Bloomberg News

Quebec Raises Taxes and Cuts Spending to Reach Budget Balance

November 20, 2012

Quebec Finance Minister Nicolas Marceau said the province will keep a pledge to eliminate its deficit for the first time in four years by raising income and consumption taxes and capping infrastructure spending, in a budget that drew immediate criticism from opposition lawmakers.

The province’s books will be balanced in the year starting April 2013 “and will stay balanced in subsequent years,” Marceau told reporters today. By excluding C$1.8 billion ($1.8 billion) in costs linked to the closing of a nuclear power plant, Quebec will meet its goal of a C$1.5 billion deficit in the year that ends March 31, documents show.

Marceau’s budget is the first introduced by the Parti Quebecois government under Premier Pauline Marois since it won the Sept. 4 election, ending nine years of Liberal Party rule. Marois failed to win a majority of seats in the election, meaning her government depends on support from opposition parties to pass laws.

“We are seeing through to completion the plan to restore fiscal balance, which was left unfinished by the former administration,” Marceau said today in the text of a speech he’s giving at the provincial legislature in Quebec City.

Marceau’s predecessor, Liberal Raymond Bachand, said his party would oppose the budget, calling it irresponsible and incomplete. Still, Bachand said Liberal lawmakers, the second- largest group in the legislature, hadn’t decided whether to vote against the document, which could trigger new elections.

The third-largest party, Coalition Avenir Quebec, will vote against the budget, leader Francois Legault said.

Borrowing Plans

Quebec plans to borrow about C$15 billion in the 2013-14 fiscal year, budget documents show. That’s down from C$17.3 billion in the current year, C$4.4 billion of which was pre- funded. Debt issuance is forecast to rebound to C$17.3 billion in 2014-15.

Quebec bonds have underperformed the Bank of America Merrill Lynch Canadian Provincials & Municipals Index since the Parti Quebecois returned to power.

Yields on Quebec debt relative to Canadian federal government bonds widened by 4 basis points to 106 between Sept. 3 and Nov. 16, the data show. Average spreads on the provincial debt index widened by 2 basis points to 80 over the same period.

Next year’s budget includes a C$400 million contingency reserve, which rises to C$500 million starting in 2014-15, budget documents show.

“For bondholders, it’s quite reassuring that Mr. Marceau intends to balance the books quickly and to keep the long-term plans of debt reduction,” said Sebastien Lavoie, assistant chief economist at Laurentian Bank of Canada in Montreal.

Alterations Possible

The budget is “a sign of openness to other parties that need to support this budget,” Lavoie said. “Will there be alterations? It’s always a possibility.”

To reach its budget goals, Quebec will introduce a new tax bracket for residents earning at least C$100,000 starting next year, Marceau said today. Income above that level will be taxed by the province at 25.75 percent, up from 24 percent. The measure will raise C$74 million this fiscal year and C$326 million in 2013-14, budget documents show.

The government will raise taxes on tobacco and alcohol, moves that it expects will bring in C$230 million next year. A carton of 200 cigarettes will cost an additional C$4, Marceau said.

Quebec residents already pay the second-highest tax rates in Canada. Total taxes for a Quebec family with two or more people equal 45.7 percent of income, exceeding the 44.2 percent average for Canada, according to a June report by the Fraser Institute, a Vancouver-based free-market research organization.

Bank Tax

To boost revenue, Quebec will increase and extend by five years a tax on financial institutions such as Royal Bank of Canada (RY), which was set to expire in 2014. The move will generate C$80 million in 2013-14 and C$211 million the following year, Marceau said.

Program spending will climb 1.8 percent in 2013-14 and 2.4 percent in 2014-15, the government said. Quebec will cap infrastructure spending at C$9.5 billion a year for the next five years, C$1.5 billion less than planned by the previous government.

Quebec will eliminate a flat tax to raise money for health care -- introduced two years ago by the Liberal government -- and replace it next year with a levy based on income, Marceau said.

Electricity rates will be indexed to inflation starting in 2014, Marceau said, abandoning a plan by the previous government to boost prices by 20 percent over five years.

Job Cuts

Hydro-Quebec, the state-owned power producer, will eliminate 2,000 positions through attrition. Other government corporations will also cut costs, allowing the province to save C$290 million next fiscal year, the minister said.

Marceau’s first budget also contains measures aimed at spurring business investment.

Quebec will introduce a 10-year tax holiday for investment projects of at least C$300 million in industries such as minerals and wood processing and data processing. The exemption will apply to projects approved in the next three years, the government said.

“A window has opened for investment in Quebec,” Marceau told reporters. “These are good times to invest. The private sector has a lot of liquidity, interest rates are low and the Canadian dollar is high.”

Tax credits for pharmaceutical companies will be raised to 27.5 percent from 17.5 percent to support research, the government said. Quebec will also provide C$125 million in matching funding over five years for “research partnership projects” with drug companies.

Slow Growth

Economic growth adjusted for inflation will slow to 0.9 percent this calendar year before rebounding to 1.5 percent in 2013 and 2 percent in 2014, budget documents show.

The province’s previous budget -- introduced March 20 by Bachand -- had forecast growth of 1.5 percent in 2012.

Departing from a campaign pledge, Marceau said Quebec will seek input from mining companies before changing the provincial royalties system. Marois had vowed during the campaign to boost royalties because she argued the province didn’t get enough from resource extraction.

Marceau’s budget comes a day after Cliffs Natural Resources Inc. said it would delay part of its Bloom Lake mine expansion in Quebec. The U.S. company cited volatility in iron ore prices and declining use of the mineral by North American steelmakers.

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

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net


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