UPDATE 2-Quebec keeps 2015-16 goal for balancing the Canadian province's books

Wed Jun 4, 2014 6:00pm EDT

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By Marie-Pier Cayer

QUEBEC CITY, Quebec, June 4 (Reuters) - The new Liberal government of Quebec pledged on Wednesday to balance the Canadian province's books by 2015-16, sticking to the same timetable as the previous government of the separatist Parti Quebecois.

In presenting a budget for the 2014-15 fiscal year, it estimated a deficit for the year of C$2.35 billion ($2.15 billion), up from the C$1.75 billion gap forecast by the previous government in the budget it presented in February.

The Quebec Liberals took power in an April 7 general election, and because they have a majority of seats in the provincial legislature, passage of the budget is assured.

Quebec, the second-biggest provincial economy in Canada, faces the highest public debt load of any province.

Finance Minister Carlos Leitao, a former bank economist, sent a clear message to markets that his priority would be to reduce Quebec's debt and deficit.

He said that 90 percent of the effort required to eliminate the budget deficit would come from spending cuts, with the remainder coming from increased revenues, including higher taxes on tobacco and alcohol, but no income tax changes.

He said if the government did nothing, the province would face deficits of C$5.9 billion and C$7.6 billion this year and next.

"Spending continues to grow faster than revenue, which is the very definition of a structural deficit. The time has come to finally tackle this problem, before others force us to do so," Leitao said in a press release.

Perhaps the biggest savings will come from a two-year hiring freeze in the public sector. The budget also cuts the rates of several tax credits by 20 percent and abolishes other tax assistance measures for corporations.

Government spending growth will be limited to 1.9 percent this fiscal year versus revenue growth of 2.9 percent.

"I think the tone is right from an investor perspective," said Robert Kavcic, economist at BMO Capital Markets.

In an effort to help Quebec-based companies expand into global markets, the tax rate for small and medium-sized manufacturers will be cut immediately to 6 percent and then to 4 percent in 2015, from the current 8 percent.

Sebastien Lavoie, economist at Laurentian Bank, said Leitao wants to make long-lasting changes to spending and to the taxation regime, likely to be announced in the 2015 budget.

"There's a major overhaul coming up for the Quebec economy in the next budget," said Lavoie.

Leitao said the government would push ahead with "Plan Nord," initially unveiled by the Liberals in 2011 to help finance the development of huge mineral resources in the far north of the province.

The mining tax regime will remain intact, he said.

He confirmed the government's intention to buy equity stakes in companies in the mining and oil and gas sectors. It will allocate C$1 billion to a special fund for this purpose that will be created through legislation in the fall. ($1=$1.09 Canadian) (Reporting by Marie-Pier Cayer; Writing by Louise Egan; Editing by Peter Galloway and Dan Grebler)

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