Bloomberg News

Quebec Curbs Spending, Vows Head Office Protection as Vote Looms

February 21, 2014

Quebec Finance Minister Nicolas Marceau pledged to balance the budget in 2015-16 while offering to protect head office jobs in a spending plan that sets the stage for a possible spring election.

Quebec’s deficit will shrink to C$1.75 billion ($1.58 billion) in the year that begins April 1, Marceau said in Quebec City yesterday. Quebec’s shortfall in the year that ends March 31 will be C$2.5 billion, in line with a November forecast.

The budget pledges increased investments in the oil and mining industries and proposes to make it easier for Quebec companies to thwart hostile takeover bids as Premier Pauline Marois prepares for an election that may be held as early as April.

“The timing of the budget suggests that the Parti Quebecois is not trying to hide from the economic issues,” Antonia Maioni, associate professor of political science at McGill University, said in a telephone interview from Montreal. “At the end of the day, the ballot box issue is about Quebec’s economic future,” said Maioni, who expects an April election in Canada’s second-most populous province.

Montreal’s La Presse newspaper and Ici Radio-Canada television reported this week that Marois, buoyed by rising support for her policies, is planning to call an election in the next two weeks. Marois’ Parti Quebecois government lacks a majority in the provincial legislature, meaning she needs the support of opposition parties to pass legislation.

The two main opposition parties said they won’t support the spending plan, meaning Marois’s government would fall on the defeat of the budget bill.

Campaign Start

“Today you saw the launch of the election campaign,” Liberal Party Leader Philippe Couillard said.

Marois, 64, whose party advocates taking the French-speaking province out of Canada, ended nine years of rule by the federalist Liberal Party when she won the September 2012 election.

Her government has pledged to balance the budget, though Marceau in November abandoned a goal of eliminating the gap this fiscal year due to weaker-than-projected revenue growth.

Marceau’s budget “is unusual in that it is of the low-key variety, containing few ‘election goodies’ and emphasizing instead the government’s stated resolve to control its spending,” Robert Hogue, senior economist at Royal Bank of Canada, said in a note to clients. “Time will tell whether this budget will stand as the final 2014 budget given the provincial elections that are apparently just around the corner.”

‘Ambitious’ Goal

Balancing the budget in 2015-16 remains an “ambitious” goal, Quebec Auditor General Michel Samson said Feb. 19 in a report posted on the government’s website. Quebec will probably need to boost electricity rates or make “major” spending cutbacks, Samson said, adding that the province still needs to find ways of financing C$1 billion in planned 2014-15 spending and an additional C$1.6 billion earmarked for 2015-16.

Economic growth will be 1.9 percent in 2014 and 2015, up from 1.2 percent in 2013, the government forecast. The November forecast had projected growth of just 0.9 percent for 2013.

As a result of the accelerated growth, Quebec forecast that revenue will outpace spending in the next two fiscal years. Revenue will jump 2.5 percent in 2014-15 to C$71.6 billion, and increase 4.2 percent the following year. Program spending is set to rise 1.9 percent in each of the next two years, to C$73.7 billion in 2014-15. Spending rose 3.3 percent in the current fiscal year.

Cut-Rate Power

To create as many as 10,000 jobs, Marceau said Quebec will make 50 terawatt hours of cut-rate power available to companies that carry out new investments in the province. Rate reductions will apply to new loads of 2 megawatts or more -- a reduction from the previous threshold of 15 megawatts, budget documents show. Hydro-Quebec, the provincially owned utility, plans to have about 75 terawatt-hours of excess power between 2014 and 2023, the documents show.

Quebec is in talks with aluminum companies operating in the province to help them find ways of lowering costs, Marceau said. New York-based Alcoa Inc. (AA:US) said last year it may cut electricity use at its three Quebec smelters because of a planned increase in energy prices.

“This is a difficult time for the aluminum industry,” Marceau said at a press conference. “Prices are weak. These discussions are important. The industry represents a lot of jobs in Quebec, and we are extremely sensitive to this.”

Pre-Financing

Quebec plans to raise C$15.4 billion in bond sales in 2014-15, down from C$19.4 billion this year. The province has taken advantage of lower interest rates to pre-finance C$4.4 billion this fiscal year, including C$4 billion in debt sales in one day in December, a finance ministry official said.

“Pre-financing has been a successful recipe for them in the past, and they have done it again this year,” Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities, said in an interview. “When they eventually come back to the market, this budget should ensure a good reception. It’s good to see the targets being reaffirmed, and to see more details on how they plan to reach the budget balance.”

Quebec’s relative borrowing costs have risen since December, with yields trading at about 19 basis points higher than Ontario’s debt, according to data compiled by Bloomberg. That’s the highest gap since October 2012.

Investment Prospects

“The balanced budget is further out, they have had shortfalls on the revenue side and a little bit more spending, which does put a bit of a negative tone on investment prospects in Quebec bonds,” said Hosen Marjaee, who manages C$16 billion as senior managing director of fixed income at Manulife Asset Management Ltd. in Toronto and holds Quebec bonds. “When you are still running budget deficits it adds to the outstanding debt and debt-to-GDP becomes a little bit bigger than previously expected.”

Quebec’s ratio of debt to gross domestic product will rise to 54 percent next month, the highest among Canadian provinces, the budget shows. The province pledged to cut that ratio to 49 percent by 2019.

Among other measures in the budget, the province plans to raise day-care fees, which are the lowest in Canada, to C$8 a day from C$7 in September, rising to C$9 a year later. Quebec said it will help develop its natural resources by taking direct equity stakes in mining and oil and gas companies, increase spending on public housing and may raise tuition rates charged to foreign students.

The province will also offer tax breaks to protect head office jobs, while making it easier for companies to thwart hostile takeover bids.

Minority Government

Marois’s Parti Quebecois currently holds 54 of the 125 seats in the provincial legislature, nine short of a majority. The Liberal Party has 50, the Coalition Avenir Quebec has 18, Quebec Solidaire has two and two seats are held by independent lawmakers.

Forty percent of respondents in a Crop Inc. Internet poll published Feb. 18 in Montreal’s La Presse newspaper said they would back the Parti Quebecois if an election were held now, compared with 34 percent for the Liberal Party. That result would be enough for the separatists to form a majority government, La Presse reported. Crop surveyed 1,000 Quebec residents over the Internet from Feb. 13 to 16.

Crop’s previous poll, conducted in January, showed that the Parti Quebecois and the Liberals were tied with 35 percent support.

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

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


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