Quebec taps rainy-day funds to ease cost of higher deficits

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Quebec is planning to take billions of dollars from its rainy-day funds to reduce borrowing needs after its finance minister released budget documents that anticipate much larger deficits in the years ahead.

Canada’s second-largest province expects to run a budget shortfall of $11 billion in the fiscal year that begins April 1 — $8 billion more that it was forecasting only four months ago. Slow economic growth will crimp corporate tax revenue, and the government’s wage bill is rising after it negotiated a new contract with public sector employees.

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So Finance Minister Eric Girard intends to pull $4.4 billion from Quebec’s Generations Fund — which saves and invests royalties from the province’s vast hydroelectric facilities — and will also draw $2.5 billion from a retirement-savings reserve fund.

Quebec’s financial plan is drawing scrutiny from bond-rating companies. The government estimates it will issue $36.5 billion in new debt in the 2024-25 fiscal year. Without using the reserve funds, that would have surged to more than $43 billion. “We need to be honest with that, a larger deficit raises the borrowing requirement,” Girard said in an interview.

Quebec’s deficit is rising at a time when interest rates remain elevated because of concerns about persistent inflation.

This week, the province sold $600 million in bonds maturing in 2033 with a 4.215 per cent yield — well above its current average cost of debt, which is around 3.7 per cent. Quebec has the third-highest rating from Moody’s Investors Service and the second-highest from S&P Global Ratings and Fitch Ratings.

Douglas Offerman, an analyst at Fitch, said the return of large budget deficits in the French-speaking province is a “big deal.” But the Generations Fund and other savings vehicles act as “shock absorbers that are very large,” reducing potential concerns. Moody’s and Morningstar DBRS said in separate notes that the outlook over the medium term will restrict Quebec’s financial flexibility within its current credit ratings.

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