November 12, 2020 | 16:14
Quebec FY20/21 Fiscal Update
The Province of Quebec is projecting a $12.3 billion deficit for FY20/21 on a public accounts basis, in line with the estimate produced in June. The shortfall will weigh in at just under 3% of GDP, which is somewhat below the provincial average, but keep in mind that Quebec entered this period running hefty surpluses.
Below the surface, the underlying fiscal situation is actually tracking $4.4 billion better than expected, thanks to a combination of firmer-than-expected revenues and lower-than-expected debt-service and department spending costs. But, the Province has used that room to roll out an additional $4.5 billion in support measures since the last fiscal update, including $700 million in this document. These new measures centre around helping people get back into the labour market (skills training and graduation rates), and some measures targeted at areas to spur investment and support certain sectors (such as tourism).
Notably, the underlying improvement has allowed the Province to roll out these new support measures without widening the deficit, and still maintaining the sizeable $4 billion cushion to cover any future downside risk to the economy, or upside risk to spending, as the second wave of COVID has rolled in.
Note that the stabilization reserve will be used to, from an accounting perspective, balance the budget for the purposes of the Balanced Budget Act.
The Province has also, for the first time since the pandemic, published a medium-term fiscal outlook. Quebec expects the deficit to narrow significantly to $5.3 billion in FY21/22, which includes a $3 billion provision for revenue/spending risk. The deficit shrinks further to $3.8 billion in FY22/23. Notably, this is a much quicker reduction in the deficit than was laid out by Ontario last week, as revenues are expected to respond more to the economic rebound (surely to become a closely-watched subject), and spending measures are presumed to roll off more quickly.
This fiscal update is based on the assumption that Quebec's economy will contract 6.0% this year, before rebounding 5.0% in 2021. We are similarly expecting a 6.1% decline this year, but a firmer 5.8% rebound next year. That said, Quebec is a province that is (again) facing a relatively large hit from the second wave of COVID-19 cases, so the handoff from 2020Q4 into 2021 could prove to be weaker than we currently have built into our forecast (even though we've recently revised Q4 down to reflect no growth).
This year's deficit will lift net debt to 43.3% of GDP this fiscal year, up from 37.3% in FY19/20. This will abruptly end a very strong run of fiscal consolidation that saw the net debt-to-GDP ratio fall from almost 51% in FY12/13. But, that ratio should begin to fall again in FY21/22, and debt service costs remain at a record low relative to revenues. Total borrowing requirements are estimated at $32.5 billion for FY20/21, little changed from the June fiscal update. This includes $10.3 billion of maturities, and the total is dampened by almost $8 billion of pre-financing done last fiscal year. Note that the FY20/21 program was about 90% complete as of the early-November. Borrowing is then expected to average a similar amount ($34 billion) over the following two years.
The Bottom Line: Overall, this update doesn't change the current-year fiscal picture for Quebec, with some underlying improvement cycled back into economic and COVID-related support measures. But, it does give us a glimpse at how finances will proceed beyond this year and, at this point, the pace of deficit reduction looks pretty quick. That's a notable contrast to what we saw from Ontario last week, and is still open to much uncertainty--how well revenues respond to the economic recovery, and how quickly support spending can be scaled back will be the two biggest determinants.