Quebec Plots Borrowing Spree as Weak Growth Grips Economy

(Bloomberg) -- Quebec, Canada’s second-largest province, expects to have higher budget deficits for years to come as the economy slows and wages rise for public sector employees.

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Finance Minister Eric Girard delayed his target to balance the books by two years, to the fiscal year that ends in 2030, in budget documents released Thursday. It’s a change of fortune for a government that one year ago announced income-tax cuts and said budget shortfalls would rapidly shrink to almost nothing.

This time, Quebec’s fiscal forecast paints a darker picture. The government sees a deficit of C$11 billion ($8.2 billion) for the fiscal year that begins on April 1, C$8 billion higher than it expected only four months ago. It’s the third large Canadian province to release a budget in recent weeks, and in every case there has been a notable deterioration in government finances.

To pay for it, Quebec will need to tap the bond market aggressively. The government’s projected financing needs for the coming year are C$36.5 billion, a 70% increase from the current year. The figure includes money needed to repay maturing debt.

This is the sixth budget for Girard, a former treasurer of National Bank of Canada, who was re-elected in 2022 as part of a landslide win for Premier Francois Legault and the Coalition Avenir Quebec party, which has since lost ground to the separatist Parti Quebecois in opinion polls. Legault’s nationalist government has sought to attract more investment to the French-speaking province of 9 million people, notably in the electric-vehicle supply chain, and to reduce the wealth gap with Ontario, its larger, richer neighbor.

“It is a challenging and responsible budget in a difficult economic context,” Girard said during a press conference in Quebec City. He announced measures to generate billions in revenue and savings over the next five years - reducing tax breaks for technology companies, hiking taxes on tobacco and conducting a major review of government expenses. “The return to a balance will necessitate real gestures, but it’s feasible.”

Public Salaries Rise

Quebec is in the throes of an economic slowdown. The province, while blessed with an unemployment rate that’s below the national average, is expected to grow just 0.6% this year and 1.6% in 2025, according to government forecasts.

It has also been hurt by dry weather. Hydro-Quebec, a government-owned utility that exports electricity to the US market, has been grappling with lower water levels in reservoirs, leading to a C$1.5 billion shortfall in revenue.

At the end of last year, the government reached an agreement with 600,000 public workers, including teachers, that led to wage increases of 17.4% over five years. The new contracts, and others that are still being negotiated, will add more than C$3 billion annually to costs, according to government estimates.

Over the next three fiscal years, deficits are expected to total more than C$23 billion, up about C$18 billion from projections in November. The figures include contingency reserves and billions in contributions to the Generations Fund, a reserve fund that’s dedicated to future debt payments and managed by the Caisse de Depot et Placement du Quebec. The figures could change, of course, if economic growth comes in faster than the government’s long-term forecast.

Girard said the government must boost the average annual growth rate of revenue from 3.3% to 4.4%, while maintaining spending growth at 2.9%, to reach a balanced budget.

Quebec’s finances had improved significantly until the pandemic, helped by strong universities and healthy financial and technology sectors, and budget changes brought in by the previous Quebec Liberal Party government. It remains one of the highest-ranked Canadian provinces with a credit rating of AA- by S&P Global Ratings. Its net-debt-to-GDP ratio, currently 39%, is expected to rise in the short term, but the government promises to reduce it to 30% by 2038.

Girard announced about C$100 million over five years to support two of Quebec’s strategic industries, aerospace and aluminum, but made few changes to business taxes or incentives. “Most corporations can therefore expect their tax position to remain similar for the upcoming year, except for the IT sector where there are some losses,” Kimrang Te, a fiscal expert with Ernst & Young LLP, said in an interview.

The new deficits show “there is no plan to the return to a balanced budget,” said Frederic Beauchemin, a lawmaker from the opposition Liberal Party who used to be a banker at Bank of Nova Scotia. “The CAQ’s strategy is to wait for the Bank of Canada to lower rates. It’s a government that’s losing control.”

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