Quebec budget kinder to business, delays work on mining royalties

Tue Nov 20, 2012 5:38pm EST

* New separatist budget more conciliatory than expected

* Analyst says no longer leaves anti-business impression

* Tax holiday for targeted investments

* Sets higher tax brackets for upper-income people

By Louise Egan

QUEBEC CITY, Nov 20 (Reuters) - The Canadian province of Quebec promised on Tuesday to overhaul its system of mining royalties next year in a budget that was otherwise seen as more business-friendly than expected.

After winning a September election, the separatist Parti Quebecois (PQ) ruffled feathers in the corporate sector with talk of increasing the financial burden on wealthy households and on companies in order to pay for tax breaks for low and middle-income households, as well as to cover the cost of reversing the previous Liberal government's decision to raise university tuition and electricity rates.

While the PQ, which has a minority of seats in the legislature, says it still plans to follow through on some of those promises, it scaled back those ambitions somewhat in a budget seen as more conciliatory.

"If we listened to their promises during the election campaign and then look this budget, it's not the same government," said Carlos Leitao, chief economist at Laurentian Bank.

"I think they realized they're in a minority situation so they can't really do everything," he said.

Leitao said the first few weeks in power for the PQ gave a negative impression to investors that it did not know how to manage the economy. "With this budget they're giving the impression that they're not anti-business."

The PQ has delayed any move on mining royalties, made no mention of measures to limit foreign takeovers in the budget and instead introduced a 10-year tax holiday for major private investments in targeted sectors such as manufacturing.

It also softened its stance on freezing electricity rates and on abolishing a special fund for paying down the debt. Prior to the budget, the government also backed down on its tax for the wealthy.

"GIVE US A FEW MONTHS"

On the issues of mining royalties, the budget proposes only to "review" the current royalties system and begin consultations with the industry and stakeholders in early 2013.

"Just give us a few months," Quebec Finance Minister Nicolas Marceau told reporters when asked to explain the shift. "We never said when we were elected, when we were campaigning, that all would be done in two months. I think we've achieved quite a lot in this budget ... and of course there remains work to be done."

Companies such as Cliffs Natural Resources, Rio Tinto Plc and Xstrata Plc own stakes in companies or projects in the province, which relies heavily on resource investment for economic growth.

In the electoral campaign, the PQ had raised the prospect of changing the mandate of the province's pension fund, Caisse de depot et placement, so that it could buy stakes in Quebec companies in order to ward off foreign takeover bids such as that for home improvement store Rona Inc by U.S. rival Lowe's Co.

There was no such measure in the budget, although Marceau said he would consider changes to the Caisse's role if it became necessary.

There have been reports that the PQ would abolish a sovereign fund known as the Generation Fund, which is used to pay down debt, but the budget maintains that fund.

The province is maintaining its promise to cancel plans by the previous Liberal government to raise electricity rates, but proposed indexing the rates to inflation instead of a flat freeze.

The budget formalizes previously announced tax hikes on those with higher incomes and the elimination of a flat healthcare levy in favor of a progressive health tax, although both of these proposals were softened prior to the budget.

It proposed two new higher tax brackets for incomes above C$ 100,000 ($100,000) and C$130,000 per year. The extra revenue will offset the fiscal impact of exempting poor households from the healthcare tax while imposing a levy of up to C$1,000 for the wealthiest residents.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article