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QUEBEC CITY, Quebec (Reuters) - Quebec's minority Liberal government said on Thursday it would balance its budget in the coming fiscal year and dip into a special reserve fund to ensure the two budgets after that were also balanced.
But the government, in spending plans that won support from the opposition Action Democratique de Quebec, said the U.S. slowdown was already taking a toll on its economy. It slashed its 2008 growth forecast to just 1.5 percent, rising to 2 percent next year.
Last May the government of the mainly French-speaking Canadian province of 7.5 million people forecast growth of 2.5 percent for 2008. Private sector economists in January predicted 2008 growth of 1.8 percent.
"When the sea is rough, we must keep a firm grip on the helm... The actions taken by our government should enable Quebec to avoid a recession," Finance Minister Monique Jerome-Forget said.
Jerome-Forget said Quebec would limit spending growth to 4.2 percent in 2008/09 and 3.0 percent in 2009/10, and would use a C$1.8 billion budgetary reserve to balance its budgets in 2009/10 and 2010/11.
"We will therefore be able to absorb the shock of the economic slowdown without raising taxes and without scaling back public services... This budget is realistic despite the winds of adversity," she told the National Assembly.
The opposition Action Democratique du Quebec party made clear it would back the budget, ensuring the Liberals' survival. "I'll make a recommendation to my caucus not to defeat this budget," finance spokesman Gilles Taillon said.
A large part of the budget focused on Quebec's manufacturing sector, hard hit by the high Canadian dollar, weakening U.S. markets and increased foreign competition.
Jerome-Forget said the government would spend C$1.9 billion over the next five years to boost private investment in industry. That includes a new investment tax credit of 5 percent for manufacturing and processing equipment bought before 2016.
Last year Quebec announced C$620 million over five years to help the manufacturers.
Pascal Gauthier, an economist with TD Bank Financial Group, said the government was right to take a cautious approach.
"Given that most of the economic risks are to the downside, in particular for the U.S. economy, we didn't expect any new major spending initiatives or tax relief outside the manufacturing sector," he said.
The government plans to hike to 75 percent from 50 percent the share of provincially-owned energy giant Hydro-Quebec's profits that are paid as dividends to Quebec.
The budget promised measures to help families, a key ADQ demands. It will create another 20,000 subsidized day-care spaces over five years, bringing the total to 220,000.
ADQ backing for the budget had been widely predicted. The right-leaning party performed superbly in the March 2007 election, coming in second behind the Liberals, but it has steadily lost support in the last few months.
Reporting by David Ljunggren; editing by Janet Guttsman