Balanced budget: Mission accomplished

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1 Balanced budget: Mission accomplished QUEBEC 2016 BUDGET Economics and Strategy March 17, 2016 Highlights As projected in last spring s budget, the Quebec government has balanced its books for fiscal Its Consolidated Financial Framework projects balanced budgets through the next five years. Estimated consolidated revenue for is up 3.6% from the year before and estimated consolidated expenditure (before debt service) is up 2.5%. For the next five years, the government sees average annual increases of 2.7% in consolidated revenues and 2.3% in consolidated expenditures. Over the five-year planning period, average annual GDP growth is projected at 1.5% real and 3.2% nominal. The projection for nominal growth is 0.3 percentage points less than the private-sector consensus. In addition, the fiveyear plan incorporates contingency reserves of $400 million annually. The phased abolition of the health care contribution, formerly projected for , will now begin this year. A net $126 million in new money is budgeted for education in , with a net $828 million in new education money over the five-year planning period. In addition, the Quebec Infrastructure Plan provides for additional investments of $200 million in and $100 million in to upgrade education infrastructures. New money for accelerating innovations and investment in the manufacturing sector is budgeted at $133 million in , with a cumulative $848 million projected over five years. Additional support for Quebec small and medium-sized businesses is projected at $282 million over five years, essentially in the form of further reduction of employer contributions to the Health Services Fund. The borrowing program for is projected at $14.0 billion, including $500 million for Financement-Québec and $13.8 billion for repayment of debt. For the two subsequent years, total borrowing is projected at $16.0 billion and 17.8 billion. As of March 31, 2016, the government estimates that the ratio of its gross debt to GDP will have begun its decline, edging down to 55.0% from 55.1% a year earlier. Continuing balanced budgets in the coming years are projected to reduce the ratio to 54.7% in 2017, 53.7% in 2018 and 49.5% in The government continues to target 45% for 2026.

2 Budget balance confirmed As projected in last spring s budget, the government expects the current fiscal year to end March 31 with no deficit. And since the contingency reserve has not been used, the end result could be a $300-million surplus. Such a surplus will constitute a reserve that, under the Balanced Budget Act, could be used to help balance future budgets. The Consolidated Financial Framework tabled today projects balanced books in the coming fiscal year and the following four years. The budget announces new measures with a net cost of $469 million in the coming fiscal year ( ) and a cumulative $3.4 billion over the coming five fiscal years. The cost is budgeted to be met in part by a $93- million upward revision of revenues thanks to a betterthan-expected showing of the economy, but mostly by $376 million in cuts in the spending of government bodies and special funds from that projected in last year s budget. The Consolidated Financial Framework assumes average annual increases of 2.7% in total revenues and 2.3% in consolidated expenditures over the next five years. It projects balanced budgets, even net of contingency reserves of $400 million in each of the next four fiscal years and $500 million in By way of perspective, the finance department projects that a GDP growth shortfall of one percentage point would reduce own-source government revenues by $650 million. The Balanced Budget Act requires that budget balances be calculated net of revenue dedicated to the Generations Fund. Thus the government is projecting operating surpluses, so to speak, of $1.4 billion in and $2.0 billion in , with steadily increasing numbers out to the five-year planning horizon. The main budget measures A net $126 million in new money is budgeted for education in (a total $166 million in new education spending of which $40 million from reallocation of expenditures). Over the five-year plan period the net additional funding is projected at $828 million. Another $133 million in new money in the budget is aimed at accelerating innovations and investments in manufacturing. Over five years the cumulative total is projected at $848 million. Among the measures under this rubric is a rebate of up to 20% in electricity rates over four years to reimburse 40% of eligible investments by companies with the large power rate (rate L) assigned by the Régie de l énergie. In another measure, the corporate income tax rate on revenue attributable to a patent is lowered to 4.0% from 11.8% effective next January 1. Finally, a refundable tax credit is introduced to encourage individuals to undertake environmentally friendly renovation, thus stimulating the green-renovation industry. This credit will be available from now through March 31, The budget introduces measures to support small and medium-sized businesses at a projected five-year cost of $282 million. These consist mainly of a further reduction in the employer contribution to the Health Services Fund. Also announced is an immediate reduction of the health contribution. In 2016, individuals with incomes of $41,265 or less will pay $50 instead of $100. As projected last year, the contribution of these taxpayers will be abolished in For those with incomes from $41,265 to $134,095, the contribution is reduced from $200 to $175 in 2016 and to $70 in 2017 ($55 less than announced last year), and will be abolished in For taxpayers with higher incomes the contribution will be reduced from $1000 to $800 in 2017 and abolished in 2018, instead of reduced to $600 in 2018 and abolished in 2019 as announced last spring. The cost of this measure is estimated at $32 million in and $130 million in For the five years from through the cumulative cost is projected at $509 million. Infrastructure Plan The government is maintaining a high level of investment under the Québec Infrastructure Plan (QIP). For the QIP it announces total investments of $88.7 billion, $300 million more than projected in last November s update of the Québec Economic Plan. The new money is earmarked for upgrades of education infrastructure $200 million in and $100 million in Debt management and borrowing requirements As of March 31, 2016, the government estimates that the ratio of its gross debt to GDP will have begun its decline, edging down to 55.0% from 55.1% a year earlier. Continuing balanced budgets in the coming years are projected to reduce the ratio to 54.7% in 2017, 53.7% in 2018 and 49.5% in The government continues to target 45% for Since the first deposit to the Generations Fund in January 2007, its balance has grown from $584 million to an esti- 2

3 mated $8.5 billion on March 31 of this year. 1 Its book value is projected to reach $22.9 billion at the end of the year, a value that the finance department projects will cut the ratio of gross debt to GDP by 5.5 percentage points. The Generations Fund, dedicated exclusively to repayment of debt, has contributed since its creation to the credibility of the government s debt management plan in the eyes of the credit rating agencies. Though the ratio of gross debt to GDP will fall in , the debt in absolute terms will increase by $5.3 billion. Much of the rise will be due to acquisition of fixed assets ($3.5 billion) and to investments, loans and advances ($3.3 billion. That latter include an investment of about $1.3 billion (US$1 billion) in Bombardier s C Series program. Contributions to the Generations Fund will reduce the gross debt by $2.0 billion in In the following year the deposit to the Fund is projected at $2.5 billion. The ratio of net debt to GDP is projected at 48.4% by the end of fiscal This ratio is not affected by the C Series financing because the government acquires a financial asset in return. The net debt ratio is projected to fall 6.4 points to 42.0% by the end of fiscal Conclusion After several years of effort, Quebec has achieved a balanced budget. In eliminating its structural deficit, the government gains room to move ahead with its plan to make the Quebec economy more competitive while reducing the burden of public debt. These objectives are the more important in that the Quebec labour force is now shrinking. The successful economies of tomorrow will be those that have put in place strategies that take demographic change into account. Attracting private capital and talented people while keeping tight control of public spending has become essential. Here Mr. Leitao s budget is consistent with the government s recent decision to increase permanent immigration from 50,000 to 60,000 annually and improve the integration of new Quebecers into the labour market. Success in this aim, which will require contributions from Quebec s many professional orders, is essential to economic growth and balanced budgets over the long term. Stéfane Marion Preliminary results show a total of $15.5 billion in government borrowing in , including $7.6 billion in prefinancing. From 2009 to 2014, pre-borrowing ran at an average $4.5 billion annually. In it was $9.6 billion. At March 31, 2016, the average maturity is expected to be 12 years. Borrowing in is projected at $14.0 billion, including $500 million for Financement-Québec and $13.8 billion for repayment of loans. For the two subsequent years borrowing is projected at $16.0 billion and $17.8 billion respectively. 1 In calculation of gross debt, the balance of the Generations Fund is subtracted from debt issued on financial markets and net liabilities of the pension funds and future benefits of employees of the public and parapublic sectors. 3

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5 ECONOMICS AND STRATEGY Montreal Office Toronto Office Stéfane Marion Marc Pinsonneault Warren Lovely Chief Economist & Strategist Senior Economist MD, Public Sector Research and Strategy Paul-André Pinsonnault Matthieu Arseneau Senior Fixed Income Economist Senior Economist Krishen Rangasamy Angelo Katsoras Senior Economist Geopolitical Associate Analyst General: National Bank Financial Markets is a business undertaken by National Bank Financial Inc. ( NBF ), an indirect wholly owned subsidiary of National Bank of Canada, and a division of National Bank of Canada. This research has been produced by NBF. National Bank of Canada is a public company listed on Canadian stock exchanges. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. 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