Quebec Cuts Taxes, Slows Debt Repayment as Economy Stalls

(Bloomberg) -- Quebec, Canada’s second-largest province, is cutting income taxes and reducing the amount it’s socking away in a debt-repayment fund as it braces for a period of slow growth and economic uncertainty.

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Finance Minister Eric Girard’s new budget trims the tax rate in the lowest two income brackets, a break equal to C$814 for those earning more than C$98,000 ($71,500) a year. The government is also sweetening a tax holiday for companies that make large investments, aiming to lure new projects in electric vehicle battery manufacturing and other sectors.

Premier Francois Legault’s Coalition Avenir Quebec party was re-elected last year with a resounding majority on a platform of attracting new investment, protecting the French language and reducing the wealth gap between Quebec and Ontario, its larger, richer neighbor. Tuesday’s budget brings Quebec’s personal income tax burden closer to Ontario’s, but it’s still the highest among Canada’s provinces and well above the OECD average.

“It’s going to stimulate economic growth and increase the work supply,” Girard said at a press conference in Quebec City. “There will not be, and I want to make this very clear, any impact on public services.”

Quebec’s finances have improved significantly over the past generation, thanks to abundant cheap hydroelectricity, an educated workforce and growth in the finance and technology sectors. Girard said the province will continue to whittle away at public debt, which is about 37% of gross domestic product. His new target is to bring that down to about 30% by 2038. If not for the tax cuts, the government could do so by 2033, he said.

The income tax cuts will reduce provincial tax revenue by C$1.7 billion annually. To pay for it, the government is reducing its contributions to the Generations Fund, a reserve fund that’s dedicated to future debt payments and managed by the Caisse de Depot et Placement du Quebec.

“It’s a fine balance between making sure that we will continue reducing the debt, but at the same time giving oxygen to the economy and Quebeckers who are the number one taxpayers in North America,” the minister said.

‘Rose-Colored Glasses’

The decision drew sharp criticism from Frederic Beauchemin, a lawmaker from the opposition Quebec Liberal Party who used to be a banker at Bank of Nova Scotia.

“The government has rose-colored glasses,” Beauchemin said. The economic risks are high, he said, and Girard’s use of the Generations Fund to pay for tax cuts is a bad idea because the fund has historically generated returns above 6%, much higher than Quebec’s cost of borrowing. “The government decided to take the most expensive way of financing.”

Girard’s budget forecasts a deficit of C$4 billion for the fiscal year that begins on April 1, down from this year’s C$4.6 billion. The government expect small deficits will remain over several years before the budget is balanced in 2027-2028. The tax breaks for new investments are expected to support about 100 projects and cost C$373 million over a five-year period.

The government’s forecast is for economic growth of 0.6% this year, slightly more optimistic than private sector economists, and Girard sees a 50% chance of a recession in Quebec.

“2023 will be a difficult year, but Quebec has undeniable advantages such as a high saving rate, low debt, diversified economy, full employment, solid public finances,” he said. “And yes, the fiscal stimulus arrives at the good moment.”

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