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Moody’s gives Quebec reason for gloating

Quebec’s Minister of Finance Carlos Leitao looks on before tabling his provincial budget at the National Assembly in Quebec City, June 4, 2014. Moody’s Investors Services has given Ontario and Quebec the same Aa2 credit rating, but this week decreed Quebec’s fiscal forecast remains stable. That favourable comparison for Quebec, however slight, had important symbolic meaning for Mr. Leitao, who this spring took over management of finances for a province long derided by critics as a financial basket case.

Jacques Boissinot/Reuters

The Quebec Finance Minister does not want to gloat, but has to admit he is pleased. It has been a long time since a person in Carlos Leitao's position could boast his province's fiscal outlook was even just a shade rosier than the forecast for Ontario.

Moody's Investors Services has given the two provinces the same Aa2 credit rating, but this week decreed Quebec's fiscal forecast remains stable. Last month, Moody's downgraded Ontario's short-term outlook to negative.

That favourable comparison for Quebec, however slight, had important symbolic meaning for Mr. Leitao, who this spring took over management of finances for a province long derided by critics as a financial basket case.

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"I won't criticize our neighbours, but I would just point out our deficit is more manageable than Ontario's. It's smaller, so that's a little easier to manage," Mr. Leitao said in an interview.

The difference in outlook between Ontario and Quebec boils down to debt. Quebec's interest payments have declined from 10.8 per cent of revenue in 2008 to 8.2 per cent this year. The number for Ontario is anticipated to grow from 9 per cent in 2011 to 10 per cent by 2016, according to Michael Yake, vice-president for Moody's Investors Service and lead analyst for Ontario and Quebec.

Quebec's overall debt is relatively high "but we see stability in the numbers, compared to Ontario," Mr. Yake said. "In Ontario, we see debt has grown quite a bit in the last few years, and it's going to grow into the future as well."

So why would Mr. Leitao brag over such a modestly flattering comparison? Serious economists from both sides of Quebec's partisan divide, including former Liberal finance minister Raymond Bachand and former Parti Québécois premier Jacques Parizeau, have raised the alarm in recent months that Quebec businesses are lagging the rest of North America when it comes to private investment.

"One of key issues for business investment is confidence. Confidence in the economy, confidence in the ability of government to contain future tax increases. I think it is important for us to highlight the fact we are headed in the right direction," Mr. Leitao said.

The detailed credit report released on Friday by Moody's is a story of modest praise written in moderate language, saying Quebec is engaging in "prudent debt management" while still facing a serious challenge in eliminating its deficit over the next two years and holding that balance.

Mr. Leitao said the "steady-as-she-goes" approach that has limited Quebec's deficit for 12 years will no longer suffice. "It's not going to work into the future. The decline in our work force is happening now and will limit economic growth. Our aging population will increase pressure on spending."

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The province's plan is ambitious: Mr. Leitao wants to be close to a spending freeze by the end of three years, while engaging in an ongoing review that he says will eliminate programs that underperform. He said Health Minister Gaétan Barrette has "a number of structural reforms on the go" that will be unveiled soon to put a lid on health care spending. "I'm not going to give you any scoops," he said, "but they are quite substantial. This entire business of trying to restrain public spending cannot work if we cannot do it in the health care area. That is going to be done."

Already, unions and other groups are organizing protests and preparing attempts to disrupt Mr. Leitao's plans. Such resistance has thwarted previous efforts to address the long-term risk to the province's finances posed by an aging population and a shrinking workforce. Jean Charest was elected after promising to "re-engineer the state" in 2003, and soon watered down the plans. Near the end of his time in office, in 2012, an attempt to raise tuition fees led to massive protests and an eventual reversal.

Moody's describes potential difficulty delivering restraint as "execution risk."

"The expenditure restraint program is quite extensive, for Quebec," Mr. Yake said. "And we know unlike other provinces, the public in Quebec seems to be a bit more vocal and a bit more powerful."

Mr. Leitao sees the potential for resistance but considers it manageable. He is more worried about economic growth that has failed to meet expectations in recent months. "I still think we have widespread public support," he said. "The issue I have no control over is the macroeconomic backdrop. I'm not going to try to hide it: Economic growth has been disappointing."

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