Quebec to Balance Budget Next Year After Deficit Widens

Quebec Finance Minister Carlos Leitao maintained a goal of balancing the budget next year, and said deficits this year and last will be larger than planned as revenue misses forecasts and spending climbs.

Quebec’s shortfall was C$3.1 billion ($2.8 billion) in the year that ended March 31 and will be C$2.35 billion this fiscal year, compared with deficits of C$2.5 billion and C$1.8 billion pledged by the previous government, Leitao said yesterday in Quebec City. Spending cuts, tax increases on alcohol and tobacco and a hiring freeze will help Quebec eliminate the shortfall next year as planned, the minister said.

Leitao’s first budget follows the April 7 election of the Liberal Party under Philippe Couillard, who promised to kick-start Canada’s second-largest provincial economy and shrink its bureaucracy. The budget also sticks to a goal of cutting the size of the province’s debt relative to gross domestic product over 12 years.

“Our government’s first budget is a budget for economic recovery and to restore sound public finances,” Leitao said yesterday in a speech to the legislature in Quebec City. Balancing the budget “is an obligation.”

Leitao’s fiscal plan assumes Quebec’s economic growth will accelerate to 1.8 percent in 2014 and 2 percent in 2015. Growth in both years will probably trail the national average, budget documents show.

Borrowing Plans

Quebec’s economy expanded by 1.1 percent in 2013, trailing the 2 percent national average, Statistics Canada data show. Unemployment in the province was stable at 7.6 percent in April, compared with 7.4 percent in Ontario and the 6.9 percent national average.

Quebec plans to raise about C$15 billion through bond sales in 2014-15, down from a February forecast of C$15.4 billion. The province took advantage of lower interest rates to pre-finance C$5.6 billion in the year ended March 31, more than the C$4.4 billion average of the past decade.

The province’s financing program also calls for borrowing of C$17.9 billion in 2015-16 and C$18.9 billion in 2016-17.

“Credit agencies should like this budget,” Stefane Marion, chief economist at Montreal-based National Bank of Canada, said yesterday in an interview in Quebec City. “There’s a credibility that was missing from the efforts of previous governments.”

Ratings

Fitch Ratings cut its outlook on Quebec’s debt to negative from stable on Dec. 12, citing “weaker-than-planned economic and revenue performance,” after Leitao’s predecessor, Nicolas Marceau, postponed the balanced-budget goal. Fitch rates Quebec AA-, its fourth-highest rating.

Quebec’s gross debt amounted to C$198.1 billion as of March 31, and will probably climb to C$217.4 billion by March 2019, budget documents show.

Leitao maintained Quebec’s goal of cutting gross debt as a proportion of gross domestic product to 45 percent by 2025-26 from an estimated 54 percent as of March 31.

Government-owned companies such as electricity utility Hydro-Quebec will need to cut spending by a combined C$438 million this year and C$172 million in 2015-16, said Leitao, who in his previous job as chief economist at Montreal-based Laurentian Bank Securities was ranked the second-most accurate forecaster of the U.S. economy by Bloomberg in 2008.

“The key is to get to zero balance next year because Quebec already delayed the goal by two years,” Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities and a former colleague of Leitao’s, said yesterday in an interview. “Next year’s budget will be the big one.”

Tax Credits

Quebec will cut tax-credit rates for industries including film production and video games by 20 percent, generating savings of C$348 million by next fiscal year, said Leitao.

Manufacturing companies operating in Quebec, who now pay a tax rate of 8 percent, will see that rate drop to 6 percent starting immediately and then 4 percent as of April. The 4 percent rate “will correspond to the Canadian average,” Leitao said in his speech.

Quebec will increase taxes on tobacco and alcohol to generate C$126 million in additional revenue this fiscal year and C$175 million in 2015-16, Leitao said. A C$4 increase per carton of 200 cigarettes took effect at midnight. The higher alcohol taxes will kick in Aug. 1.

As promised during the election campaign, Quebec will cancel a C$2 a day increase in the cost of daycare that the previous government announced in February. The C$7 daily rate will be indexed annually to the rate of growth in program costs, with the first increase to C$7.30 a day beginning of Oct. 1, the minister said.

To contact the reporter on this story: Frederic Tomesco in Quebec City at tomesco@bloomberg.net

To contact the editors responsible for this story: Paul Badertscher at pbadertscher@bloomberg.net Chris Fournier

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