BUDGET ANALYSIS

François Dupuis, Vice-President and Chief Economist • Benoit P. Durocher, Senior Economist

Desjardins, Economic Studies: 514-281-2336 or 1 866-866-7000, ext. 5552336 • desjardins.economics@desjardins.com • desjardins.com/economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2017, Desjardins Group. All rights reserved.

HIGHLIGHTS

f Fiscal 2016–2017 ended with a budget surplus of $2.4B. Adding in the $2.2B surplus recorded in 2015–2016, the Quebec government has generated a budget surplus of $4.6B over the last two years. All of that money went into a stabilization reserve.

f The government has announced an additional reduction of about $1.1B a year in the tax burden on individuals, lowering the tax rate on the first dollars of earned income from 16% to 15%, and allocating an annual $100 supplement per child for the purchase of school supplies.

f Numerous further investments have been announced for health care, education, and regional development.

f Nonetheless, the budget will remain balanced in the coming fiscal years by using a portion of the funds available in the stabilization reserve.

Quebec: Economic and Fiscal UpdateQuebecers to Receive Some of the Budget Surplus!

ECONOMIC STUDIES | NOVEMBER 21ST, 2017

#1 BEST OVERALLFORECASTER - CANADA

A $4.6B budget surplus over two yearsAccording to the figures released today by the Ministère des Finances du Québec, the 2016–2017 fiscal year ended with a $2.4B budget surplus, much more than the $250M projected last March when the budget was tabled. The improvement is largely due to better-than-expected economic conditions. Last March, for example, real GDP was forecast to grow 1.7% in 2017, followed by a gain of about 1.5% in 2018. The latest projections are calling for nearly 2.5% growth for 2017, and 2.0% next

year (graph 1). Also, the Quebec economy’s solid performance, combined with the increasingly striking impacts of the labour shortage arising from the demographic shock, fostered a bigger spike in average hourly wages in Quebec than elsewhere in Canada (graph 2).

This resulted in more sustained growth in revenue from personal income taxes, corporate taxes, and consumption taxes. That being said, the lower annual growth in program

GRAPH 1 The economy is growing faster than initially forecast

Sources: Ministère des Finances du Québec and Desjardins, Economic Studies

Real GDP forecast...

Annual variation in %

1.7 1.6

2.6

1.8 1.7 1.5

2.5

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2017 2018 2017 2018

Ministère des Finances du Québec forecasts Desjardins forecasts

...in the March 2017 budget ...in the November 2017 update

GRAPH 2 Strong economic growth benefits Quebec employees

* Average for the first 10 months of 2017 compared with the same period in 2016. Sources: Statistics Canada and Desjardins, Economic Studies

Average hourly wage of all employees

Variation in %

2.8

2.1

1.5

2.1

2.8

3.1

1.0

1.5

2.0

2.5

3.0

3.5

2015 2016 2017*

Canada Quebec

ECONOMIC STUDIES

2NOVEMBER 21ST, 2017 | BUDGET ANALYSIS

spending—2.9% rather than 4.5%—also factors into the good results for 2016–2017.

Adding in the $2.2B surplus recorded in 2015–2016, the Quebec government generated a budget surplus of $4.6B over the last two years. All of this money went into a stabilization reserve, the tool provided by the Balanced Budget Act to facilitate the Quebec government’s multi-year financial planning. Part of the reserve will be used in upcoming budget years to finance the new initiatives the Quebec government announced today, while still balancing the budget. However, as of 2020–2021, $1.8B will be kept in the stabilization reserve, an amount that corresponds to the potential negative impact of real GDP growth being 3% lower than forecast (graph 3). In addition to the small contingency reserves, this will give the Quebec government substantial leeway for dealing with uncertainties.

Further tax relief and new investmentsThe update released today includes several new measures that will be financed, in part, by budget surpluses recorded in prior years. In all, the additional cumulative expenditures will total $11.1B by March 31st, 2023. This is slightly higher than the $10.7B cumulative financial cost of the measures announced in

the last budget. Below is a summary of the main new measures announced in the update.

f Additional tax relief for individuals of about $1.1B per year starting in 2017:

• The tax rate on the first dollars of income earned up to $42,705 drops from 16% to 15%. This tax cut will

GRAPH 3 Change in the stabilization reserve

Sources: Ministère des Finances du Québec and Desjardins, Economic Studies

Projected value of the stabilization reserve at March 31

In $M

0

2,191

4,552 4,302

2,895

2,144 1,800 1,800 1,800

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

2015 2016 2017 2018 2019 2020 2021 2022 2023

Ministère des Finances du Québec forecasts

ACTUAL

2016–2017 2017–2018 2018–2019 2019–2020 2020–2021 2021–2022 2022–2023

Own-source revenue 82,728 83,677 86,255 89,189 92,005 94,847 97,542Variation (%) 1.8 1.1 3.1 3.4 3.2 3.1 2.8

Federal transfers 20,179 22,793 22,391 23,220 23,669 24,290 24,953Variation (%) 6.8 13.0 -1.8 3.7 1.9 2.6 2.7

Total budget revenues 102,907 106,470 108,646 112,409 115,674 119,137 122,495Variation (%) 2.8 3.5 2.0 3.5 2.9 3.0 2.8

Program spending -89,018 -94,662 -97,628 -100,276 -102,436 -104,837 -107,501Variation (%) 2.9 6.3 3.1 2.7 2.2 2.3 2.5

Debt service -9,527 -9,508 -9,613 -9,753 -10,017 -10,193 -10,469Variation (%) -4.8 -0.2 1.1 1.5 2.7 1.8 2.7

Contingency reserves --- -100 -100 -100 -100 -200 -200Balance 4,362 2,200 1,305 2,280 3,121 3,907 4,325

Generations Fund -2,001 -2,450 -2,712 -3,031 -3,465 -3,907 -4,325Balance in the meaning of the Act 2,361 -250 -1,407 -751 -344 0 0Use of the stabilization reserve -2,361 250 1,407 751 344 0 0Balance in the meaning of the Act after reserve

0 0 0 0 0 0 0

Gross debt 203,490 207,015 213,113 213,485 214,717 215,124 ---Variation (%) 0.1 1.7 2.9 0.2 0.6 0.2 ---In % of GDP 51.9 50.9 50.7 49.2 47.9 46.7 ---

Debt representing combined deficits 117,401 114,951 112,239 109,208 105,743 101,836 ---Variation (%) -2.3 -2.1 -2.4 -2.7 -3.2 -3.7 ---In % of GDP 29.9 28.3 26.7 25.1 23.6 22.1 ---

TABLE 1Summary of transactions

IN $M (EXCEPT IF INDICATED)

PROJECTIONS

Source: Ministère des Finances du Québec

3NOVEMBER 21ST, 2017 | BUDGET ANALYSIS

ECONOMIC STUDIES

represent an additional reduction of nearly $1B a year in the tax burden as of 2017–2018. The reduction applies retroactively to January 1st, 2017.

• A supplement of $100 per child will be paid to families at the start of each school year for the purchase of school supplies as of the 2017 school year, with an initial amount to be disbursed in January 2018.

f An action plan to lift more than 100,000 people out of poverty through an additional $2.6B investment to enhance last-resort financial assistance payments and the Objectif emploi program, increase the incentive to work, and strengthen the social inclusion of low-income earners.

f An additional investment of nearly $1.1B over six years to enhance services ($600M for health care and $400M for education, children, and higher education).

f An investment of more than $660M over six years to support regional economies:

• $367M to deploy high-performance digital infrastructures that are accessible in all regions of Quebec.

• $300M to support economic development in all regions.

A positive ripple effectThe reduction in the tax burden and increase in Quebecers’ disposable income will be good for Quebec’s economy. According to Ministère des Finances simulations, the nearly $1B per year in relief for taxpayers announced today could, in the long term, translate into an increase of about $1.5B in the province’s GDP, thanks to more sustained household consumption spending and business investment.

The lower tax burden on workers should also be one more incentive to participate actively in the labour market. This is a good thing, given that the working-age population is getting older; it could potentially help curb the decline in the Quebec economy’s growth potential.

In the end, the faster economic growth should also have positive repercussions for the state of the province’s public finances in future. In other words, it is clear that the effort to clean up the public finances in recent years is not only affecting Quebec’s economy, but it is also having an impact on how public finances will evolve in the years to come. And, it is doing all this while maintaining some room to manoeuvre, thanks to the stabilization reserve, and significantly boosting the Generations Fund, which should total close to $13B on March 31st, 2018.