Quebec separatists push fiscal plan to forefront

Fri Aug 31, 2012 11:28am EDT

* Polls show separatist Parti Quebecois in lead

* PQ would raise personal taxes, mining royalties

* PQ eyes C$10 bln fund to take stakes in Quebec firms

By Rita Devlin Marier and Cameron French

MONTREAL/TORONTO, Aug 31 (Reuters) - Quebec's separatist Parti Quebecois, tipped by polls to win the Sept. 4 provincial election, has stirred emotions across Canada and outside the country with its call for independence for the mostly French-speaking province.

But it is the left-leaning party's proposed fiscal changes that have raised the most concern within Quebec's business community. The PQ wants to balance the budget by increasing mining royalties and boosting income taxes on individuals, while canceling unpopular electricity and tuition fee hikes.

The fiscal plan "does add some uncertainty to the formula here without a doubt if the PQ are in power," said Karl Moore, a business professor at Montreal's McGill University.

Uncertainty is not what most Quebec business leaders want. The province's resource-driven economy, which depends heavily on foreign investment for growth, grew just 1.7 percent last year, lagging most of Canada.

Still, a recent poll shows the PQ holding about 32 percent support, ahead of the newly created Coalition for the Future of Quebec (CAQ) and the incumbent Liberals, who have been polling in the mid to high 20s.

That suggests the PQ could form a minority government, ending a nine-year Liberal reign.

Party leader Pauline Marois, a career politician, calls her framework "responsible and rigorous" and vowed to balance the budget by next year as the governing Liberals also promise.

"It's very important for me to manage our finances responsibly. That is without doubt why our engagements are the least costly of all parties," she told reporters last week, outlining a program that would amount to net new spending of C$992 million ($1.0 billion) over five years.

Key to the PQ plan to balance the budget is an increase to the tax burden on individuals and mining companies.

The party plans to cut the personal income tax exemption for capital gains to 25 percent from 50 percent, and halve income tax credits on dividends. It would also create two higher-income tax brackets starting at C$130,000 and C$250,000.

HIGHER ROYALTIES

Once considered the world's most mining-friendly jurisdiction, Quebec is still considered among the best for miners despite tax rates that are higher than many other jurisdictions.

Under a new system, the province would impose royalties of 5 percent on the gross value of all mining output and slap a 30 percent surtax on any mining profits over an 8 percent return on the investment.

Current mining duties are 16 percent of an operator's profit, and the PQ says its new mining regime would generate an additional C$388 million in revenue over five years, which it would put towards the province's debt.

The party would also establish a C$10 billion fund that would take stakes in Quebec companies and discourage foreign takeovers.

That would undoubtedly add uncertainty to Lowe's Cos Inc's C$1.8 billion bid for Canadian home improvement chain Rona Inc.

The offer has already become a political football in the election campaign, as Rona is based in Boucherville, Quebec, and about half of the company's 30,000 employees work in the province.

The move to limit takeovers could also deter investment from the large foreign companies that dominate the global mining industry, one of Quebec's biggest industrial sectors.

Companies such Cliffs Natural Resources, Rio Tinto and Xstrata own stakes in companies or projects in the province, but may be wary of putting in additional money if they stand to lose profits to the government.

"They will not move, but they will certainly reduce the pace of their investment if the government that is elected is not able very rapidly to reassure the business community, because right now they are worried," said Yves-Thomas Dorval, president of the Conseil du Patronat, Quebec's biggest business lobby.

Mining companies contacted by Reuters declined to comment on the risks that could come out of the election.

THIRD REFERENDUM

Against the economic backdrop, the party's signature position - separating the French-speaking province from the rest of Canada - has receded as an issue.

Marois has said she would only hold a separation referendum if she felt sure of victory, and with polls showing less than 40 percent of Quebeckers support separation, a vote is unlikely in the near future.

Even so, the past experience of Quebec's flirtations with separation are enough to keep the business community on edge.

The Parti Quebecois' first provincial election victory in 1976 triggered a corporate exodus from Quebec that saw longtime Montreal-based companies such as Royal Bank of Canada and Bank of Montreal decamp to Toronto, which is now home base for much of corporate Canada.

That led to Quebec's first separation referendum in 1980, which was handily defeated. But a second vote in 1995 came within a sliver of passing, with the separatists winning 49.4 percent of the vote.

The close call led to another business chill that sent unemployment higher, hammered home values in Montreal, and contributed to the Canadian dollar's precipitous decline during the 1990s, as foreign investors eyed the country with unease.

This time, the Canadian currency has been stable, and has indeed risen over the last three months as the election race has gained momentum.

INVESTORS NERVOUS

Quebec bond yields have risen in comparison to Government of Canada bonds, suggesting investors see rising risks, but analysts say these moves might also be due to a wave of student protests that have disrupted life in Montreal this summer.

"The markets in the past, they've always been a little bit nervous when there's been a Quebec election just because of the sovereignty issue always pops up," said Michael Yake, Moody's analyst for Quebec.

"We do expect stability, even coming out of the election at this point in time."

However, not all are so sanguine. In a note entitled "Quebec Election: Handle With Care," PIMCO portfolio manager Ed Devlin warns that Quebec bond investment could suffer if foreign buyers feel politicians are calling into question the province's fiscal union with Canada.

Those risks could extend well beyond bond investors, particularly among foreign players who are not familiar with the normal ebb and flow of the sovereignty movement in Quebec, McGill's Moore said.

"Most business people, particularly global multinationals... are nervous when the idea of separatism arises," he said.

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