DBRS Comments on 2015-16 Québec Budget: Committed to Balance

DBRS Limited (DBRS) notes today that the Province of Québec (the Province or Québec; rated A (high) and R-1 (middle) with Stable trends) introduced its 2015-16 budget on March 26, 2015, which is consistent with its fiscal plan presented last June to return to balance in 2015-16. The government continues to emphasize efforts to constrain spending while also moving forward with a plan to gradually reduce taxes for individuals and businesses, but only after fiscal balance is restored, to help stimulate investment and job creation. DBRS recognizes the sound fiscal progress made thus far and notes that the Province’s financial profile remains supportive of existing ratings.

For the year ending March 31, 2015, preliminary estimates indicate that the Province’s fiscal plan remains on track with a deficit of $2.4 billion anticipated, after contributions to the Generations Fund. On a DBRS-adjusted basis (including capital expenditures as incurred rather than as amortized), this equates to a shortfall of approximately $6.8 billion, or 1.8% of gross domestic product (GDP). Own-source revenues are expected to fall somewhat short of expectations although this has been fully offset by higher federal transfers and lower debt servicing costs.

Looking ahead, the budget points to a balanced fiscal position in both 2015-16 and 2016-17. This translates into DBRS-adjusted deficits of less than 1.0% of GDP. The government continues to focus on cost containment and has identified a further $1.2 billion in measures to contain spending. This follows $2.5 billion in measures announced last December and efforts already introduced in the 2014-15 budget last June. Over the five-year fiscal planning horizon, consolidated spending growth is projected to average 2.0%. Furthermore, the government aims to constrain any increases in public sector compensation to the rate of growth in program spending. DBRS considers this to be a challenging, yet achievable target given Québec’s disciplined track record of expenditure management.

Following upon the recommendations of the Québec Taxation Review Committee released last week, the 2015-16 budget takes steps to gradually reduce taxation on individuals to support consumer spending while at the same time implementing modest reductions in business taxation to ensure Québec remains a competitive place to invest. This will involve a gradual elimination of the health contribution levy beginning on January 1, 2017, and the introduction of other measures to provide increased incentives for experienced workers to participate in the labour force, and reduce disincentives for those affected by benefit claw backs. Furthermore, efforts to reduce business taxation and foster investment include a gradual reduction in the corporate income tax rate by 0.1% annually starting on January 1, 2017, until it is equal to Ontario’s 11.5% rate four years later.

After experiencing estimated real GDP growth of just 1.5% in 2014, the budget is based on an acceleration in real growth to 2.0% in both 2015 and 2016. This appears to be slightly below the current private sector consensus tracked by DBRS. A strengthening U.S. economy, and weaker Canadian dollar should be supportive of improved trade.

Based on budget projections, DBRS-adjusted debt (including unfunded pension liabilities and the debt of municipalities) is estimated to reach 62% of GDP at March 31, 2015, up from 61% the prior year, but consistent with DBRS’s expectations at the time of last year’s review. This should now represent the peak in Québec’s debt burden, as it is expected to gradually trend downward to roughly 55% by 2019-20 provided tight fiscal discipline is maintained and the economic environment remains cooperative.

The above noted projections on a DBRS-adjusted basis are based on high-level estimates but will be refined as part of DBRS’s detailed annual review to be completed later this spring.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.