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Quebec puts focus on restraint, Ontario on jobs. Who’s right? Add to ...

These are stories Report on Business is following Thursday, June 5, 2014.

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A tale of two provinces
Canada’s two central provinces are taking markedly different approaches to their economic and fiscal woes.

Who’s right?

Yesterday, Quebec Finance Minister Carlos Leitao, just a few weeks into the job, began to move forcefully to get the province’s books in order, unveiling a first budget that would tame spending increases and slap a freeze on the public sector, among other measures.

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He’ll miss the estimate of the previous government, with a fatter deficit of $2.35-billion for fiscal 2014-15, but still aims to balance the budget by 2015-16.

Compare that to the Ontario Liberals, now in the midst of an election campaign, who, in a budget that would be re-introduced should they win, missed their short-term deficit targets but promised to balance by 2017-18.

These are, of course, distinctly different provinces, but they share certain troubles.

Quebec is home to about 332,000 people who can’t find work, with a unemployment rate above the national average, at 7.6 per cent.

Program expenses on a per-capita basis, according to Royal Bank of Canada, would be $8,676 in Ontario in 2014-15, and $8,644 a year later. The corresponding Quebec figures are $8,002 and $8,0003.

Ontario’s unemployed number more than 555,000. Its jobless rate is also above the Canadian average, just below Quebec’s at 7.4 per cent.

Quebec’s Liberals have put the focus on restraint, while Ontario’s Liberals have put the focus on jobs.

In a March forecast, RBC projected economic growth would pick up to a still modest 1.9 per cent this year, followed by 1.8 per cent in 2015, with unemployment running at 7.5 per cent this year and 7.3 per cent next.

RBC forecast Ontario’s economic growth at 2.5 per cent this year, and 2.9 per cent in 2015, with a jobless rate of 7.3 per cent this year a jobless rate of 7.3 per cent this year and 7 per cent next year.

Net debt in Ontario would climb to $289-billion in Ontario in 2014-15, and in Quebec to $192-billion.

Senior economist Robert Kavcic of BMO Nesbitt Burns takes an interesting look at the two provinces today, noting that Quebec has “made progress” on the deficit recently, while Ontario is poised to “backslide” again.

But as net debt climbs in both provinces, Quebec’s burden is greater, topping 50 per cent of gross domestic product.

“In a nutshell, both provinces face significant, but somewhat different, challenges,” he said.

“In Ontario, it is carrying out the spending restraint necessary to balance the books (whoever wins next week). In Quebec, it’s a persistent focus on long-term debt reduction for the newly elected government.”

Here’s what some analysts said of yesterday’s Quebec budget:

“The first budget from the Liberal government is indeed a transition budget, layout out a framework for restrained spending and a balanced budget by FY15/16. But, this is just the opening act, with program and taxation reviews likely to bring further meaningful policy changes in the year ahead.” Mr. Kavcic

“Last year’s poor results underscore how vulnerable budget projections can become when the economy fails to co-operate and expense management loosens. Even though Budget 2014 rests on reasonable economic assumptions (the ministry of finance forecasts real GDP growth of 1.8 per cent in 2014 and 2 per cent in 2015, both close to our own 1.9-per-cent and 1.8-per-cent forecasts respectively), it should be noted that the budget removed the contingency reserve in both 2014/15 and 2015/16. This leaves less room to manoeuvre in the event of unexpected developments.” Robert Hogue, RBC

“Cognizant of the challenges ahead, Québec’s new administration has begun moving early in its mandate to put its fiscal house in order … The incoming government will thus need to rein previous spending patterns to reach balance, and even surpluses further out. In fact, with health and education spending getting around a 3-per-cent boost in 2014/15, aggregate spending in remaining departments will need to fall, indicative of the challenges in wrestling the consolidated spending-to-GDP ratio back down to its long-term average.” Peter Buchanan, Nick Exarhos, CIBC World Markets

And here’s what some said of the Ontario budget that did not pass:

“Running higher deficits in the short term necessarily has negative implications for Ontario’s debt. The provincial debt will likely come into focus in the period ahead as rating agencies pass judgment on Ontario’s credit risk.” Mr. Hogue, Laura Cooper, RBC

“The cost-containment plan remains a major challenge, and despite some progress in recent years, this budget might leave some questioning the resolve to hit those targets.” Mr. Kavcic

“Ontario is relaxing its short-term deficit fighting efforts in order to shore up the economy. The proposed budget embraces a longer-term policy perspective, including 10-year plans for growth and infrastructure investment, alongside a made-in-Ontario pension solution to bolster retirement income adequacy. Growth disappointments and lower federal transfers are weighing on revenue, while a host of new commitments add to program spending.” Warren Lovely, CIBC

ECB cuts rates
The European Central Bank launched an aggressive assault on waning inflation today but stopped short of deploying quantitative easing to try to pump up the slow-moving economy, our European correspondent Eric Reguly reports.

In an unprecedented move, the ECB reduced interest rates, putting one of its key rates into negative territory for the first time. No other major central bank has taken such a drastic move. The ECB also introduced a €400-billion scheme to flood the banks with cheap loans in the hope they will use it to jump-start lending to businesses and households.

The ECB entered into uncharted territory by cutting the main refinancing rate to 0.15 per cent from 0.25 per cent. The deposit rate, which was already at zero, was cut by the same amount, pushing it into negative territory. The deposit rate is the interest paid to any bank which parks its money at the ECB overnight. The negative rate – essentially a fee charged on the deposits – is designed to encourage banks to lend out the money and put some downward pressure on the euro, whose rise has helped to drag down the inflation rate.

“The main reason for the cut is to lower the value of the euro, which will help raise inflation,” TD economist Andrew Labelle said in a research note. “Given the large amount of economic slack, particularly in the periphery, it remains to be seen whether this will be sufficient to allay fears of deflation.”

Just Energy in sale of unit
Gas and energy retailer Just Energy Group Inc. has sold off its water heater rental arm to competitor Reliance Home Comfort for $505-million, as part of its strategy to divest non-core assets and reduce its debt, The Globe and Mail's Richard Blackwell reports.

While the move will improve Just Energy’s balance sheet, it will also trim its income, so the company will make a substantial cut in its dividend. Its annual payout will drop from 84 cents to 50 cents, and be paid quarterly instead of the current monthly payments.

After closing, Just Energy will use about $400-million from the transaction to pay down its debt, which is currently close to $1-billion.

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