March 30, 2010 / 9:04 PM / 8 years ago

Quebec outlines spending cuts, tax hikes in budget

QUEBEC CITY (Reuters) - The Quebec government said on Tuesday it would run a budget deficit of C$4.5 billion ($4.4 billion) in 2010-11 but vowed to balance its books by 2013-14 through a combination of spending curbs, tax hikes and user fees.

The predominantly French-speaking Canadian province also lowered its estimated budget shortfall for the 2009-10 fiscal year, ending March 31, to C$4.3 billion from C$4.7 billion previously, due to higher revenues than expected.

The Liberal government sees the deficit narrowing to C$2.9 billion in 2011-12 and to C$1.2 billion the following year.

Finance Minister Raymond Bachand promised the government would do most of the heavy lifting to eliminate the budget shortfall through spending restraint. But, because it does not want to cut services, it will look to taxpayers to carry some of the load through a sales tax hike, a new healthcare fee and other revenue-generating measures.

“What’s motivating us is very, very simple. We want to maintain services for the citizens,” Bachand told reporters at a press conference. “Secondly, we have more debt than all the other provinces in Canada so we have to get our act together by 2014.”

Bachand said it would be much tougher to balance the budget beyond 2014, because retiring baby-boomers would mean a shrinking workforce and less wealth creation.

The budget plan will likely be passed easily by the provincial legislature, where the Liberals hold a majority after winning the December 2008 election.

FEASIBLE STRATEGY

Laurentian Bank Chief Economist Carlos Leitao said the deficit reduction strategy was feasible, as long as the government follows through on curbing spending growth.

“We are rather positively impressed with this budget,” said Leitao.

“It’s quite credible and there are some serious measures that are being taken, not only to bring the budget back into balance but also to make sure that once we do that, we are in much better shape to face the significant changes in the demographics,” he said.

Quebec, Canada’s second most populous province with an economy comparable to that of Portugal, was hard-hit by the recession and has the highest debt burden of any province.

The province committed to following through on the second phase of a two-year, C$15 billion economic stimulus package. After shrinking 1.4 percent in 2009, the economy is expected to bounce back with 2.3 percent growth this year and 2.6 percent growth in 2011.

Bachand said the government’s net debt would rise to C$152.5 billion, or 48.7 percent of gross domestic product, in 2010-11 from C$142.8 billion in the year just ending.

The province’s borrowing requirements will total C$12.9 billion in the coming fiscal year, down from C$15.5 billion in 2009-10.

TOUGH MEASURES

Quebec taxpayers had seen hints of some of the government’s more controversial moves during pre-budget consultations. “Now they will see it in black and white,” said Leitao.

The government said the biggest savings would come from capping spending growth at 2.9 percent in 2010-11 and at 2.2 percent annually from 2010-11 through 2013-14. To help reach that goal it will freeze the salaries of the premier, cabinet ministers, legislators and the entire civil service.

Quebec residents will see a one percentage point increase to the provincial sales tax on January 1, 2012, bringing the rate to 9.5 percent. The province had previously announced a hike to 8.5 percent in 2011.

Taxpayers will also have to start paying into a new healthcare fund as of July this year. Contributions will rise gradually to C$200 per person a year by 2012, with a tax credit for low-income individuals. Fuel taxes will also rise.

The opposition Parti Quebecois blasted the tax moves as proof the Liberals had mishandled the province’s finances.

“The people of Quebec are going to have to pay for the government’s poor management,” said PQ leader Pauline Marois.

Businesses will also face higher mining taxes, a temporary hike in a compensatory tax on banks, and the introduction of a water utility fee.

The government will also increase electricity rates via provincially owned Hydro-Quebec, but postponed the 3.7 percent hike in tariffs until 2014 when it expects the budget to be balanced.

Quebec government debt prices were mixed following the budget. The yield on the province’s 10-year benchmark bond was 4.312 percent, compared with 4.339 percent earlier in the session. The yield was about 73 basis points above its above its Canadian government counterpart.

($1=$1.02 Canadian)

Reporting by Louise Egan; editing by Rob Wilson

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