The Quebec government has the largest provincial debt load in Canada. In 2013, it reached a peak of 54% of the province’s GDP, compared to 45% in Ontario and 39% in Nova Scotia. Its bonds have always traded at a discount to those of Ontario, from a mere 8 bps all the way up to 50 bps, depending on the political zeitgeist. But the Balanced Budget Act – passed in 1996 – brought major changes to the way in which the budget is managed. Its goal was to minimize budget deficits unless 3 situations come to be:
1- A catastrophe that could impact the revenue or expenses of the government.
2- A downturn in the economy.
3- A change in fiscal transfers from the Federal government.
This had a positive impact, as the Quebec Government ran a few small surpluses in that period. But the biggest impact was the creation of the Generations Fund, whose purpose was to accumulate funds used to pay down the provincial debt. The goal was to have that fund reaching a level of $21 billion by 2024. On top of that, over the last 5-7 years, the government imposed some austerity measures with the goal of creating budget surpluses and reducing the total debt to 45% of the GDP, a goal which should be reached in 2020-21, 5 years earlier!
The reward for these efforts was an upgrade of Quebec’s credit rating and a dramatic drop in the interest rate spread on its bonds. Now, Quebec bonds yield less than those of Ontario, demonstrating a rare success story for Quebec’s budget.
Vice President and Portfolio Manager
Active and Strategic Fixed Income Team
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