UPDATE 2-Quebec promises balanced budget by 2013-14

Tue Nov 20, 2012 5:39pm EST

Related Topics

* Canadian province still aims to balance books by 2013-14

* Cuts, tax hikes to curb deficit to C$1.5 bln in 2012-13

* Minority PQ gov't needs opposition support to pass budget

* Bond markets little changed following budget

By Louise Egan

QUEBEC CITY, Nov 20 (Reuters) - The Canadian province of Quebec said on Tuesday it will eliminate its budget deficit by 2013-14 through spending restraint and higher taxes on the rich, but delayed plans to raise mining royalties.

Finance Minister Nicolas Marceau promised to whittle down the budget shortfall in the current 2012-13 fiscal year to C$1.5 billion ($1.5 billion), or 0.4 percent of gross domestic product, and balance the books in the following year, as was widely expected, ending a four-year string of deficits.

The current year deficit excludes a C$1.8 billion fiscal cost of shutting down the Gentilly nuclear power plant.

About two-thirds of the effort towards achieving the target comes from limiting growth in government spending, with the rest coming from modest tax hikes and other measures such as cracking down on tax evasion and cutbacks at state-run enterprises.

The ruling Parti Quebecois won a minority of seats in the province's legislature in a September election, and needs the support of some opposition members for its budget or it will be defeated in a non-confidence vote, triggering a snap election.

The main opposition party, the Liberals, called the budget incomplete and "unacceptable" but said it was reluctant to force Quebeckers back to the polls so soon.

Liberal finance spokesman Raymond Bachand said the party would decide later on Tuesday how to proceed.

The third party, Coalition for the Future of Quebec (CAQ), will vote against the budget unless there is a "major amendment" such as a reversal of tax hikes, its leader Francois Legault said.

The PQ has 54 seats in the National Assembly while the Liberals have 50 and the CAQ has 19.

TAX INCREASES

If the impact of the closing Quebec's Gentilly nuclear power plant is included in the overall figures, as some critics say it should, the deficit this year balloons to C$3.3 billion, the biggest since 1995-96.

The budget formalizes tax increases for those earning more than C$100,000 a year -- a move the opposition rejects. Finance Minister Marceau said the plan as a whole helps the middle class and should win the backing of the two opposition parties.

"Its a balanced, responsible budget ... I have difficulty believing the opposition parties would reject this budget," he told reporters.

The budget pledges to limit growth in program spending to 1.9 pct in current fiscal year, down from 2.5 percent in the previous year, a goal analysts said was quite ambitious.

"There's no doubt it will be a challenge to eliminate the deficit," said Robert Hogue, senior economist at Royal Bank of Canada.

"It's reassuring that they remain committed and we'll see if they have the resolve to go through with it. Those are very ambitious goals," he said.

Spending growth is set at 1.8 pct in 2013-14 and 2.4 pct in 2014-15. The budget also caps public infrastructure spending at C$9.5 billion a year.

The government proposes raising taxes on tobacco and alcohol and extending to 2019 a payroll tax on banks that was due to expire in 2014.

Marceau said that if the government had done nothing, the deficit was on track to reach C$1.4 bln in 2013-14 and C$2.8 billion in 2014-15 because of a weaker economic outlook and overspending on infrastructure projects.

The budget cuts Quebec's 2012 economic growth forecast to 0.9 percent from 1.5 percent forecast in the previous budget.

MUTED MARKET MOVE

Market reaction was muted following the budget. Quebec's benchmark 10-year bond yield hovered around 118 basis points above the Canadian government counterpart before and after the release.

This was still well below the spread of 174 basis points seen in late 2008 after the global financial crisis hit, but above the 30 to 40 basis point range seen in early 2007.

Brian Calder, a Calgary-based bond trader with the Bissett unit of Franklin Templeton Investments, called the overall reaction in fixed income markets a "shoulder shrug."

"I'm not reading anything here that would cause anybody to change their position," he said. "On the whole, there's nothing outrageous here. They're trying to do the right thing."

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