Economics and Strategy

Quebec 2020 Budget

March 10, 2020

Surpluses applied to key investments and Quebecers’ needs By Stéfane Marion and Marc Pinsonneault

Highlights Fiscal 2019-20 is on track for a surplus of $1.9 billion. Revenue is estimated at $2.5 billion over last spring’s budget, operating

expenditures at $800 million under budget and debt service at $1.2 billion under budget. After higher-than-expected deposits to the Generations Fund, partly offset by non-use of the contingency reserve, the improvement of the financial framework from last spring’s budget is $4.3 billion. Of this improvement, $857 million is allocated to new initiatives announced in last fall’s financial update and $947 million to other initiatives announced in today’s budget (both amounts being new charges to fiscal 2019-20). After an estimated $603 million loss on government investment in the CSeries, the surplus for the year ending March 31 is $1.9 billion.

For the next five years, the government projects balanced books (after deposits of dedicated revenue to the Generations Fund). Over this period, revenue is projected to grow an average 2.9% annually and spending (including debt service) an average 3.7% annually. Operating expenditures increased sharply in the year just ending (7.4%) and are budgeted to increase 5.1% in 2020-21. The five-year projection implies an excess of spending over revenue of $125 million in fiscal 2021-22 and $250 million is each of the following three years. The government expects to absorb these shortfalls by measures yet to be announced.

New initiatives announced today are projected to cost a grand total of $15.5 billion over seven years, of which $947 billion will be charged to the fiscal year just ending and $1.7 billion to fiscal 2020-21. These initiatives fall under three main headings: the environment ($6.7 billion), increasing the potential of the economy ($5.3 billion) and improving public services and meeting Quebecers’ needs ($3.5 billion).

Environment: Investments totalling $6.2 billion will support the initial implementation plan of the “electrification and climate change framework policy.” Two-thirds of this investment ($4.1 billion) will be funded by revenue from the carbon market. These investments will be aimed at reducing greenhouse gas emission (GGE) and adapting to climate change by: supporting public transit and electrification of transportation; decarbonization of industry; reduction of fossil-fuel use in construction; residual materials management, including operations not covered by Quebec’s cap-and-trade system for GGE allowances; adaptation of Quebec to climate change and development of Quebec expertise; and protection of natural environments and other sectors having a beneficial effect on the environment. The budget includes an additional $472.7 million to implement other environmental protection measures.

Increasing the potential of the economy: These initiatives include additional education spending of $1.5 billion over six years; an additional reduction of school-tax rates that will reduce the taxpayer burden by $1.2 billion; $900 million for regional development; $647 million for responsible development of natural resources; and $213 million to promote integration and retention of workers in the labour force. In addition, initiatives totalling $1.0 billion over six years will be taken to enhance business productivity and competitiveness. These include implementation of an income tax credit for investment and inno-vation (projected at $525.8 million over five years) that will encourage businesses to acquire manufacturing and processing equipment, computer hardware and management software, through assistance of up to 20% of eligible investment. These initiatives are in addition to the significant measures for accelerated depreciation announced in the fall of 2018. To foster innovation and its commercialization, the government is introducing an incentive deduction for commercialization of inno-vations (projected to cost $91 million over five years) to encourage businesses to commercialize Quebec innovations in Que-bec. Their revenues from commercialization of intellectual property will be taxed at an effective rate of 2.0%, or 9.5 percentage points less than the general rate. The resulting combined tax rate of 17% will be the most competitive in North America.

Improving services and meeting the needs of Quebecers. Of the additional spending under this heading, totalling $3.5 billion over six years, $1.5 billion will go to new spending on health and social services. If we count $3.9 billion from reallocation of health care spending, including savings arising from the government’s memorandum of understanding with the Fédération des médecins spécialistes du Québec, the total allocated to such new initiatives could be put at $5.4 billion. Almost $1.8 billion over six years will be allocated to the needs of people facing special challenges, including $532 million from introduction of a refundable income tax credit for caregivers (replacing the refundable income tax credit for informal caregivers of persons of full age, making the tax credit available to a greater number of caregivers) and $68 million to improve caregivers’ quality of life. Funding of $449 million over six years is projected for stronger support of families, including $339 million to add 6,000 new subsidized childcare places. An amount of $207 million over five years is projected for housing assistance and $181 million for support of women who are victims of domestic violence.

 

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Economics and Strategy

Quebec 2020 Budget

$15.1-billion increase in investment under the Quebec Infrastructure Plan (QIP) over 10 years. Spending under the 2020-30 QIP is brought to $130.5 billion or an average of $13 billion a year. The 10-year QIP allocates a substantial sum – $13.6 billion – to public transit and includes study of a number of new large-scale projects for development of structuring networks. In addition, it provides for major investments in education and higher education ($20.5 billion, of which $19.2 billion for schools) and for keeping the road network in good condition ($26.8 billion).

Economic growth assumptions. Quebec real GDP is estimated to have grown 2.8% in 2019, a remarkable showing for Quebec. The budget assumes growth of 2.0% in 2020, 1.5% in 2021 and an average 1.4% in subsequent years. The latter rate is closer to the estimated growth of potential GDP. Growth in nominal terms is estimated of 4.7% in 2019. The budget assumes nominal growth of 4.1% in 2020, 3.4% in 2021 and an average 3.2% in following years. Employment growth is not expected to maintain the unsustainable 2019 rate of 1.7%. The projection is 0.9% in 2020 and 0.6% in 2021. Since the latter rates are close to the growth rate of the working-age population, the unemployment rate is projected to remain among the lowest in Can-ada at 5.0% in 2020, edging down further in subsequent years. The budget assumes that inflation will move to the 2% target and the Bank of Canada will keep its policy rate unchanged throughout 2020, with a first hike in late 2021.

Debt management. As at March 31, 2020, the debt-to-GDP ratio will be 43%, well below the 45% forecast in last November’s fiscal update and a ratio initially projected to be reached six years later. The ratio is projected to continue falling, to 38.9% in 2026. Debt representing accumulated deficits was 20.9% of GDP in 2020; the target of 17% is projected to be reached in 2023, three years ahead of schedule. The government intends to define new policy directions for debt reduction while maintaining the 2023 targets. As at March 31, 2020, gross debt will be $198 billion.

 

  

Financing program. For fiscal 2020-21 the government plans to borrow $13.9 billion, substantially less than the $19.2 billion it borrowed in 2019-20. The difference is due mainly to $6.3 billion in pre-financing carried out in 2019-20. For 2021-22 the government projects borrowing of $27 billion, of which $16.7 billion for repayments of borrowings. Given the demand for Quebec green bonds, the province will be a regular issuer of such an instrument. Five issues totalling $2.8 billion have been executed to date, including $500 million in February 2020.

 

 

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Economics and Strategy

Quebec 2020 Budget

 

 

Conclusion The exceptional performance of the Quebec economy again in 2019 has enabled finance minister Eric Girard to maintain his trademark increase of spending on the key missions of health and education in addition to capital expenditures to increase economic productivity and potential growth. All while reducing the debt-to-GDP ratio faster than projected. We can only approve of the minister’s long-term vision. Under conditions of growing uncertainty around the global supply chain, the rise of protectionism, climate change, population aging and challenges related to adoption of new technologies, it is essential to prepare the economy to face coming disruptions by moderating the debt ratio. The imperative need to accelerate productivity growth follows from this picture, as well as being necessary to offset the coming decline of federal transfers in proportion to Quebec’s total revenue.

At this writing, an assumption of 2% GDP growth to reach budget balance seems ambitious given the unknowns of how COVID-19 will affect the economy. A reduction of 1% in GDP would subtract more than $800 million from Quebec’s own-source revenues. That said, the minister has gained some room for manoeuvre from interest rates now one percentage point below those assumed in the budget (equivalent to a $300-million reduction in debt service cost) and from better terms of trade amid the recent fall of oil prices, which, if maintained, would by our estimate reduce the cost of Quebec’s imports of crude by almost $3 billion in 2020.

In short, despite the current uncertainties, a significant deterioration of Quebec public finances in 2020 seems to us unlikely.

 

Economics and Strategy

Quebec 2020 Budget

 

Economics and Strategy

Quebec 2020 Budget

Economics and Strategy

Montreal Office Toronto Office 514-879-2529 416-869-8598

Stéfane Marion Matthieu Arseneau Warren Lovely Chief Economist and Strategist Deputy Chief Economist Chief Rate Strategist, Economics and Strategy stefane.marion@nbc.ca matthieu.arseneau@nbc.ca warren.lovely@nbc.ca

Krishen Rangasamy Paul-André Pinsonnault Marc Pinsonneault Taylor Schleich Senior Economist Senior Economist Senior Economist Associate, Rates Strategist, Economics and Strategy krishen.rangasamy@nbc.ca paulandre.pinsonnault@nbc.ca marc.pinsonneault@nbc.ca taylor.Schleich@nbc.ca

Kyle Dahms Jocelyn Paquet Angelo Katsoras Economist Economist Geopolitical Analyst kyle.dahms@nbc.ca jocelyn.paquet@nbc.ca angelo.katsoras@nbc.ca

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Economics and Strategy

Quebec 2020 Budget

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