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Moody's: Quebec's Balanced Budget Allows for Measured Increases to Expenditures.

Toronto: Moody's Investors Service notes that the recently released 2016/17 Budget of the Province of Quebec (Aa2, stable) presents a balanced budget for the year which is forecasted to generate a surplus of CAD2.0 billion before transfers to the Generations Fund (2.0% of revenue). The budget also presents the expected maintenance of balanced budgets over a 5 year horizon. For prudency, the budget horizon includes annual contingency reserves of CAD400 million over the years 2016/17-2019/20 and CAD500 million in 2020/21.

This forecast follows a balanced budget in 2015/16, which was achieved despite the province recording slightly lower economic growth than previously forecasted. This lower growth will also continue to impact economic growth over the medium-term. Nominal GDP is forecasted to have increased 2.0% in 2015, compared to the forecast of 3.8% in the previous Budget. Economic growth will continue to be moderate across the budget horizon, with nominal GDP growing 3.2% in 2016 and 3.3% in 2017, lower than previously forecasted.

As previously signalled, with the return of balanced budgets the province will slightly increase the growth of expenditures which had been tightened during the effort to reduce deficits. While program spending grew 1.7% in 2015/16, this is expected to increase to 2.7% in 2016/17 and 2.8% in 2018/19. Education and culture spending is expected to increase 3% in 2016/17, while health and social services will see a 2% increase.

Quebec forecasts spending CAD9.6 billion in infrastructure in 2016/17, and CAD88.7 billion over the period 2016-2026, largely unchanged from previous forecasts.

Quebec has also accelerated its previous commitment to reduce the overall level of taxation. Budget 2016/17 includes, for example, a reduction to the Quebec health contribution retroactive to January 1, 2016. This reduction was previously set to be implemented in 2017. Furthermore, the province increased or expanded various tax credits.

Given the lower economic forecasts and lower revenue stemming from the reduction of taxes, revenue growth is slightly lower than previous forecasts. Own-source revenues are forecasted to grow 2.6% in both 2016/17 and 2017/18, down from the expected 3.8% growth rate in 2015/16. Nonetheless, consolidated revenues, aided by slightly higher federal transfers, will increase 3.2% in 2016/17, well above the planned 2.5% increase in consolidated expenditures. This offers some protection that the balanced outcome can be maintained if revenues should be lower or expenditures slightly higher than forecasted.

"Quebec's return to balanced budgets should allow for some relief to the health and education sectors in the province, which we have noted have seen funding challenges in recent years," noted Michael Yake, Moody's Vice President. "The province, nonetheless, continues to be prudent on its spending forecasts given the weaker than previously expected economic environment."

With the return and maintenance of balanced budgets, Quebec's net direct and indirect debt is expected to rise only marginally over the rating horizon. The province's debt burden, measured by net debt relative to revenues, which has fluctuated between 190-200% in recent years, should fall slightly over the medium-term as the rate of new debt accumulartion will be less than revenue growth. This will be aided by the increasing deposits to the Generations Fund over the medium-term, a debt repayment fund created by the province in 2006. The Generations Fund is expected to total CAD8.5 billion at March 31, 2016.

As part of its normal monitoring process, Moody's will evaluate the 2016/17 Budget's assumptions and its potential for upside and downside risks within the context of likely impacts on the province's debt burden.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1CQUE
Date:May 16, 2016
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