The Quebec Minister of Finance released a pre-election report showing an improved fiscal situation for the province. The budgetary balance for the next five years has improved by $950M annually due to higher than expected GDP and tax revenues. For the 2017-2018 fiscal year, there was a $4.6B surplus before contributions to the Generations Fund. The report estimates Quebec's finances would withstand NAFTA termination or a typical recession, but a major economic slowdown would cost the province $8.5B in revenues. The Auditor General found the economic forecasts to be plausible, reducing the risk of an unexpected fiscal shortfall after the elections.

1.
Pre-Election Report on the State of Quebec’s Public Finances
Yesterday, the Quebec Minister of Finance released his first pre-election report on the state of public finances. This
report is essentially a fiscal update and the last piece of information available for bond investors before the October
1st elections.
The report shows a solid improvement in the Province’s budgetary balance. Underpinned principally by a stronger
GDP deflator in 2017 boosting taxation revenues, the budgetary balance for the next five fiscal years has improved
by $950M annually compared to the 2018 March budget. For instance, the fiscal surplus for FY 2017-18 is estimated
at $4.6B (1.1% of nominal GDP) before the $2.3B contribution to the Generations Fund (see chart). This surplus is
significant considering that program spending soared by 5.9% last year. As required by law, the remaining $2.3B
surplus will be dedicated to the stabilization reserve. The stabilization reserve reached a significant $6.9B at the end
of FY 2017-18 (see chart).
Since the elections will be held in six weeks, it is difficult to assess how the $950M annual fiscal improvement will be
used overtime. The electoral orientations of political parties suggest this money may be used more towards additional
programs and capital spending, rather than towards lower taxes and further debt reduction. For now, the $950M
upside to the budgetary balance reduced the need of using the stabilization reserve in FY 2018-19, FY 2019-20 and
FY 2020-21. Recall that this was required in the March 2018 budget to balance the books and to make the desired
contribution to the Generations Fund over time (see charts).
The stabilization reserve would be a sufficient cushion to preserve the balanced budget and the $2B per year
withdrawal from the Generations Funds dedicated to repay maturing bonds on financial market if NAFTA is
terminated (in the pre-electoral report, it is estimated that the end of NAFTA would reduce Quebec’s GDP growth by
0.5pp and lower own-source revenues by about $350M annually). However, the stabilization reserve and $100M
annual contingency reserve would not be enough to preserve the balanced budget from a major economic slowdown
(in the pre-electoral report, it is estimated that a typical recession would cost the government $8.5B in own-source
revenues).
Finally, the Auditor General of Quebec reviewed the pre-election report and found that the Province’s financial
framework and economic forecasts presented are “plausible”. Thus, the risk of finding an unexpected fiscal hole after
the elections (caused by overrun costs or an understated debt for instance) is very low.
Bottom Line: The pre-electoral report reveals further improvement to Quebec’s fiscal situation and outlook. This
should help the government to achieve its debt reduction objective: the gross debt-to-GDP ratio is now forecast to fall
to 42.4% by FY 2022-23 (see chart). This strategy is particularly rewarding at a time when the interest rates are
rising.
Sébastien Lavoie | Chief Economist | 514 350-2931 | lavoies@vmbl.ca

2. Economic Research and Strategy
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