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Quebec Finance Minister Nicolas Marceau responds to Opposition questions over his economic update, Thursday, November 28, 2013 at the legislature in Quebec City.

Jacques Boissinot/The Canadian Press

Quebec is abandoning its goal of a balanced budget this year, saying wary consumers and softening economic growth in North America have sent its revenues spiralling downward.

In contrast to pledges just a few months ago of an imminent end to deficits, the Quebec government is now projecting a shortfall of $2.5-billion for the current fiscal year, having rejected any deep spending cuts or tax hikes that would have closed that gap.

The Parti Québécois government cited some issues particular to Quebec, including a surprise drop in sales-tax revenues after a rate hike at the start of the year. But many of the factors in Quebec's grim financial assessment – which comes amid growing concerns over the state of provincial finances in Canada – could ripple through to other parts of the country: a flat housing market in the wake of changes by the federal government; the drag on revenues from low inflation; soft consumer spending; and weakening commodity prices.

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The minority government now says that the province won't return to balance until the end of the 2015-16 fiscal year. The opposition Liberals and the Coalition Avenir Québec called the economic update devastating and vowed to vote against the next budget and defeat Premier Pauline Marois's minority government, which would trigger an election in the spring.

The announcement made by Finance Minister Nicolas Marceau on Thursday had been widely expected in recent months, as a slowing economy and falling fiscal revenues made the province's fiscal challenge even more daunting. Ms. Marois raised the possibility of a deficit as early as last spring, after only small cutbacks to the province's social-insurance program punctured the government's popularity.

"I'm not happy about this. Sure I'm disappointed," Mr. Marceau said, adding that sticking to the promised balanced-budget target would have plunged Quebec into recession. "The decision to reach a balanced budget is always possible. But there are costs and there are benefits, and the costs are way larger than the benefits."

But that decision was criticized as a failure to realize that Canada's second most-populous province appears to have hit a fiscal wall. "More than ever, Quebec is living beyond its fiscal means," Yves-Thomas Dorval, president of the Quebec Employers Council, said in a statement.

Quebec is expected to underperform the rest of Canada in terms of economic expansion, growing just 0.9 per cent this year, lower than the previously projected 1.3 per cent. Revenues are similarly stalled and are expected to grow 2.6 per cent in the current fiscal year, compared with the 5.2-per-cent growth the government forecast in March.

Quebec is already carrying the biggest debt load in the country. As a percentage of gross domestic product, Quebec's net debt stood at 49 per cent for the 2012-13 fiscal year. Ontario was second highest at 37.4 per cent, followed closely by Nova Scotia and Prince Edward Island.

Mr. Marceau has promised that the province's debt load would be reduced to a more manageable level over the next decade. But opposition politicians have expressed healthy skepticism that Mr. Marceau can get the job done.

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Don Drummond, the former TD Bank chief economist who wrote a major report last year for the Ontario government on how to address that province's fiscal situation, says Quebec also has a "competitive issue" with wages. since they haven't compressed as in the U.S. "There's something particular going on in Quebec," said Mr. Drummond. "Quebec productivity has always been very weak and as the world economy starts to get more competitive that shows up more and more."

While spending has been modest, Mr. Drummond noted that Quebec's fiscal management has "never been consistent with the economics and demographics" of the province. Instead, successive governments have all but ignored issues such as an aging population and low birth rate. "These are not conditions under which you want to carry high debt," he said.

In its annual report on Canadian finances, the International Monetary Fund praised Ottawa's approach to balancing the books by 2015 and noted that it could even ease up on its plans if the economy slows. Provinces, however, were warned that they may have to raise taxes, something Quebec says is not an option. "At the provincial level, consolidation plans are facing increasing challenges on the backdrop of disappointing economic growth, and some provinces may need to consider additional measures, especially on the revenue side, to return to a balanced budget," the IMF report stated in its Nov. 26 report.

With reports from Bill Curry and Sean Silcoff in Ottawa

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