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Quebec Weighs Personal Tax Cuts After Budget Surplus

  • Province to pre-finance borrowing after flurry of bond sales
  • Quebec tax cuts would be aimed at middle class, Leitao says

Quebec is mulling another cut in personal income taxes next year after the Canadian province posted its second straight year of budget surpluses, Finance Minister Carlos Leitao said.

“We know that the personal income tax burden in Quebec is still the highest in North America,” Leitao said Friday in an interview at Bloomberg headquarters in New York. “We also know that this is an obstacle to continued economic growth. If we have the margin to do it, come next budget, if there is still another significant surplus, then we will consider another modest tax cut.”

After three years of spending restraint, Premier Philippe Couillard’s government has started to turn on the taps again ahead of a scheduled election next year in Canada’s second-most populous province. In March, Leitao eliminated a provincial healthcare levy while raising the basic personal income tax threshold by 28 percent -- providing tax relief that the government estimates at about C$1.41 billion ($1.03 billion) for 4.3 million taxpayers over five years.

Quebec is forecasting balanced budgets for the next five years, after a preliminary surplus of C$250 million for the fiscal year that ended March 31. Any future tax cuts would be contingent on the province continuing to balance its books, Leitao stressed.

“We don’t think it is appropriate to lower taxes if all that this will do is to put us right back into a deficit position,” Leitao said. “We would not be financing tax cuts with borrowed money.”

Middle Class 

While no decision has been made, Leitao hinted he’s leaning toward building on the tax relief he offered in his 2017-18 budget -- mostly to the benefit of middle-class taxpayers.

“In the last budget, the way we structured our tax reduction efforts, we changed the taxation thresholds,” Leitao said. “That will give you an idea of where we intend to go in the future. If we have space to do it, that’s what we would do. That would benefit primarily lower-income taxpayers.”

Bondholders such as Yves Paquette, a fund manager at AllianceBernstein Holding LP, say the pressure for Leitao to announce substantial tax cuts ahead of the next election will be intense.

“2018 will be a litmus test,” said Paquette, whose firm oversees $498 billion in assets globally and owns Quebec bonds. “We will see if Mr. Leitao can resist the political pressures that will inevitably materialize. We will see if sound financial management can carry the day.”

Most Indebted

Even with the improving fiscal situation, Quebec remains Canada’s most indebted province relative to gross domestic product. Its adjusted debt -- which includes unfunded pension liabilities and municipal debt -- represents about 59 percent of GDP, according to a March 29 report from DBRS Ltd., the Toronto-based credit rating company.

Quebec’s debt is rated Aa2 by Moody’s Investors Service and A+ by S&P Global Ratings. In June, S&P revised its outlook to positive from stable, citing Quebec’s “strong budgetary performance, strong financial management, and very strong economy.” An update is due in the next month, S&P credit analyst Paul Judson said Friday from Toronto.

Bonds issued by the province have outperformed most of their Canadian peers in recent months amid optimism over the province’s fiscal prudence. The debt gained 3.94 percent from the end of 2016 through May 3, compared with an average 3.39 percent return for the Bank of America Merrill Lynch Canadian Provincial & Municipal Index.

After issuing 2.25 billion euros ($2.47 billion) of 10-year bonds last month and $1.25 billion of bonds in the U.S. dollar market, Quebec has completed about 60 percent of its C$11.3 billion borrowing plan for the year that ends March 31.


With C$16 billion of bonds due in fiscal 2018-19 and C$13.6 billion maturing the following year, it’s a good bet the province will take advantage of current interest rates to “pre-finance” some of that debt over the next 11 months, Leitao said in the interview.

“The door is wide open for us to do significant pre-financing this year,” he said. “Borrowing requirements this year are relatively modest, but in the next two years there are significant requirements. So we have a great opportunity this year to pre-finance. We will pick our spots.”

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