Quebec Cuts Business Taxes in Fourth-Straight Balanced Budget

(Bloomberg) -- Quebec plans to balance its budget for a fourth straight year, allowing the province to pay down debt and lower taxes for small businesses and homebuyers with an election just six months away.

Canada’s second-most populous province is committed to five more years of balanced books following a net surplus of C$850 million ($660 million) this fiscal year, even after setting aside C$2.29 billion in a debt-reduction pool known as the Generations Fund.

Fiscal balance “is not an obsession, it’s a necessity,” Finance Minister Carlos Leitao told reporters Tuesday in Quebec City after releasing his budget. “If you can’t balance the budget at the top of the business cycle when can you?”

With an economy growing at the fastest pace in almost 20 years, Quebec Premier Philippe Couillard is trying to reverse months of declining popularity in the run-up to an Oct. 1 election by offering tax breaks and increased spending on health care, education and families. Quebec residents are among the most heavily taxed in North America.

The latest measures are on top of moves announced by Leitao in November, when he introduced personal income tax cuts worth about C$1.08 billion to benefit 4.2 million taxpayers.

“We have restored confidence in the future,” Leitao said in the text of his budget speech to lawmakers. “With this budget, we want to strengthen that confidence.”

Consumer Spending

Robust consumer spending and real estate gains are contributing to some of the fastest economic growth for Quebec in decades, driving the unemployment rate to a record low. Gross domestic product expanded 3 percent in 2017 and will rise 2.1 percent this year, exceeding the 1.8 percent forecast in November. Growth next year will slow to 1.7 percent, according to budget documents.

Program expenditures will increase 4.7 percent in the year that begins April 1 as consolidated revenue climbs 2.2 percent. The budget contains C$3.6 billion of new investments in health care and C$1.6 billion in education over five years, as well as plans to pay down C$10 billion in debt over the period.

Next year’s budget will be balanced even with a C$2.49 contribution to the Generations Fund.
Starting April 1, Quebec plans to pay down C$2 billion of debt annually by withdrawing money from the Generations Fund, Leitao said. The repayments will reduce interest costs by C$1.1 billion over five years.

“It’s the right strategy for Quebec to be a little bit aggressive about reducing debt,” Kamyar Hazaveh, vice president of fixed income at CI Investments Inc. in Toronto, said in an interview before the budget. “If global growth is weaker, some of these projections for balanced budgets may not pan out. So if you use a sunny day to repair the roof, it gives you better flexibility down the road.”

Borrowing Plans

Quebec plans to borrow C$13.4 billion in the next fiscal year, down from C$17.9 billion in 2017-18 as Quebec took advantage of low interest rates to pre-finance C$9.34 billion this year. In the four-year period ending in March 2023, annual borrowings will average C$18.7 billion.

Quebec’s gross debt as a percentage of GDP will be 49.6 percent as of March 31, down from 51.5 percent a year ago. It’s fallen for three straight years, and the government now expects the ratio to drop to 45 percent by 2023 -- three years ahead of schedule.

Quebec bonds have outperformed their Canadian peers in recent years amid optimism over the province’s improving fiscal situation. The debt has gained 21 percent since Couillard’s Liberals won the April 2014 election, compared with an average 17 percent return for the ICE BofAML Canadian Provincial & Municipal Index. Ontario bonds returned 19 percent in the period, the data show.

“Since the election of 2014, we consider Quebec to be an improving credit,” said Hazaveh at CI, whose team manages about C$8.5 billion in fixed-income assets. “Quebec is starting from as position of high debt, but they are credible and they are delivering.”

Among other budget measures:

  • Small and medium-sized businesses will see their tax burden fall by C$2.2 billion over five years -- mostly through a drop in the income tax rate for services and construction companies, and a reduction in the contribution to the provincial health services fund.
  • Leitao’s budget paves the way for a reform of the provincial school tax system, which reduce property taxes by C$3.22 billion over five years.
  • Quebec is committing C$1.8 billion over five years for “sustainable mobility.” The amount includes money for studies on a proposed C$3.3 billion tramway system in Quebec City. Quebec intends to apply for federal infrastructure funding for that project and a planned C$3.9 billion extension of the Montreal metro’s blue line.
  • First-time homebuyers will get tax breaks worth C$140 million over five years through a tax credit on real estate fees.
  • Banks will save C$109 million over five years with a reduction in the compensation tax for financial institutions.
  • Quebec will raise C$23 million in excise duties on the sale of marijuana once it’s legalized in Canada later this year. That will rise to C$50 million in 2019-20.

To contact Bloomberg News staff for this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

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