Dominion Bond Rating Service predicts that the overall provincial debt will widen by $1.7 billion to $10.6 billion, the weakest performance since 1995-96.

The projection came in a study DBRS released today. The report highlights the economic and fiscal progress made by Canadian federal and provincial governments in recent years, as well as the key factors that contribute positively and negatively to their credit profiles.

The report says that the fiscal situation is expected to remain difficult in 2004-05. Three provinces are projected to have worsening fiscal positions in 2004-05: Québec; Alberta; and Saskatchewan. However, it notes that recent indicators point to better-than-budgeted results in both Alberta and Saskatchewan due to strong energy revenues.

The 2004-05 government budgets were characterized for the most part by spending restraint, including layoffs, and modest tax increases to help maintain fiscal results, the report says. Continued deficits will keep debt growing at a steady pace in 2004-05, estimated at 4.2% year-over-year, although continued moderate GDP growth is likely to keep debt-to-GDP ratios virtually unchanged over the prior year.

Although fiscal balances at the provincial level remained weak on average, the provincial and federal governments continue to maintain relatively sound financial profiles, the rating agency says. However, a number of pressures will have to be dealt with if financial profiles are to be maintained or improved. These challenges include: rising health care costs, growing infrastructure requirements, and rising debt levels.

“With spending pressures likely to continue over the medium term, especially for health care, spending restraint will have to be maintained if provinces want to return to balanced fiscal positions and keep debt growth on a sustainable path,” DBRS says. “Otherwise, the provinces risk resorting to tax increases or rising debt levels to fund spending, which would likely result in deteriorating financial profiles.”