Although Canadian provinces need balanced budgets to achieve stronger financial positions, balanced budgets alone are not sufficient to meet this goal, according to a new report from Moody’s Investors Service.

The findings are in the report “Canadian Provincial Analysis: Linking Budgetary Outcomes to Debt Profiles”.

For some Canadian provinces, the stock of net direct and guaranteed debt has actually increased at the same time as these provinces recorded budget surpluses. Moody’s says, however, that it is the relative change in debt that impacts the evaluation of a province’s creditworthiness.

“How a province’s stock of debt compares to relative measures, such as the size of the economy and government revenues, is a key factor for our analysis given that the amount of debt is only relevant in the context of the province’s ability to service that debt,” said David Rubinoff, a VP/senior analyst with Moody’s in Toronto and author of the report.

Just as deficits lead to higher debt, surpluses — once achieved — should lead to lower debt. In most cases this is true, but, for a variety of reasons, the attainment of fiscal balance may not always coincide with debt reduction, Rubinoff said.

Moody’s expects that the fiscal discipline exhibited by Canada’s provinces in recent years will continue to support the positive direction of provincial public policy, and that the provincial governments will be able to manage their fiscal challenges.

It says the provinces’ much-improved fiscal framework, combined with strong economic fundamentals, bodes well for the Canadian provincial sector’s medium-term outlook.