DBRS Comments on Québec’s 2016–17 Budget: A Cautious Course for la Belle Province

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 2016–17 budget on March 17, 2016, which points to the continuation of balanced budgets, after contributions to the Generations Fund (to be used for debt retirement), and a gradually declining debt burden over the medium term. The plan is largely consistent with DBRS’s expectations at the time of the last review, which had contemplated the debt burden peaking around 62% of GDP in 2015–16, and remains supportive of the current ratings.

For 2015–16, the Province anticipates a balanced fiscal position after $1.4 billion in 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 $2.2 billion, or just 0.6% of GDP – a favourable outcome in relation to many provincial peers where larger deficits continue to linger. Slower than planned growth in revenues has been offset by lower debt servicing costs.

Consistent with last year’s plan, the medium-term fiscal outlook points to the continuation of a balanced fiscal position after gradually increasing contributions to the Generations Fund. This equates to very modest DBRS-adjusted deficits of less than 1.0% of GDP, slowly moving to balance by the end of the fiscal planning horizon in 2020–21. Given recent improvements in fiscal management, DBRS believes these targets are achievable, but will require ongoing political commitment.

Québec’s improving fiscal performance has allowed for modest new investments in education, which is expected to increase by 3.0%, while health and social services spending will increase by 2.0% in 2016–17. Furthermore, DBRS notes that the spending plan incorporates a new collective agreement with the bulk of public sector employees, which provides cost certainty for salaries and benefits through 2018–19. Overall, total spending is forecast to grow by 2.3% annually over the coming five years.

Meanwhile, provincial revenues are projected to grow by 2.7% annually through 2020–21, somewhat slower than anticipated previously on account of slower economic growth and the Province’s decision to accelerate the reduction in the health contribution levy. The health levy will now be reduced starting January 1, 2016, one year earlier than planned. There are a number of other minor revenue measures being implemented to encourage innovation and job growth, including electricity rate discounts for manufacturing and natural resource sectors, payroll tax relief for small and medium-sized businesses and changes to encourage greater labour market participation. However, larger structural tax changes that had been contemplated in last year’s budget will not go forward at this time.

The fiscal plan is based on a gradual improvement in economic conditions, following a subpar performance in 2015. Real GDP is expected to rise by 1.5% and 1.6% in 2016 and 2017, respectively. This appears to be slightly below the current private sector consensus tracked by DBRS and is dependent on a shift to export-driven growth and modest growth in consumption. Thus far, a weaker Canadian dollar and steady U.S. expansion appear to be supporting Québec’s economy, with international exports slowing gaining momentum, suggesting the current forecast appears realistic.

Investment in infrastructure remains a key area of focus for this government, with the ten-year Québec Infrastructure Plan pointing to $88.7 billion in total investment, including $9.6 billion in 2016–17. This represents a very modest increase from last year’s plan and as such, has little impact on anticipated debt requirements. DBRS notes that commitments within the budget do not include potential new funds for infrastructure investment to be allocated in the upcoming federal budget. Québec has indicated that for potential new federal funding, any required contributions from the Province will be allocated from funds already contemplated within the current plan, thus alleviating any additional pressures on debt.

Based on the Government’s medium-term plan, DBRS-adjusted debt (including unfunded pension liabilities and the debt of municipalities) is estimated to remain stable, at 62% of GDP in 2015–16, and begin to gradually decline thereafter. However, in relation to last year’s plan, slower growth in nominal GDP and somewhat smaller contributions to the Generations Fund, will result in a slower decline in the debt burden. The debt burden is expected to trend downward gradually toward 56% by 2020–21. This is an encouraging trend, but will need to be sustained in order to rebuild flexibility within the credit profile to withstand subsequent economic downturns.

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.