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QUEBEC—Trying to emulate wealthy Alberta and its royalties on oil exploitation, debt-ridden Quebec yesterday unveiled a provincial budget that will tap into the province’s most plentiful resource, its abundance of water.
In an otherwise low-key, understated, balanced budget, Finance Minister Michel Audet announced he will finance Quebec’s new debt-reduction fund through royalties on commercial users of water. The bulk of those royalties are to be paid by the provincial electrical utility, Hydro-Québec, which has an extensive network of hydroelectric dams.
Mr. Audet assured reporters that the utility will bear the additional cost through more exports, or even taking lower profits, rather than increases in electricity rates.
Major new spending in the budget includes $1.5-billion for public transit and other environmentally friendly forms of transportation, and $925-million in loans and tax credits to help the forestry sector.
But the bulk of expenditures still revolves around health and education, which eat up $35-billion, nearly 69 per cent of the total spending of the $50.8-billion total budget for 2006-2007.
Mr. Audet announced personal income tax cuts of $362-million, mainly by doubling to $1,000 the tax deduction for workers. For a fourth year, the government failed to meet its key election pledge to cut income taxes by $1-billion a year.
“We never said we’d cut tax at the detriment of public services,” Mr. Audet said.
As he did in the previous budget, he spoke again merely of aiming for the Canadian average. “We’ve gone a good stretch of the way. We were not able to run, but we’re walking that way.”
Instead, the budget focused on debt reduction. With Quebec’s aging population, “there’ll be fewer taxpayers in the years ahead to pay for services and the debt. We have to tackle this problem now,” Mr. Audet said.
Quebec’s total debt of more than $118-billion is equivalent to 42.7 per cent of its gross domestic product, the highest rate of any Canadian province.
It will be $121-billion by the end of 2006-2007.
The province forecasts it will trim the debt-to-GDP ratio to 41.1 per cent by fiscal 2007-2008.
Mr. Audet aims to lower the debt rate to the current Canadian average of 25 per cent of GDP—though he plans to reach that level by 2025, when the Canadian average might be even lower.
Budget documents state that the Finance Department’s forecasts are in line with the average private-sector forecasts. Some observers, however, thought that the budget’s outlooks, while within realistic brackets, tended to veer toward the optimistic end. The budget forecasts a 2.5-per-cent real GDP increase for 2006 whereas Scotiabank Group is predicting 2.1 per cent.
Two weeks ago, Premier Jean Charest announced the creation of a so-called Generations Fund to pay down the debt. Mr. Audet didn’t indicate when the fund will start repaying the debt, saying that its content will be invested and managed by the Caisse de dépôt et placement.
Parti Québécois critic François Legault mocked the government plan by noting that the debt will increase this year by $3-billion, whereas the Generations Fund is expected to accumulate only $74-million during that period. “It’s like saving $74 when you owe $3,000 on your credit card,” he said.
This year’s budget outlines for the first time how the fund will be financed, through a resource tax on industrial water usage.
Beginning next year, Hydro-Québec, will begin paying annual royalties for using power for its dams, a fee that private operators such as paper and aluminum mills already pay, which brings in $80-million.
Hydro-Québec is expected to pay $325-million for 2007 and $500-million annually afterward. Officials say the utility is expected to cover the added expenditure by reducing costs elsewhere and increasing exports.
Next month, Hydro-Québec will increase its electricity rates by 5.3 per cent—nearly double the national inflation rate of 2.8 per cent. This comes after news that the utility paid the Quebec government record dividends of $1.35-billion in 2004, after posting a net income of $2.435-billion.
The government has shrugged off criticism of the electricity increases by saying that they had been approved by an independent board initially set up under the PQ.
Power rates had been frozen for five years. Finance officials hope higher rates will push residential customers into lowering their usage, freeing the utility to expand its more lucrative export markets.
The province will also collect royalties on commercial users who harness water in Quebec, although specifics on that new resource tax remain to be studied. Officials say the move could affect water bottlers, brewers and industries that use a lot of water. The government expects only small revenues from those businesses, about $10-million a year, so as not to choke them.
Health expenditures will continue to mushroom, rising by $1.4-billion to reach $22.1-billion for 2006-2007, a 6.3-per-cent growth. In the previous budget, there had been a 4.1-per-cent increase.
The extra health expenditures include an increase of $54-million in tax credits and extra spending for home care for elderly people.
The Education Department, the budget gives the Education Department $13-billion, an increase of $660-million, or 5.4 per cent.
Besides health and education spending, two other major items are transport and support for the forest industry. The government will commit $1.5-billion over three years to support public transit and other environmentally friendly transport options, such as a $1,000 refund on provincial sales tax for buying hybrid cars, a credit that already exists in Ontario, Prince Edward Island and British Columbia.
The bulk of the new spending in transport will go to renovate Montreal’s aging subway and expand its suburban commuter train system.
Highlights
Balanced budget on spending of $50.8-billion
As of March 31, 2006, debt is projected to be $118.2-billion
Creation of Generations Fund to reduce debt by $30-billion in 2025-26; it will be funded with royalties from Hydro-Québec, private producers and eventually other industrial users of water
Tax deduction for workers doubled from to $1,000 from $500, for a total income-tax deduction of $288-million for 3.2 million.
$1.4-billion increase in spending for health care, to $22.1-billion
$660-million increase in spending for education, to $13-billion
$158-million more for social housing
$100-million in new support for farmers