March 19, 2009 / 8:37 PM / in 9 years

Quebec sees deficits, will spend to fight crisis

QUEBEC CITY, Quebec (Reuters) - Quebec’s Liberal provincial government said on Thursday it would run budget deficits for the next four years and predicted the economy would shrink in 2009, but also promised to boost spending to help fend off the global crisis.

The French-speaking Canadian province of 7.5 million, which relies heavily on exports to the United States, said its main priority was to stimulate the economy and protect jobs. Eliminating the deficit will take second place for now.

Finance Minister Monique Jerome-Forget said Quebec would run a C$3.9 billion ($3.1 billion) deficit in the 2009-10 fiscal year -- the first since 2004 -- and would stay in the red until the 2013-14 budget. She had already said there would be a deficit.

“Our priority at this time must be to limit the impact of the recession on our jobs, even at the price of deficits. Quebecers accept deficits in a recession,” she told the National Assembly. The Liberals won a majority in the assembly in elections last December so the budget is sure to be adopted.

The government says the economy will shrink by 1.2 percent in 2009, the first year of negative growth since 1991, before bouncing back to grow by 1.9 percent in 2010.

In November 2008, Jerome-Forget predicted 2009 growth of 0.6 percent but said on Thursday that since then “the global economic outlook has become much bleaker”.

She acknowledged she had no idea whether the government’s forecasts would turn out to be accurate, telling reporters that “there is no certainty in the economy right now”.

The steps outlined in the budget, added to other more significant past measures, mean Quebec will pump a total of an extra C$15 billion into the economy in 2009 and 2010, while raising some taxes -- including a 1 percentage point hike in the sales tax in 2011 -- and service fees.

The new programs include more money for training, social services and infrastructure projects as well as C$1.1 billion per year for two years in additional cash resources for businesses, which have been hard hit by a credit crunch.

Yet despite this, Quebec says its jobless rate will jump to an average of 8.9 percent in 2009 from 7.2 percent in 2008. During the 1983 recession the rate hit 14.2 percent.

Quebec sends 75 percent of its exports -- equivalent of almost 23 percent of GDP -- to the United States. This year it expects overall exports to drop by 8.3 percent after falling 3.4 percent in 2008.

WILL RAMP UP BORROWING

TD Bank Financial Group economist Pascal Gauthier -- noting the budget referred to measures that had yet to be identified -- said it would be tough to return to surplus in five years.

“Spending growth is being kept well under control, which is encouraging. Increasing the sales tax can only take you so far in eliminating the deficit. They’ll have to be creative and show more specifics on other measures to shore up the rest of the gap,” he said.

The government said it could not tolerate long-term deficits and promised to cut spending growth from the current average of 4.6 percent a year to 3.2 percent by 2010.

Quebec will therefore clamp down on tax evaders, increase fees for most public services and hike its sales tax by one percentage point to 8.5 percent on Jan 1, 2011.

“Restoring budget balance will take a lot of effort on our part,” said Jerome-Forget.

Quebec said its net debt would rise to C$137 billion in 2009-10 and to C$145 billion in 2010-11 from C$129 billion in 2008-09. The debt financing program will total C$9.8 billion in 2009-10 and C$15.4 billion in 2010-11.

Quebec government debt outperformed slightly following the release of the budget. The yield on the 10-year benchmark bond was 157.1 basis points above the Canadian government yield curve, down from 159.8 basis points before the budget’s release.

Jerome-Forget said the government would move to suspend provincial legislation that requires balanced budgets.

The main opposition Parti Quebecois, which tilts more to the left than the Liberals, said the budget was full of small steps that reflected what it called a paralyzed government.

($1=$1.24 Canadian)

Reporting by David Ljunggren; Editing by Jeffrey Hodgson and Peter Galloway

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