Without strong economic growth government finances are going to remain under pressure for the foreseeable future, Dominion Bond Rating Service Ltd. warns.

“Without a marked pick-up in economic growth, the next few years are likely to be a testing time for government fiscal discipline, as aggressive efforts to restrain spending are expected to be required in order to restore fiscal balance and keep provincial debt on a sustainable trajectory,” DBRS says in a new study on the finances of the Canadian federal and provincial governments.

The rating agency’s study highlights the economic and fiscal progress made by Canadian senior governments in recent years as well as the key factors that contribute positively and negatively to their credit profiles.

The study finds that escalating health-care costs, weak corporate tax collections, and poor investment results for government entities led to a second year of weakening fiscal results for Canadian provincial governments in 2002-03. As a result, their combined shortfall grew by $885 million to $5.9 billion, which represents their weakest performance in six years.

“Conditions were challenging for most governments, as the number of provinces in a DBRS-adjusted deficit position grew from seven to nine — a situation not seen since 1994-95,” it reports. “Only Alberta was in a surplus position, although Nova Scotia also improved its situation, notably helped by sustained spending discipline.”

The federal government performed better than the provinces, turning in a sizable surplus and lopping $6.1 billion off its’ net debt level, which helped push its debt-to-GDP ratio to the lowest level in two decades.

“The fiscal environment is expected to remain challenging in 2003-04, with once again only Alberta and the federal government projected to show a DBRS-adjusted surplus,” the firm says. “Factors generally impeding fiscal improvement include sustained health care cost pressures, slower-than-expected economic growth in 2003, and one-off shocks such as severe acute respiratory syndrome, bovine spongiform encephalopathy, drought conditions, and forest fires, which have led most provinces to cut their fiscal outlook for the year since the release of their budgets.

Debt is expected to continue to grow at a solid pace in most provinces in 2003-04, greatly limiting the potential for meaningful improvement in debt-to-GDP ratios.”