to be demonstrated ability to contain spending growth on a sustainable basis, and on the continuation of sound economic conditions.”

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