Dominion Bond Rating Service has confirmed the Government of Canada’s AAA credit rating.

“The confirmation reflects a track record of budget surpluses that is expected to continue in 2005-06, ongoing fiscal prudence, and steady declines in the net debt-to-GDP ratio over the past ten years,” DBRS said in a report Friday. The rating tends are stable.

Fiscal prudence was maintained in the 2005-06 budget, the rating agency says, although the government announced numerous year-end initiatives for 2004-05, reflecting significant in-year revenue improvement and the fragile minority government. These measures reduced the DBRS-adjusted surplus to a modest $400 million, and supported a $300 million decline in net debt (total liabilities less financial assets) to $556.0 billion, or 43.0% of GDP, it reports.

For 2005-06, a $4 billion DBRS-adjusted surplus is projected, as total expense growth is restrained by the sizeable year-end spending in 2004-05, while economic growth will help support an increase in total DBRS-adjusted revenues of 3.7%.

However, DBRS notes that private sector forecasters have begun reducing their GDP growth projections since the budget, which could pose a risk to revenues. “There were some tax cuts in the budget, although they will provide only modest benefits in the coming year, as the largest changes take place in later years,” it says. “As well, the government will have to incorporate the recently announced $1 billion farm aid package, which would reduce the fiscal balance if accounted for in 2005-06.”

“Many of the initiatives announced in the recent budget, including the health and Equalization agreements, the child care agreement, and the higher defence funding, will increase annual spending over the following four years at an average growth rate just under 5%,” the rating agency adds. However, DBRS expects that sound revenue growth projections will help the government incorporate significant reserves in the budget.

“These will provide some flexibility to help cope with continued spending pressures, especially from health care and municipalities, over the medium term,” DBRS says.