Quebec's Long Streak of Balanced Budgets Ends on Virus Costs – Yahoo Finance

(Bloomberg) — The coronavirus crisis is putting a halt to Quebec’s budget discipline.

Canada’s second-largest province, which at the beginning of March was counting on a sixth straight year of balanced books, now expects a C$14.9 billion ($11 billion) deficit. The shortfall — stemming from a combination of sinking tax revenue and virus-related expenses — includes a C$4 billion provision to mitigate a potential second wave of infections.

“The last few months haven’t been easy and we still have a great deal of work to do, but I’m convinced that we will be able to prepare a post-Covid-19 future where Quebec and its economy will recover the vitality and momentum that characterized it only a few weeks ago,” Finance Minister Eric Girard said in a press release Friday.

The province now expects its economy to contract 6.5% this year, compared with the 2% growth it forecast previously. It will bounce back with a 6% expansion in 2021, according to the government, which plans to return the budget to balance within five years. In dollar terms, the deficit is the largest since World War II, Girard told reporters.

The deficit, as defined by Quebec, comes after a contribution to a debt-reduction pool known as the Generations Fund.

A 40% Lockdown

While a string of budget surpluses helped the province reduce its debt and enter the crisis in a strong fiscal position, the scope of the pandemic was insurmountable. Quebec closed about 40% of its economy for eight weeks to contain the spread of Covid-19, according to Girard.

Thanks to its budget rules, Quebec will tap its entire stabilization reserve, a pool into which surpluses are automatically allocated over the years. It’s not readily-available cash but an accounting tool policy makers can use without endangering the budget balance.

Quebec’s debt as a percentage of its gross domestic product will jump to 50% by the end of March 2021, from 43% a year earlier, as a result of the new borrowing.

The province expects net financial requirements to total C$28.2 billion this year, from less than C$2 billion last year.

The government also indicated it may review rules around the Generations Fund, if a debt burden target of 45% of GDP by March 2026 appears out of reach when it next updates its budget, in the fall.

With deficits to finance for the next few years, “it’s going to be tight,” Girard said.

(Adds finance minister’s comments starting in fourth paragraph.)

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