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OCTOBER 2016 UPDATE

THE QUÉBECECONOMICPLAN

october 2016 update

The québececonomicplan

The Québec Economic Plan – October 2016 Update

Legal deposit – October 25, 2016Bibliothèque et Archives nationales du QuébecISBN 978-2-550-77012-1 (Print)ISBN 978-2-550-77013-8 (PDF)

© Gouvernement du Québec, 2016

THE QUÉBEC ECONOMIC PLAN – OCTOBER 2016 UPDATE

Highlights

Section A Québec’s Financial Situation

Section B The Québec Economic Plan

Section C The Québec Economy: Recent Developments and Outlook for 2016 and 2017

Section D The Government’s Detailed Financial Framework

Section E The Québec Government’s Debt

1

HIGHLIGHTS

Highlights ................................................................................................. 3

2015-2016: A $2.2 billion surplus recorded ...................................................... 4 A balanced budget in 2016-2017 and subsequent years ................................. 5

Acceleration in economic growth in Québec .................................................... 6

Québec Economic Plan: Additional investment of $2.2 billion in services ......................................................................................................... 9

‒ $300 million more per year for health ....................................................... 10

‒ $110 million more per year for education and higher education .............. 11

‒ $100 million more per year to support regional economic development ............................................................................................. 12

‒ Additional investments of $400 million in public infrastructure ................. 13

‒ Complete elimination of the health contribution as of January 1, 2017 ............................................................................... 14

$610-million reduction in the gross debt in 2015-2016 ................................... 15

Highlights 3

HIGHLIGHTS The October 2016 Update of the Québec Economic Plan is an opportunity for the government to report on its economic and financial initiatives. The update reflects the latest information on the economic situation and the government’s revenue and expenditure.1

In particular, it:

— confirms a balanced budget as at March 31, 2016. A $2.2-billion surplus was recorded in the Public Accounts 2015-2016;

— includes an enhancement of the Québec Economic Plan. In view of the improved financial situation, the government is:

— strengthening the funding of public services through additional investments in health, education and infrastructure to spur economic and regional development,

— easing the tax burden on taxpayers by eliminating the health contribution completely on January 1, 2017.

— continues reducing the debt.

CHART 1

Budgetary balance(1) from 2009-2010 to 2017-2018 (millions of dollars)

(1) Budgetary balance within the meaning of the Balanced Budget Act. (2) Budgetary balance excluding the impact of accounting changes. The budgetary balance including accounting

changes totalling $418 million is a deficit of $725 million.

1 Unless otherwise indicated, this document is based on the data available as at October 6, 2016.

–3 607–3 150

–2 628

–1 600

–2 824

–1 143

2 191

0 0

2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

(2)

The Québec Economic Plan 4 October 2016 Update

22001155--22001166:: AA $$22..22 BBIILLLLIIOONN SSUURRPPLLUUSS RREECCOORRDDEEDD The results published in the Public Accounts 2015-2016 confirm the achievement of a balanced budget. A $2 191-million surplus was recorded for 2015-2016. The improvement relative to the March 2016 forecasts reflects the economy’s good performance and stems mostly from one-off, or non-recurring, factors. This is attributable to:

— higher-than-expected own-source revenue owing, in particular, to the completion of processing of personal income tax returns and more robust corporate results recorded at fiscal year-end;

— lower spending as a result of one-off factors; for example, non-utilization of the Contingency Fund, sums not spent because of strike days, and one-off savings of certain government funds and bodies, such as school board surpluses;

— non-utilization of the contingency reserve.

TABLE 1

Actual results in 2015-2016 relative to Budget 2016-2017 (millions of dollars) 2015-2016

Budget

2016-2017 Adjustments Actual

results Consolidated revenue

Own-source revenue excluding government enterprises 75 370 839 76 209 Government enterprises 4 961 52 5 013 Federal transfers 19 089 –188 18 901 Total ‒ Consolidated revenue 99 420 703 100 123 % change 3.6

4.4

Consolidated expenditure Program spending –66 460 829 –65 631

Other consolidated expenditure(1) –21 174 335 –20 839 Mission expenditures –87 634 1 164 –86 470 % change 2.5

1.1

Debt service –10 055 46 –10 009 Total ‒ Consolidated expenditure –97 689 1 210 –96 479 % change 2.0

0.7

Contingency reserve –300 300 — SURPLUS (DEFICIT) 1 431 2 213 3 644 BALANCED BUDGET ACT

Deposits of dedicated revenues in the Generations Fund –1 431 –22 –1 453 BUDGETARY BALANCE(2) — 2 191 2 191

(1) Including consolidation adjustments. (2) Budgetary balance within the meaning of the Balanced Budget Act.

Highlights 5

AA BBAALLAANNCCEEDD BBUUDDGGEETT IINN 22001166--22001177 AANNDD SSUUBBSSEEQQUUEENNTT YYEEAARRSS The government’s consolidated financial framework presents a balanced budget in 2016-2017 and for subsequent years.

Overall, expenditure will remain equal to revenue.

— In 2016-2017, consolidated revenue will be $102.3 billion, for 2.2% growth, and consolidated expenditure will stand at $100.2 billion, for 3.8% growth.

— For 2017-2018, consolidated revenue growth will be 2.7% and consolidated expenditure growth, 2.3%.

The government will keep the budget balanced while continuing to make deposits of dedicated revenues in the Generations Fund. Deposits will total $2.0 billion in 2016-2017 and $2.5 billion in 2017-2018.

TABLE 2

Consolidated summary financial framework – October 2016 Update (millions of dollars)

2016-2017 2017-2018 2018-2019

Own-source revenue 82 070 84 271 86 800

% change 1.0 2.7 3.0

Federal transfers 20 264 20 828 21 448

% change 7.2 2.8 3.0

Consolidated revenue 102 334 105 099 108 248

% change 2.2 2.7 3.0

Mission expenditures –90 138 –92 346 –94 904

% change 4.2 2.4 2.8

Debt service –10 047 –10 149 –10 376

% change 0.4 1.0 2.2

Consolidated expenditure –100 185 –102 495 –105 280

% change 3.8 2.3 2.7

Contingency reserve –150 –150 –150

SURPLUS (DEFICIT) 1 999 2 454 2 818

BALANCED BUDGET ACT

Deposits of dedicated revenues in the Generations Fund –1 999 –2 454 –2 818

BUDGETARY BALANCE(1) — — —

(1) Budgetary balance within the meaning of the Balanced Budget Act.


AACCCCEELLEERRAATTIIOONN OOFF EECCOONNOOMMIICC GGRROOWWTTHH IINN QQUUÉÉBBEECC Québec is enjoying favourable economic conditions:

— sound public finances are bolstering consumer and business confidence;

— The Index of Consumer Confidence, measured by the Conference Board of Canada, is at its highest level since 2007.

— For the first time in 16 years, Québec businesses are the most confident among all the provinces, according to the Canadian Federation of Independent Business.

— job creation is continuing, particularly full-time employment and private-sector jobs;

— In the first nine months of 2016, Québec created the second-highest number of full-time jobs of all the provinces.

— low oil prices benefit consumers and the Québec manufacturing sector, while the low dollar boosts exports.

These conditions will translate to an acceleration in economic growth in Québec. Following 1.1% growth in real gross domestic product (GDP) in 2015, the October 2016 Update of the Québec Economic Plan forecasts economic growth of 1.4% in 2016 and 1.5% in 2017.

— This means that 2016 will be the seventh consecutive year of economic growth since the 2008-2009 recession.

CHART 2

Economic growth in Québec (real GDP, percentage change)

Sources: Institut de la statistique du Québec, Statistics Canada and Ministère des Finances du Québec.

1.1

1.4

1.5

2015 2016 2017

Highlights 7

Confidence in the Québec economy is increasing

Several indicators show that consumer and investor confidence is getting stronger.

Job creation continued in 2016, with job gains mainly in full-time employment and the private sector.

— Compared to the same period in 2015, 44 200 full-time jobs and 30 500 jobs in the private sector were created in the first nine months of 2016.

The robust job creation has fuelled consumer spending.

— In the first two quarters of 2016, household consumption expenditure rose by 1.8% in real terms, outstripping GDP growth.

The strong labour market was reflected in consumer confidence.

— The Index of Consumer Confidence, measured by the Conference Board of Canada, stood at 129.0 points in Québec in September, a record high since 2007.

Furthermore, responsible management of public finances and the Québec government’s sound financial position boosted business confidence.

— In September 2016, Québec businesses were the most optimistic among the provinces for the first time in 16 years, according to the Canadian Federation of Independent Business’ Business Barometer Index.

Moreover, the optimism of small businesses spurred an upturn in business investment.

— Non-residential business investment in real terms was 0.5% higher in the second quarter of 2016 than in the previous quarter.

TABLE 3

Change in selected economic indicators in Québec (percentage change in real terms, unless otherwise indicated)

2016 Q1 Q2 Q3(1) 2015 2016(1)

Real GDP 0.7 0.2 n/a

1.1 1.3

Creation of full-time jobs (thousands) 14.6 19.2 0.7

45.0 44.2

Household consumption 0.8 0.2 n/a

1.3 1.8

Consumer confidence (points, 2014 = 100) 94.3 115.6 127.8

102.8 112.6

Business confidence (points) 64.2 61.4 65.4 57.9 63.6

(1) Cumulative for available periods. Sources: Institut de la statistique du Québec, Statistics Canada, Conference Board of Canada and Canadian

Federation of Independent Business.


Good employment performance since May 2014

Québec’s labour market has performed well since May 2014. Statistics Canada’s monthly Labour Force Survey shows that 127 800 jobs have been created in Québec since May 2014, including:

– 125 200 full-time jobs, 98% of the total job creation;

– 97 600 jobs in the private sector, 76% of the total job creation.

Québec stands apart from the rest of Canada in that it contributed nearly 50% of the private-sector jobs created in Canada as a whole.

– Québec ranks first among the provinces, ahead of Ontario and British Columbia, in the number of jobs created in the private sector.

Private-sector jobs created since 2014, Canada (thousands)

Source: Statistics Canada.

97.6

70.863.0

6.8 3.6 0.8

-0.6 -1.6 -6.1

-36.6

QC ON BC NB MB SK PE NL NS AB

Highlights 9

QQUUÉÉBBEECC EECCOONNOOMMIICC PPLLAANN:: AADDDDIITTIIOONNAALL IINNVVEESSTTMMEENNTTSS OOFF $$22..22 BBIILLLLIIOONN IINN SSEERRVVIICCEESS The improvement in Québec’s financial situation enables the government to announce additional investments of over $900 million in 2017-2018, reaching $2.2 billion within the next three years.

In particular, the government is announcing:

— an immediate increase of over $500 million over a full year in funding for new public services:

— $300 million for health,

— $110 million for education,

— $100 million for regional economic development;

— $400 million more for public infrastructure investment.

In addition, the government is announcing that the health contribution will be completely eliminated ahead of schedule, on January 1, 2017, for another $253 million.

— Overall, elimination of the health contribution will reduce the tax burden on Québec taxpayers by $759 million a year.

TABLE 4

Additional investments from 2016-2017 to 2019-2020 – October 2016 Update (millions of dollars)

2016-2017 2017-2018 Cumulative(1)

Strengthening of funding for public services

– Health and social services 100 300 1 000

– Education and higher education 35 110 365

– Regional economic development 100 100 400

Increase in the Québec Infrastructure Plan — 400 400

Subtotal 235 910 2 165

A

Complete elimination of the health contribution as of January 1, 2017 53 179 253

TOTAL 288 1 089 2 418

(1) From 2016-2017 to 2019-2020.


$$330000 MMIILLLLIIOONN MMOORREE PPEERR YYEEAARR FFOORR HHEEAALLTTHH The government has undertaken a major reform aimed at improved access to health care and social services and better organization of these services.

The October 2016 Update provides for immediate additional investments of $300 million on an annual basis in health and social services. These investments will go to improving access to, and the quality of, health and social services, particularly in the following areas:

— home care;

— Increase the services available to persons suffering a loss of functional independence.

— residential and long-term care centres;

— Improve residential standards and the care provided in residential and long-term care centres (CHSLDs).

— intermediate care.

— Improve the offering of intermediate care services.

With these additional investments, spending growth in the Santé et Services sociaux portfolio will reach 3.0% in 2017-2018, an increase of 0.6 percentage point over Budget 2016-2017.

TABLE 5

Santé et Services sociaux – Program spending (millions of dollars)

2015-2016 2016-2017 2017-2018

Actual results

Budget(1) 2016-2017(1) Change

October(1) 2016(1)

Budget 2016-2017 Change October 2016

Health and social services 32 760

33 739(1) 100 33 839(1)

34 564 300 34 864

% change 1.6

3.0(1)

3.3(1)

2.4

3.0

(1) Excluding transfers from the provision for francization of the Ministère de l’Immigration, de la Diversité et de l’Inclusion.

Highlights 11

$$111100 MMIILLLLIIOONN MMOORREE PPEERR YYEEAARR FFOORR EEDDUUCCAATTIIOONN AANNDD HHIIGGHHEERR EEDDUUCCAATTIIOONN To build on the efforts made, the October 2016 Update provides for additional investments of $35 million in 2016-2017 and $110 million in 2017-2018 and 2018-2019 to add new education and higher education services.

For example, these new investments will be aimed at:

— increasing academic success for elementary and secondary students;

— continuing efforts to tailor vocational training to labour market needs;

— improving continuing education programs by offering short course skills training aligned with regional characteristics and issues;

— developing bridging programs for professionals trained abroad and facilitating recognition of skills and experience for faster integration into the labour market;

— supporting the college and university networks in developing measures to assist special needs students;

— supporting the promotion, recruitment and retention of foreign students in the higher education networks;

— improving funding for Québec sports federations and ensuring greater predictability.

These additional investments will bring spending growth for the Éducation et Enseignement supérieur portfolio to 3.5% in 2017-2018, which represents an increase of 0.5 percentage point relative to Budget 2016-2017.

TABLE 6

Éducation et Enseignement supérieur – Program spending (millions of dollars)

2015-2016

2016-2017

2017-2018

Actual

results

Budget) 2016-2017) Change

October

2016)

Budget 2016-2017 Change October 2016

Education and higher education 16 603

17 245 35 17 280

17 769 110 17 879

% change 0.8(1)

4.4(2)

4.6(2)

3.0

3.5

(1) Excluding the impact of strike days. (2) Excluding transfers from the provision for francization of the Ministère de l’Immigration, de la Diversité et de

l’Inclusion.


$$110000 MMIILLLLIIOONN MMOORREE PPEERR YYEEAARR TTOO SSUUPPPPOORRTT RREEGGIIOONNAALL EECCOONNOOMMIICC DDEEVVEELLOOPPMMEENNTT The October 2016 Update provides for immediate additional investments of $100 million annually to support regional economic development.

The additional investments will total $400 million over four years.

TABLE 7

Support for regional economic development (millions of dollars)

2016-2017 2017-2018 2018-2019 2019-2020 Total

Additional investments 100 100 100 100 400

Through these new amounts, the government will offer the regions, including the Capitale-Nationale region and the region of the metropolis, further financial means to support their economic development. The $100 million made available as of 2016-2017 will enhance the government’s actions to foster the regions’ outreach and the carrying out of economic development projects in Québec’s regions.

In subsequent years, the amounts will enable the government to, among other things, put in place two priority measures for the regions:

— specific support for the regions to take charge of their economic development without the creation of new administrative structures;

— encourage regional tourism, particularly through festivals and events.

The other regional economic development initiatives to be funded through these new amounts will be announced soon by the government.

Highlights 13

AADDDDIITTIIOONNAALL IINNVVEESSTTMMEENNTTSS OOFF $$440000 MMIILLLLIIOONN IINN PPUUBBLLIICC IINNFFRRAASSTTRRUUCCTTUURREE To meet Québec’s needs respecting quality public infrastructure, the government will maintain a high level of public capital investment under the Québec Infrastructure Plan (QIP).

— Capital investments are expected to be $10.0 billion in 2017-2018, an increase of $400 million over the investments forecast in March 2016.

TABLE 8

Level of investment under the QIP in 2017-2018 (billions of dollars) 2017-2018 Investments planned under the 2016-2026 QIP 9.6 Increase in investments 0.4 Investments planned under the 2017-2027 QIP 10.0

2017-2027 Québec Infrastructure Plan The government is announcing investments of $89.1 billion under the 2017-2027 QIP. These investments will be earmarked first and foremost for the replacement of outdated infrastructure, economic development projects and sports infrastructure.

— In this context, the Sports and Physical Activity Development Fund will see its envelope increased.

The government is therefore confirming that, to meet Québec’s needs, high levels of capital investment will be maintained, without losing sight of taxpayers’ ability to pay and the debt reduction objectives.

CHART 3

Investments under the 2017-2027 Québec Infrastructure Plan (billions of dollars)

2.8

4.5

8.9 9.2 9.6 9.6 10.0 9.69.0 8.9 8.6 8.6 8.6 8.6 8.6 8.6

Av. 97-98to 01-02

Av. 02-03to 06-07

Av. 07-08to 13-14

2014-2015

2016-2017

2018-2019

2020-2021

2022-2023

2024-2025

2026-2027

QIP 2017-2027: 89.1


CCOOMMPPLLEETTEE EELLIIMMIINNAATTIIOONN OOFF TTHHEE HHEEAALLTTHH CCOONNTTRRIIBBUUTTIIOONN AASS OOFF JJAANNUUAARRYY 11,, 22001177 The October 2016 Update of the Québec Economic Plan eases the tax burden on individuals by completely eliminating the health contribution as of January 1, 2017, two years ahead of schedule.

A total of nearly 4.5 million Québec taxpayers will see their tax burden reduced by $759 million annually.

This measure will especially ease the tax burden on low- and middle-income households. These households alone will benefit from 83% of the total tax relief stemming from the elimination of the health contribution.

TABLE 9

Tax relief stemming from the elimination of the health contribution

Net income Number of

taxpayers affected

Maximum reduction granted

($) Tax relief ($million)

$18 705 to $41 560(1) 2 114 189 100 196

$41 560 to $135 060 2 197 338 200 433

Over $135 060 148 782 1 000 130

TOTAL 4 460 309 — 759

(1) Taxpayers with income below $18 705 are exempt from the health contribution.

83%

17%

Highlights 15

$$661100--MMIILLLLIIOONN RREEDDUUCCTTIIOONN IINN TTHHEE GGRROOSSSS DDEEBBTT IINN 22001155--22001166 As at March 31, 2016, the gross debt was down in absolute terms. The gross debt recorded as at March 31, 2016 was $610 million lower than the level recorded at March 31, 2015 and stood at $203.3 billion.

A similar situation had not been seen since 1959.

This outcome results from a combination of restored fiscal balance and the deposits made in the Generations Fund.

CHART 4

Annual change in Québec’s gross debt as at March 31 (millions of dollars)

The gross debt will rise over the coming years, particularly because of capital investments, but its weight in the economy will continue to decline.

TABLE 10

Gross debt of the Québec government as at March 31 (millions of dollars)

2015 2016 2017 2018 2019 2020 2021

GROSS DEBT 203 957 203 347 208 061 211 838 213 619 213 770 214 138

% of GDP 55.1 53.8 53.7 52.9 51.6 50.0 48.6

2 834

4 777 4 720

3 289

5 688

10 118 9 948

8 482

5 941 6 150

‒610-2 000

0

2 000

4 000

6 000

8 000

10 000

12 000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$610-million reduction in the gross debt as at March 31, 2016

A.1

Section A A QUÉBEC’S FINANCIAL SITUATION

Introduction .......................................................................................... A.3

1. Recent developments in the economic and budgetary situation ......................................................................................... A.5

1.1 Acceleration of Québec’s economic growth ........................................ A.7

1.2 Budgetary situation ............................................................................ A.10

1.2.1 Improvement of results in 2015-2016 ................................... A.14

1.2.2 Main adjustments to the financial framework ....................... A.18

2. The Québec Economic Plan ........................................................A.21

2.1 Further investments in health, education and the regional economies .......................................................................................... A.23

2.2 Complete elimination of the health contribution as of January 1, 2017 ........................................................................ A.27

3. Fiscal outlook ...............................................................................A.29

3.1 The government’s five-year financial framework ............................... A.29 3.2 Change in revenue............................................................................. A.33

3.3 Change in expenditure ....................................................................... A.36

3.4 Debt reduction .................................................................................... A.42

Québec’s Financial Situation A.3

A

SECT

ION

INTRODUCTION As soon as it took power in April 2014, the government established two central policy directions to guide its action:

— the return to sound, balanced public finances;

— the creation of favourable conditions for economic growth.

The Québec Economic Plan under budgets 2014-2015 and 2015-2016 gave the government a responsible plan for rebalancing the public finances in 2015-2016.

Last March, Budget 2016-2017 ensured the maintenance of fiscal balance in 2016-2017 and the years thereafter by continuing responsible management of government spending and stepping up action to stimulate economic growth.

The October 2016 Update of the Québec Economic Plan confirms, based on the results published in the Public Accounts 2015-2016, that the objective of a balanced budget has not only been met, it has been surpassed.

This section provides an overview of the government’s economic and fiscal policy directions.1 It presents:

— recent developments in the economic and budgetary situation;

— Economic growth will accelerate in 2016 and 2017.

— Actual results for 2015-2016 confirm a balanced budget. A $2.2-billion surplus is recorded.

— Thanks to the improvement of results in 2015-2016, which provides fiscal room, the government is investing more in the state’s priority missions while keeping the budget balanced in 2016-2017 and subsequent years.

— The government will continue to make deposits in the Generations Fund in order to meet the debt reduction objectives by 2025-2026.

— the new initiatives under the Québec Economic Plan.

— The update of the plan provides for:

‒ additional investments in health, education and regional economic development;

‒ an increase in infrastructure investment;

‒ complete elimination of the health contribution as of January 1, 2017.

1 The budgetary data presented throughout this section for 2016-2017 and subsequent years are

forecasts.


A

SECT

ION

1. RECENT DEVELOPMENTS IN THE ECONOMIC AND BUDGETARY SITUATION

The October 2016 Update of the Québec Economic Plan reports on the government’s current economic and budgetary situation.

The Public Accounts 2015-2016 confirm that the budget has been balanced after running deficits six years in a row. The October 2016 Update consolidates fiscal balance for the current and subsequent years thanks to the improvement of results in 2015-2016, responsible spending management and faster economic growth.

— The government wants Quebecers to benefit from the improvement in public finances. New investments are planned with a view to strengthening the funding of public services, enhancing the Québec Infrastructure Plan and reducing the tax burden on individuals.

This update is also an opportunity to reiterate the government’s economic and fiscal policy directions and align them with the results in 2015-2016:

— maintenance of a balanced budget;

— alignment of spending growth with taxpayers’ ability to pay, giving priority to health, education and the most vulnerable population groups;

— support for the transition to a low-carbon economy;

— maintenance of a high level of public capital investments;

— support for regional economic development;

— reduction of the tax burden, starting with elimination of the health contribution;

— ongoing debt reduction.

The Québec Economic Plan A.6 October 2016 Update

Government revenue and expenditure

In 2016-2017, the government’s consolidated revenue will stand at $102.3 billion and will be used to finance:

— expenditures for the government’s various missions, that is, spending for the government’s primary functions, totalling $90.1 billion;

— debt service, for a total of $10.0 billion;

— deposits of dedicated revenues in the Generations Fund, totalling $2.0 billion.

A $150-million contingency reserve is also established.

CHART A.1

Breakdown of the government’s consolidated revenue and expenditure for 2016-2017 (billions of dollars)

Note: Totals may not add due to rounding. (1) The missions represent the government’s primary functions: Health and Social Services, Education and Culture,

Economy and Environment, Support for Individuals and Families, and Administration and Justice.

Consolidated revenue102.3

Consolidated expenditure100.2GenerationsFund: 2.0 Contingencyreserve: 0.2

Debt service10.0

Federal transfers20.3

102.3

Own-sourcerevenue

82.1

Missionexpenditures(1)

90.1


A

SECT

ION

Acceleration of Québec’s economic growth 1.1The growth forecasts in the October Update have been adjusted downwards slightly from the March 2016 Québec Economic Plan, for most countries and regions of the world.

— In Québec, economic growth is expected to accelerate from 1.1% in 2015 to 1.4% in 2016 and 1.5% in 2017.

— These are downward adjustments of 0.1 percentage point relative to the forecasts in the March 2016 Québec Economic Plan and stem from developments in the global economy. The adjustments are lower than those expected for Canada and the United States.

— In Canada, economic growth is projected to remain at 1.1% in 2016, the same pace of growth as in 2015. The negative effects of low oil prices are felt by oil-producing provinces. In 2017, Canada’s real gross domestic product (GDP) is expected to expand by 1.9%.

— These are downward adjustments of 0.2 percentage point for 2016 and 2017 relative to the growth forecast in March 2016.

— In the United States, economic growth is projected to slow to 1.5% in 2016 and accelerate to 2.1% in 2017.

— Growth forecasts for U.S. GDP have been revised downward by 0.8 percentage point for 2016 and 0.2 percentage point in 2017.

TABLE A.1

Economic growth outlook (real GDP, percentage change and percentage point adjustment)

2015 2016 2017

Québec – October 2016 Update 1.1 1.4 1.5

– Adjustment

−0.1 −0.1

Canada – October 2016 Update 1.1 1.1 1.9

– Adjustment

−0.2 −0.2

United States – October 2016 Update 2.6 1.5 2.1

– Adjustment

−0.8 −0.2

World – October 2016 Update 3.2 3.0 3.2

– Adjustment

−0.1 −0.1

Sources: Institut de la statistique du Québec, Statistics Canada, IHS Global Insight and Ministère des Finances du Québec.


Québec’s economic growth driven by consumption and renewed investment

The forecast real GDP growth of 1.4% in 2016 and 1.5% in 2017 will be driven primarily by consumer and business confidence.

— Household consumption will remain robust thanks to continued job creation, high consumer confidence and low energy prices.

— Non-residential business investment returned to growth in the second quarter of 2016, after remaining weak since 2013. The recovery is expected to strengthen in the coming quarters.

— Moreover, business confidence is bolstered by the sound public finances.

— In addition, spending and investment by all governments should help sustain growth.

Furthermore, after several years of strong growth, the volume of exports is expected to remain at peak levels.

— Exports got off to a slow start in 2016 due, in particular, to a slowdown among Québec’s main trading partners.

— In the coming quarters, Québec exports will benefit from the weak Canadian dollar and strengthening of economic activity in the United States.

TABLE A.2

Real GDP and its major components (percentage change and contribution in percentage points) 2015 2016 2017

Contribution of domestic demand 0.5 1.2 1.4

− Household consumption 1.3 1.9 1.8

− Residential investment −0.6 0.8 −1.2

− Non-residential business investment −4.8 −1.9 3.2

− Government spending and investment 0.4 0.4 0.6

Contribution of the external sector 0.6 0.6 −0.0

− Total exports 2.3 0.2 2.2

− Total imports 0.8 −0.9 2.1

Contribution of inventories −0.1 −0.3 0.2 REAL GDP 1.1 1.4 1.5

Note: Totals may not add due to rounding. Sources: Institut de la statistique du Québec, Statistics Canada and Ministère des Finances du Québec.


A

SECT

ION

Favourable economic conditions in Québec

Québec is enjoying favourable economic conditions. Current conditions are conducive to stronger economic growth:

— consumer and business confidence remain sustained;

— low oil prices benefit consumers and the Québec manufacturing sector, while the low dollar boosts exports.

These conditions will translate to an acceleration in economic growth in Québec in 2016 and 2017.

Following 1.1% real GDP growth in 2015, the October 2016 Update of the Québec Economic Plan forecasts an economic growth rate of 1.4% in 2016 and 1.5% in 2017.

— This means that 2016 will be the seventh consecutive year of economic growth since the 2009 recession.

— The increase in economic activity raised Quebecers’ standard of living which, since 2007, has improved in pace with the standard of living of Ontarians, Americans and Canadians as a whole.

CHART A.2

Standard of living (real GDP per capita, index 2007 = 100)

(1) For 2016, Conference Board of Canada forecasts for Ontario and Ministère des Finances du Québec forecasts for Québec, Canada and the United States.

Sources: Institut de la statistique du Québec, Statistics Canada, Ontario Ministry of Finance, Conference Board of Canada, IHS Global Insight and Ministère des Finances du Québec.

Qué.: 99.1

Qué.: 103.4

Can.: 95.9

Can.: 102.9

Ont.: 95.1

Ont.: 103.7

U.S.: 95.2

U.S.: 104.2

94

96

98

100

102

104

106

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Québec Canada Ontario United States


Budgetary situation 1.2The government pledged to balance the budget and then keep public finances balanced. Following six consecutive years of deficit, the efforts made in the last two years enabled the government to balance the budget in 2015-2016.

— In 2015-2016, the budgetary surplus reached $2 191 million. The bulk of the surplus resulted from one-off, or non-recurring, factors.

The improvement of results in 2015-2016 and the acceleration in economic growth enable the government to maintain a balanced budget this year and in future while strengthening funding for public services and supporting regional economic development.

Maintaining a balanced budget in 2016-2017 and subsequent years remains a crucial condition for Québec’s economic development and compels the government to continue managing public finances in a responsible manner by controlling spending.

Fiscal 2015-2016 marked an important milestone: for the first time since the late 1950s, Québec’s gross debt dropped. The government is on track to meet the debt reduction targets set for 2025-2026.

CHART A.3

Budgetary balance,(1) 2009-2010 to 2017-2018 (millions of dollars)

(1) Budgetary balance within the meaning of the Balanced Budget Act. (2) Budgetary balance excluding the impact of accounting changes. The budgetary balance including accounting

changes totalling $418 million is a deficit of $725 million.

–3 607–3 150

–2 628

–1 600

–2 824

–1 143

2 191

0 0

2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

(2)


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The government’s financial framework

The government’s consolidated financial framework presents a balanced budget in 2016-2017 and for subsequent years.

— The improved results in 2015-2016 make it possible to inject $2.2 billion more into public services and eliminate the health contribution ahead of schedule, on January 1, 2017.

Expenditure will remain equal to revenue.

— In 2016-2017, consolidated revenue will be $102.3 billion, for 2.2% growth, and consolidated expenditure will stand at $100.2 billion, for 3.8% growth.

— For 2017-2018, consolidated revenue growth will be 2.7% and consolidated expenditure growth, 2.3%.

More specifically, expenditure for the two chief missions, that is, health and education, will be:

— $38.5 billion in 2016-2017 and $39.5 billion in 2017-2018 for the Health and Social Services mission;

— $21.8 billion in 2016-2017 and $22.5 billion in 2017-2018 for the Education and Culture mission.

Furthermore, the government is continuing to make deposits of dedicated revenues in the Generations Fund. Deposits will total $2.0 billion in 2016-2017 and $2.5 billion in 2017-2018.


TABLE A.3

Detailed consolidated financial framework, 2016-2017 to 2018-2019 (millions of dollars)

2016-2017 2017-2018 2018-2019

Consolidated revenue

Personal income tax 29 757 30 911 32 147

Contributions for health services 6 452 6 065 6 133

Corporate taxes 6 743 7 017 7 252

School property tax 2 122 2 208 2 293

Consumption taxes 19 043 19 548 19 927

Duties and permits 3 435 3 600 3 702

Miscellaneous revenue 9 948 10 324 10 714

Government enterprises 4 570 4 598 4 632


% change 1.0 2.7 3.0


% change 7.2 2.8 3.0

Total consolidated revenue 102 334 105 099 108 248

% change 2.2 2.7 3.0

Consolidated expenditure Health and Social Services –38 517 –39 514 –40 749

Education and Culture –21 841 –22 528 –23 237

Economy and Environment –12 497 –12 730 –12 975

Support for Individuals and Families –9 873 –9 987 –10 066

Administration and Justice –7 410 –7 587 –7 877

Mission expenditures –90 138 –92 346 –94 904

% change 4.2 2.4 2.8

Debt service –10 047 –10 149 –10 376

% change 0.4 1.0 2.2

Total consolidated expenditure –100 185 –102 495 –105 280

% change 3.8 2.3 2.7

Contingency reserve –150 –150 –150


BALANCED BUDGET ACT

Deposits of dedicated revenues in the Generations Fund –1 999 –2 454 –2 818


Note: Certain data from Budget 2016-2017 have been reclassified for comparability with the presentation adopted in the October 2016 Update of the Québec Economic Plan.



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Mission expenditures

In the Public Accounts, government expenditures are broken down into five major public service missions corresponding to the government’s functions, namely:

– Health and Social Services, which consists primarily of the activities of the health and social services network and the programs administered by the Régie de l’assurance maladie du Québec;

– Education and Culture, which consists primarily of the activities of the education networks, student financial assistance, programs in the culture sector and immigration-related programs;

– Economy and Environment, which primarily includes programs related to economic development, employment assistance measures, international relations, the environment and infrastructure support;

– Support for Individuals and Families, which primarily includes last resort financial assistance, assistance measures for families and seniors, and certain legal aid measures;

– Administration and Justice, which consists of the activities of legislature, central bodies and public security, as well as administrative programs.

Expenditures for the two chief missions will increase by:

– 2.7% in 2016-2017 and 2.6% in 2017-2018 for Health and Social Services;

– 3.6% in 2016-2017 and 3.1% in 2017-2018 for Education and Culture.

Mission expenditures(1) (millions of dollars) 2016-2017(2) 2017-2018 Health and Social Services 38 517 39 514 % change 2.7(2) 2.6 Education and Culture 21 841 22 528 % change 3.6(2) 3.1 Economy and Environment 12 497 12 730 % change 6.8 1.9 Support for Individuals and Families 9 873 9 987 % change 3.8(2) 1.2 Administration and Justice 7 410 7 587 % change 10.8 2.4 TOTAL 90 138 92 346 % change 4.2 2.4


(1) Excluding debt service. (2) To assess growth in 2016-2017 based on comparable spending levels, the percent changes for that year

were calculated by excluding, from 2015-2016 expenditures, transfers from the provision for francization attributed to the Health and Social Services mission ($12.2 million) and the Support for Individuals and Families mission ($75.0 million) and including them in the 2015-2016 expenditures of the Education and Culture mission.


Improvement of results in 2015-2016 1.2.1

The results published in the Public Accounts 2015-2016 show a $2 191-million surplus after deposits in the Generations Fund. This surplus helped reduced the gross debt in 2015-2016.

The bulk of the $2.2-billion improvement relative to the budgetary balance forecast in Budget 2016-2017 results from one-off, or non-recurring, factors. This is attributable to:

— higher-than-expected own-source revenue owing, in particular, to the completion of processing of personal income tax returns and more robust corporate results recorded at fiscal year-end;

— lower spending as a result of one-off factors; for example, non-utilization of the Contingency Fund, sums not spent because of strike days, and one-off savings of certain government funds and bodies, such as school board surpluses;

— For several of these funds and bodies, the freed-up sums will be spent in future years.

— non-utilization of the contingency reserve.

Consolidated revenue has been revised upward by $703 million relative to forecasts.

— These results are attributable, in particular, to the value of capital gains and investment income reported by individuals and higher-than-anticipated profits reported by companies.

The expenditure results for 2015-2016 show a decrease of:

— $829 million in program spending;

— $335 million in spending by special funds and government bodies.


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TABLE A.4

Actual results in 2015-2016 relative to Budget 2016-2017 (millions of dollars)

2015-2016

Budget

2016-2017 Adjustments Actual results

Consolidated revenue

Own-source revenue excluding government enterprises 75 370 839 76 209

Government enterprises 4 961 52 5 013

Federal transfers 19 089 –188 18 901

Total ‒ Consolidated revenue 99 420 703 100 123

% change 3.6

4.4

Consolidated expenditure Program spending –66 460 829 –65 631

Other consolidated expenditure(1) –21 174 335 –20 839

Mission expenditures –87 634 1 164 –86 470

% change 2.5

1.1

Debt service –10 055 46 –10 009

Total ‒ Consolidated expenditure –97 689 1 210 –96 479

% change 2.0

0.7

Contingency reserve –300 300 —


BALANCED BUDGET ACT Deposits of dedicated revenues

in the Generations Fund –1 431 –22 –1 453

BUDGETARY BALANCE(2) — 2 191 2 191

(1) Including consolidation adjustments. (2) Budgetary balance within the meaning of the Balanced Budget Act.


A favourable adjustment to consolidated own-source revenue in 2015-2016

Consolidated own-source revenue have been adjusted upward by $891 million relative to the Budget 2016-2017 forecast, raising revenue to $81.2 billion. Even though economic growth was in line with the projections, a number of specific factors contributed to the adjustment to revenue:

– a difference of $282 million in personal income tax, primarily attributable to a higher-than-expected amount of income tax payable following processing of tax returns for the 2015 taxation year;

▪ The higher income tax payable results from a higher-than-expected level of capital gains realized, as well as interest, dividend and investment income.

– a difference of $612 million in corporate taxes, primarily resulting from higher-than-expected tax revenues at year-end, mainly due to an upward adjustment of 2.0 percentage points in the growth of net operating surplus of corporations in 2015 (corporate profits);

– a $52-million adjustment in revenue from government enterprises.

These are similar results to those of the federal government, which recorded a higher-than-forecast level of revenue from personal income tax and corporate taxes.

Adjustments to consolidated own-source revenue in 2015-2016 (millions of dollars)

BUDGET 2016-2017 80 331

Adjustments

Personal income tax 282

Corporate taxes 612

Government enterprises 52

Other −55

Total adjustments 891

PUBLIC ACCOUNTS 2015-2016 81 222


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Adjustments to expenditure in 2015-2016

Mission expenditures in 2015-2016 have been revised downward by $1 164 million from the Budget 2016-2017 forecast. The adjustment represents projected expenditure that was not incurred due to one-off factors. The $829-million difference in program spending results primarily from:

– an amount of $147 million not spent by the Ministère de l’Éducation et de l’Enseignement supérieur owing to strike days mainly in school boards, which posted a surplus in 2015-2016; 1

– $220 million less than expected in health spending for compensation for physicians, pharmaceutical services and prescription drugs;

– a $64-million decrease in the cost of the provision for guaranteed financial initiatives of the Economic Development Fund;

– $63 million less than forecast in employer contributions to retirement plans. The $335-million difference in other consolidated expenditure stems primarily from lower-than-anticipated spending on project planning and programs at:

– the Société d’habitation du Québec ($96 million), the Société de financement des infrastructures locales ($73 million) and the Green Fund ($67 million). This spending will be carried out in future.

Adjustments to mission expenditures in 2015-2016 (millions of dollars) Budget 2016-2017 87 634 Adjustments

Program spending Education and higher education – Strike days –147

Health and social services ‒ RAMQ and other –220 Provision for guaranteed financial initiatives –64 Employer contributions –63 Municipal affairs (reimbursements of property tax and other) –47 Other programs (allocated sums not used) –288 Subtotal –829

Other consolidated expenditure Société d'habitation du Québec –96

Société de financement des infrastructures locales du Québec –73 Green Fund –67 La Financière agricole du Québec –34 Other consolidated expenditure –65 Subtotal –335 Total adjustments –1 164 PUBLIC ACCOUNTS 2015-2016 86 470

1 On the basis of the government’s fiscal year ending March 31.


Main adjustments to the financial framework 1.2.2

Overall, economic developments and use of part of the contingency reserve brings positive adjustments to the financial framework. The adjustments result primarily from recurrence of part of the budgetary surplus recorded in 2015-2016.

Adjustments related to the economy amount to $399 million in 2016-2017, $323 million in 2017-2018 and $449 million in 2018-2019.

— In particular, favourable economic developments bring:

— upward revisions of $122 million in 2016-2017 and $156 million in 2017-2018 to own-source revenue;

— reductions of $359 million in 2016-2017 and $322 million in 2017-2018 to debt service.

— Downward adjustments to revenue from government enterprises, totalling $102 million in 2016-2017 and $183 million in 2017-2018, essentially result from a downward adjustment to anticipated export revenue for Hydro-Québec.

The Québec Economic Plan

Furthermore, the government is announcing additional investments to strengthen funding for public services and continue reducing the tax burden.

— These investments, totalling $288 million in 2016-2017 and $689 million in 2017-2018, will be funded primarily through the recurrence of part of the budgetary surplus recorded in 2015-2016.


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TABLE A.5

Adjustments to the financial framework since Budget 2016-2017 (millions of dollars)

2016-2017 2017-2018 2018-2019

BUDGETARY BALANCE ‒ BUDGET 2016-2017 — — —

ADJUSTMENTS RELATED TO THE ECONOMY Own-source revenue 122 156 197

Revenue from government enterprises –102 –183 –129

Federal transfers 20 28 204

Debt service 359 322 177

TOTAL ‒ ADJUSTMENTS RELATED TO THE ECONOMY 399 323 449

A QUÉBEC ECONOMIC PLAN ‒ OCTOBER 2016 Investments in health –100 –300 –300

Investments in education and higher education –35 –110 –110

Support for the regional economies –100 –100 –100

Elimination of the health contribution as of January 1, 2017 –53 –179 –21

TOTAL ‒ QUÉBEC ECONOMIC PLAN –288 –689 –531

A OTHER ADJUSTMENTS Partial use of the contingency reserve 250 250 250

Other –361 116 –168

TOTAL ‒ OTHER ADJUSTMENTS –111 366 82

A BUDGETARY BALANCE ‒ OCTOBER 2016 UPDATE — — —


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2. THE QUÉBEC ECONOMIC PLAN

The Québec Economic Plan consists of several measures announced since June 2014 with the aim of strengthening funding of public services, supporting the economy and boosting employment.

The October 2016 Update of the Québec Economic Plan is an opportunity for the government to announce new initiatives thanks to good fiscal performance in 2015-2016. The government is choosing to allow taxpayers to immediately reap the rewards of sound management.


Further investments of $2.2 billion in services

The improvement in Québec’s financial situation enables the government to announce additional investments of over $900 million in 2017-2018, reaching $2.2 billion within three years.


— an immediate increase, of over $500 million over a full year, in funding for new public services:

— $300 million for health;

— $110 million for education;

— $100 million for regional economic development;

— an additional investment of $400 million in public infrastructure in 2017-2018.

The government is also announcing that the health contribution will be completely eliminated ahead of schedule, on January 1, 2017, representing another $253 million.

— Overall, elimination of the health contribution will reduce the tax burden on Québec taxpayers by $759 million a year.

TABLE A.6

Additional investments, 2016-2017 to 2019-2020 – October 2016 Update (millions of dollars)

2016-2017 2017-2018 Cumulative(1)

Strengthening of funding for public services – Health and social services 100 300 1 000




Subtotal 235 910 2 165 Complete elimination of the health contribution as of January 1, 2017 53 179 253

TOTAL 288 1 089 2 418

(1) From 2016-2017 to 2019-2020.


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Further investments in health, education and the 2.1regional economies

The government is stepping up initiatives to strengthen funding for public services and stimulate further economic growth as of 2016-2017. The government plans to make additional investments for the purpose of introducing new services:

— $100 million in 2016-2017 and $300 million per year starting in 2017-2018 to provide more funding for home and residential care services for seniors;

— $35 million in 2016-2017 and $110 million per year starting in 2017-2018 to enhance funding for education and higher education with the aim of increasing student success;

— $100 million per year starting in 2016-2017 to drive economic development in Québec’s regions.

These additional investments increase spending growth to 4.0% in 2016-2017. For 2017-2018, program spending will grow by 3.2%, an increase of 0.4 percentage point relative to Budget 2016-2017.

TABLE A.7

Program spending for the major portfolios, 2015-2016 to 2017-2018 (millions of dollars)

2015-2016 2016-2017

2017-2018

Actual results

Budget 2016-2017 Change

October 2016


October 2016

Santé et Services sociaux 32 760 33 739 100 33 839 34 564 300 34 864

% change 1.6 3.0(1) 3.3(1) 2.4 3.0

Éducation et Enseignement supérieur 16 603

17 245 35 17 280

17 769 110 17 879

% change 0.8(2)

4.4(1)

4.6(1)

3.0

3.5

Other portfolios 16 268

16 599 100 16 699

16 961 100 17 061

% change –1.4

1.5(1)

2.1(1)

2.2

2.2

Contingency Fund —

655 –235 420

612 –100 512

Fiscal room —

— — —

250 –160 90

PROGRAM SPENDING 65 631 68 238 — 68 238 70 156 250 70 406

% change 0.4

4.0

4.0

2.8

3.2

(1) To assess growth in 2016-2017 based on comparable spending levels, the percent changes for that year were calculated by excluding, from 2015-2016 expenditures, transfers from the provision for francization attributed to the Santé et Services sociaux portfolio ($12.2 million) and the Éducation et Enseignement superior portfolio ($78.5 million) and including them in the 2015-2016 expenditures of the other portfolios.

(2) Excluding the impact of strike days.


Stronger funding for health and social services

The government has undertaken a major reform aimed at improved access to health care and social services and better organization of these services.

The October 2016 Update provides for immediate additional investments of $300 million on an annual basis in health and social services. These investments will go to improving access to, and the quality of, health and social services, particularly in the following areas:

— home care;




— intermediate care;




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Canada Health Transfer

The federal share of provincial and territorial health funding through the Canada Health Transfer currently stands at 22.2%.1

If the federal government were to raise its share back to the 1980s level of 25%, it would mean an additional $4.5 billion in health care funding across Canada in 2016-2017.

– For Québec, it would mean a $1-billion catch-up increase that would help improve health care.

Share of federal funding in provincial health spending, 1977-1978 to 2016-2017 (per cent)

Note: For 2004-2005 to 2013-2014, federal funding includes the payments made to the provinces to reduce wait times. It includes $4.25 billion paid through a trust from 2004-2005 to 2008-2009 and $1.25 billion in transfers from 2009-2010 to 2013-2014, for a total of $5.5 billion.

Sources: Canadian Institute for Health Information and Department of Finance Canada.

1 For additional information on the federal government’s current share of health funding through the Canada Health Transfer to the provinces and territories, see the March 2016 Québec Economic Plan, pages F.11 to F.14.

25.0

26.5

14.0

22.2

1977-1978

1980-1981

1983-1984

1986-1987

1989-1990

1992-1993

1995-1996

1998-1999

2001-2002

2004-2005

2007-2008

2010-2011

2013-2014

2016-2017


Further investments in education and higher education To build on the efforts made, the October 2016 Update provides for additional investments of $35 million in 2016-2017 and $110 million in 2017-2018 and 2018-2019 to add new education and higher education services.






— supporting the college and university networks in developing measures to assist special needs students;



These additional investments will bring spending growth for the Éducation et Enseignement supérieur portfolio to:

— 3.5% in 2017-2018, which represents an increase of 0.5 percentage point relative to Budget 2016-2017.

Support for regional economic development The October 2016 Update provides for immediate additional investments of $100 million on an annual basis to support regional economic development. The additional investments will total $400 million over four years.

Prosperity for all of Québec’s regions is a central priority for the Québec government. With the October 2016 Update of the Québec Economic Plan, the government is taking the opportunity to give the regions, including the Capitale-Nationale region and the region of the metropolis, further financial means to support their economic development. These additional investments will:

— provide specific support for the regions to take charge of their economic development without the creation of new administrative structures;



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Complete elimination of the health contribution 2.2as of January 1, 2017

The October 2016 Update of the Québec Economic Plan eases the tax burden on individuals by a further $253 million by eliminating the health contribution completely as of 2017, two years ahead of schedule.

Eliminating the health contribution for all Quebecers on January 1, 2017 means that 4.5 million taxpayers will no longer pay the health contribution.

CHART A.4

Illustration of the elimination of the health contribution ‒ 2017 (dollars)

Note: Expected thresholds for 2017.

Elimination of the health contribution represents an easing of the tax burden by $759 million a year, or $3.2 billion over five years.

TABLE A.8

Financial impact of the elimination of the health contribution (millions of dollars)

2016-2017-

2017-2018-

2018-2019-

2019-2020-

2020-2021- Total

Relief already provided for –211 –520 –733 –759 –759 –2 982

Complete elimination as of January 1, 2017(1) –53 –179 –21 — — –253

REDUCTION OF THE TAX BURDEN –264 –699 –754 –759 –759 –3 235

(1) Impact in 2018-2019 attributable to payments of the health contribution, made as of July 2018, for the 2017 taxation year.

0100200300400500600700800900

1 0001 100

15 000 35 000 55 000 75 000 95 000 115 000 135 000 155 000 175 000

Hea

lth c

ontr

ibut

ion

Net income

Initial health contribution ($100 / $200 / $1 000)

Budget 2016-2017 ($0 / $70 / $800)

October 2016 Update (complete elimination)

$200

$70

$800

$100

$135 060$41 560

$1 000


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3. FISCAL OUTLOOK

This section presents the government’s fiscal outlook for the years 2016-2017 to 2020-2021.

The government’s five-year financial framework 3.1The government’s financial framework provides for a balanced budget in 2016-2017 and subsequent years.

— Consolidated revenue is expected to grow by 2.2% in 2016-2017 and 2.7% in 2017-2018.

— For the same two years, consolidated expenditure is projected to increase by 3.8% and 2.3%, respectively.

The financial framework includes a contingency reserve of $150 million for the period 2016-2017 to 2019-2020 and $250 million in 2020-2021.

Deposits in the Generations Fund will reach $2.0 billion in 2016-2017 and $2.5 billion in 2017-2018.


TABLE A.9

Consolidated financial framework, 2015-2016 to 2020-2021 (millions of dollars)

2015-2016-

2016-2017-

2017-2018-

2018-2019-

2019-2020-

2020-2021-

Consolidated revenue Personal income tax 28 753 29 757 30 911 32 147 33 300 34 512

Contributions for health services 6 614 6 452 6 065 6 133 6 288 6 434

Corporate taxes 7 016 6 743 7 017 7 252 7 336 7 441

School property tax 2 090 2 122 2 208 2 293 2 366 2 443

Consumption taxes 18 517 19 043 19 548 19 927 20 209 20 551

Duties and permits 3 828 3 435 3 600 3 702 3 822 3 893

Miscellaneous revenue 9 391 9 948 10 324 10 714 11 195 11 735

Government enterprises 5 013 4 570 4 598 4 632 4 810 4 998

Own-source revenue 81 222 82 070 84 271 86 800 89 326 92 007

% change 4.9 1.0 2.7 3.0 2.9 3.0

Federal transfers 18 901 20 264 20 828 21 448 21 669 22 231

% change 2.0 7.2 2.8 3.0 1.0 2.6

Total consolidated revenue 100 123 102 334 105 099 108 248 110 995 114 238

% change 4.4 2.2 2.7 3.0 2.5 2.9

Consolidated expenditure Mission expenditures –86 470 –90 138 –92 346 –94 904 –96 984 –99 380

% change 1.1 4.2 2.4 2.8 2.2 2.5

Debt service –10 009 –10 047 –10 149 –10 376 –10 639 –10 989

% change –2.5 0.4 1.0 2.2 2.5 3.3

Total consolidated expenditure –96 479 –100 185 –102 495 –105 280 –107 623 –110 369

% change 0.7 3.8 2.3 2.7 2.2 2.6

Contingency reserve — –150 –150 –150 –150 –250

SURPLUS (DEFICIT) 3 644 1 999 2 454 2 818 3 222 3 619


in the Generations Fund –1 453 –1 999 –2 454 –2 818 –3 222 –3 619

BUDGETARY BALANCE (1) 2 191 — — — — —



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Financial framework for the General Fund and consolidated entities

Financial framework for the General Fund and consolidated entities, 2015-2016 to 2020-2021 (millions of dollars)

2015-2016-

2016-2017-

2017-2018-

2018-2019-

2019-2020-

2020-2021-

GENERAL FUND Revenue Own-source revenue excluding

government enterprises 52 486 53 780 55 661 57 529 59 143 60 808

% change 6.3 2.5 3.5 3.4 2.8 2.8

Government enterprises 4 915 4 403 4 173 4 167 4 260 4 348

% change –7.9 –10.4 –5.2 –0.1 2.2 2.1

Federal transfers 17 035 18 224 18 921 19 096 19 502 20 296

% change 1.2 7.0 3.8 0.9 2.1 4.1

Total revenue 74 436 76 407 78 755 80 792 82 905 85 452

% change 4.0 2.6 3.1 2.6 2.6 3.1

Expenditure Program spending –65 631 –68 238 –70 406 –72 339 –74 322 –76 368

% change 0.4 4.0 3.2 2.7 2.7 2.8

Debt service –7 955 –7 959 –7 961 –7 945 –7 983 –8 078

% change –2.4 0.1 0.0 –0.2 0.5 1.2

Total expenditure –73 586 –76 197 –78 367 –80 284 –82 305 –84 446

% change 0.1 3.5 2.8 2.4 2.5 2.6

NET RESULTS OF CONSOLIDATED ENTITIES

Non-budget-funded bodies and special funds(1) 1 281 –37 –233 –358 –450 –756

Health and social services and education networks 60 –23 –5 — — —

Generations Fund 1 453 1 999 2 454 2 818 3 222 3 619

Total consolidated entities 2 794 1 939 2 216 2 460 2 772 2 863

Contingency reserve — –150 –150 –150 –150 –250

SURPLUS (DEFICIT) 3 644 1 999 2 454 2 818 3 222 3 619


in the Generations Fund –1 453 –1 999 –2 454 –2 818 –3 222 –3 619

BUDGETARY BALANCE(2) 2 191 — — — — —

(1) Including the impact of elimination of the health contribution and consolidation adjustments. (2) Budgetary balance within the meaning of the Balanced Budget Act.


Gradual reduction in the state’s weight in the economy to pre-2008 recession levels

The weights of government revenue and expenditure in the economy generally follow similar paths.

From 2008-2009 to 2013-2014, the weight of spending in the economy exceeded that of revenue. The weight of spending rose steadily up to 2013-2014, when it reached 26.2%.

Total expenditure as a share of GDP will be reduced gradually to 24.9% within five years. This is a similar level to that in 2007-2008, before the recession.

The reduction in the tax burden will gradually bring total revenue as a share of the economy to 25.7% in 2020-2021.

CHART A.5

Change in the share of consolidated revenue and expenditure in the economy – 1997-1998 to 2020-2021 (percentage of GDP)

23.9

24.0

24.8

24.7

25.7

26.426.2

25.7

25.0

23.4

24.3

25.4

26.2

25.4

25.6

24.9

22

23

24

25

26

27

1998-1999

2000-2001

2002-2003

2004-2005

2006-2007

2008-2009

2010-2011

2012-2013

2014-2015

2016-2017

2018-2019

2020-2021

Consolidated revenue Consolidated expenditure

Revenue

Expenditure


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Change in revenue 3.2

Revenue growth in line with economic growth

Own-source revenue excluding government enterprises consists chiefly of tax revenue. Its growth generally reflects the changes in economic activity and the impact of measures introduced in the budgets.

In 2016-2017, consolidated own-source revenue excluding government enterprises will increase by 1.7%.

— Revenue growth in 2016-2017 will result primarily from the tax relief and economic support measures announced since Budget 2015-2016, including complete elimination of the health contribution as of January 1, 2017.

— Had it not been for those measures, own-source revenue would grow by 2.4%, in line with economic growth.

Revenue will see relatively stable growth over the forecasting period, expanding in pace with the economy.

CHART A.6

Growth in consolidated own-source revenue excluding government enterprises – 2015-2016 to 2019-2020 (per cent)

5.9

1.72.8 3.1 2.9

4.0

2.43.6 3.2 2.9

2015-2016 2016-2017 2017-2018 2018-2019 2019-2020

Consolidated own-source revenueConsolidated own-source revenue before measures and other factors affecting revenueNominal GDP per capita for the calendar year


Revenue growth in line with economic growth

Growth in consolidated own-source revenue excluding government enterprises – 2015-2016 to 2019-2020 (millions of dollars)

2015-2016-

2016-2017-

2017-2018-

2018-2019-

2019-2020-

Own-source revenue 81 222 82 070 84 271 86 800 89 326

% change 4.9 1.0 2.7 3.0 2.9

Government enterprises 5 013 4 570 4 598 4 632 4 810

Own-source revenue excluding government enterprises 76 209 77 500 79 673 82 168 84 516

% change 5.9 1.7 2.8 3.1 2.9

Measures and other factors affecting revenue growth(1)

Complete elimination of the health contribution as of January 1, 2017(2) –32 –264 –699 –754 –759

Fight against climate change ‒ Carbon market 862 416 457 465 435

Elimination of restrictions on input tax refunds for large businesses(3) — — –22 –115 –220

Other measures Budget 2016-2017 — –7 –42 –57 –71

Budget 2015-2016 –8 –52 –116 –187 –217

December 2014 Update 626 685 563 569 573

Budget 2014-2015 304 278 259 247 239

Other measures(4) and adjustments 748 944 1 089 1 277 1 504

Subtotal 2 500 1 999 1 489 1 445 1 484

Own-source revenue excluding government enterprises before measures 73 709 75 501 78 184 80 723 83 032

% change 4.0 2.4 3.6 3.2 2.9

Nominal GDP growth (%) 2.0 2.6 3.3 3.3 3.3

Note: Totals may not add due to rounding. (1) Main measures affecting consolidated revenue growth. (2) Includes the financial impact of the gradual elimination of the health contribution as of January 1, 2017

announced in Budget 2015-2016, the immediate reduction in the health contribution announced in Budget 2016-2017 and the complete elimination of the health contribution as of January 1, 2017 announced in the October 2016 Update of the Québec Economic Plan.

(3) Businesses with taxable sales of over $10 million. (4) Includes primarily the measures in budgets 2012-2013 and 2013-2014, as well as investment income of

the Generations Fund.


A

SECT

ION

Change in consolidated own-source revenue in the economy

In 2016-2017, consolidated own-source revenue excluding revenue from government enterprises will represent 19.8% of Québec’s nominal GDP.

The measures announced in recent years, especially elimination of the health contribution, will gradually reduce the share of own-source revenue in the economy to 19.6% in 2020-2021.

Change in consolidated own-source revenue excluding government enterprises in the economy – 1997-1998 to 2020-2021 (percentage of GDP)

19.219.6

18.918.5

17.7

19.3

20.119.8 19.6

16

17

18

19

20

21

1998-1999

2000-2001

2002-2003

2004-2005

2006-2007

2008-2009

2010-2011

2012-2013

2014-2015

2016-2017

2018-2019

2020-2021


Change in expenditure 3.3With a balanced budget and the responsible management of public finances in recent years, the government is in a position to immediately strengthen funding of public services.

Mission expenditures Mission expenditures consist primarily of program spending by government departments and spending by special funds, non-budget-funded bodies and bodies in the health and social services and education networks.

According to the Public Accounts 2015-2016, mission expenditures in 2015-2016 totalled $86 470 million, which is $1 164 million less than forecast in Budget 2016-2017.

— For 2015-2016, growth was revised downward by 1.4 percentage points, from 2.5% in March 2016 to 1.1% in October.

— In 2016-2017, expenditure has been revised upward by $418 million relative to the March forecast, to $90 138 million.

— The decrease in expenditure recorded in 2015-2016 and the increase in expenditure in 2016-2017 raise growth in mission expenditures for 2016-2017 from 2.4% in Budget 2016-2017 to 4.2% in the October 2016 Update.

Over three years, that is, from 2015-2016 to 2017-2018, expenditure will grow at an average annual rate of 2.6%, an increase consistent with taxpayers’ capacity to pay.

CHART A.7

Growth in mission expenditures(1) – 2011-2012 to 2020-2021 (per cent)

(1) Consolidated expenditure excluding debt service.

3.22.6

4.7

1.41.1

4.2

2.42.8

2.22.5

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

2018-2019

2019-2020

2020-2021

2.6


A

SECT

ION

Weight of expenditure in the economy

Between 2007-2008 and 2013-2014, the weight of mission expenditures, that is, consolidated expenditure excluding debt service as a share of GDP, rose from 21.4% to 23.2%.

In order to balance the budget in 2015-2016, the government managed government spending in a responsible manner.

While strengthening funding for public services, the government will control spending to gradually lower the weight of mission expenditures to 22.4% by 2020-2021. This is comparable to the level prior to the last recession and is more sustainable in terms of taxpayers’ ability to pay.

Lower spending levels will:

— prevent excessively high spending from creating an onerous fiscal burden in relation to the other Canadian provinces, which could undermine Québec’s tax competitiveness and dampen its economic growth;

— provide the government with the capacity, during difficult economic times, to once again finance measures that may be needed to support the economy.

CHART A.8

Change in mission expenditures(1) in the economy – 1997-1998 to 2020-2021 (percentage of GDP)

(1) Consolidated expenditure excluding the debt service.

21.1

20.0

21.4

23.1

22.6

23.2

23.0

23.122.4

19

21

23

25

1998-1999

2000-2001

2002-2003

2004-2005

2006-2007

2008-2009

2010-2011

2012-2013

2014-2015

2016-2017

2018-2019

2020-2021


A comparative look at mission expenditures

The forecast growth in mission expenditures in Québec is similar to the growth path elsewhere in Canada.

To ensure the return to a balanced budget, Québec, Ontario and British Columbia slowed growth in their mission expenditures. Once the budget has been balanced, higher spending increases are possible.

Overall, Québec held spending growth to similar levels as Ontario and British Columbia.

– In Québec, the average rate of annual spending growth from 2014-2015 to 2017-2018 is 2.3%, compared to 1.8% in Ontario and 2.9% in British Columbia.

Growth in provinces’ mission expenditures(1) (per cent)

(1) Consolidated expenditure excluding debt service. Sources: Department of Finance Canada and Ministère des Finances du Québec.

1.42.1

2.5

1.1

3.6

5.1

4.2

-0.2

3.7

2.41.7

0.5

Québec Ontario British Columbia

2014-2015 2015-2016 2016-2017 2017-2018

Balanced budgetin 2015-2016



Av.2.3% Av.

1.8%

Av.2.9%


A

SECT

ION

Program spending

Program spending consists of spending by government departments and is mainly tax-funded.

Spending growth

According to the Public Accounts, program spending was $65 631 million in 2015-2016, a decrease of $829 million over the March forecast.

— The downward adjustment essentially stems from lower spending owing to one-off factors.

Program spending growth for 2015-2016 has therefore been adjusted downward by 1.3 percentage points from 1.7% in March 2016 to 0.4% in October 2016.

The program spending target for 2016-2017 remains unchanged, at $68 238 million. Owing to the lower spending recorded in 2015-2016, growth for 2016-2017 now stands at 4.0%, compared to the 2.7% growth forecast in March.

Taking into account the additional investments to strengthen the funding of public services, spending growth stands at 3.2% in 2017-2018, 2.7% for the two subsequent years and 2.8% in 2020-2021.

From 2015-2016 to 2017-2018, annual program spending growth will average 2.5%.

CHART A.9

Program spending growth – 2011-2012 to 2020-2021 (per cent)

2.5

1.2

3.3

1.6

0.4

4.0

3.22.7 2.7 2.8

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

2018-2019

2019-2020

2020-2021

2.5


Adjustment to spending growth in 2016-2017

The adjustment to program spending growth in the October 2016 Update of the Québec Economic Plan relative to the March forecast stems from the fact that actual spending was lower than expected in 2015-2016.

– Last March, the program spending forecast was $66 460 million for 2015-2016 and $68 238 million for 2016-2017. Anticipated growth in program spending was 2.7%.

– According to the Public Accounts 2015-2016, actual program spending for 2015-2016 was $65 631 million, that is, $829 million less than forecast in Budget 2016-2017.

– Therefore, even though the level of spending in 2016-2017 remains unchanged ($68 238 million), growth in program spending now stands at 4.0%.

Growth in mission expenditures for 2016-2017 is now 4.2% in the October 2016 Update of the Québec Economic Plan.

– The upward adjustment to growth in mission expenditures results primarily from the downward adjustment of $1 164 million to mission expenditures in 2015-2016.

Impact of the adjustment to program spending in 2015-2016 on growth rate in 2016-2017

Impact of the adjustment to mission expenditures(1) in 2015-2016 on growth rate in 2016-2017

(millions of dollars) (millions of dollars)

(1) Consolidated expenditure excluding debt service.

65 631

68 238−829

—

2015-2016 2016-2017

Adjustments - Public Accounts 2015-2016October 2016 Update

2.7%

4.0%

March 2016forecast

66 460

86 470

90 138−1 164

—

2015-2016 2016-2017

Adjustments - Public Accounts 2015-2016October 2016 Update

March 2016forecast

87 634

2.9%

4.2%


A

SECT

ION

Program spending for the major portfolios

More specifically, program spending will increase by 4.0% in 2016-2017, 3.2% in 2017-2018 and 2.7% in 2018-2019.

— Program spending for the Santé et Services sociaux portfolio will rise by 3.3% in 2016-2017 and 3.0% in 2017-2018.

— Program spending for the Éducation et Enseignement supérieur portfolio will increase by 4.6% in 2016-2017 and by 3.5% in 2017-2018.

— Overall, the funding allocated to the other portfolios will increase by 2.1% in 2016-2017 and 2.2% in 2017-2018.

TABLE A.10

Program spending for the major portfolios (millions of dollars)

2015-2016 2016-2017(1) 2017-2018 2018-2019

Santé et Services sociaux 32 760 33 839 34 864 35 829

% change 1.6 3.3(2) 3.0 2.8

Éducation et Enseignement supérieur 16 603 17 280 17 879 18 409

% change 0.8(1) 4.6(2) 3.5 3.0

Other portfolios 16 268 16 699 17 061 17 145

% change –1.4 2.1(2) 2.2 0.5

Contingency Fund — 420 512 617

Fiscal room — — 90 340

PROGRAM SPENDING 65 631 68 238 70 406 72 339

% change 0.4 4.0 3.2 2.7

Note: Totals may not add due to rounding. (1) Excluding the impact of strike days. (2) To assess growth in 2016-2017 based on comparable spending levels, the percent changes for that year were

calculated by excluding, from 2015-2016 expenditures, transfers from the provision for francization attributed to the Santé et Services sociaux portfolio ($12.2 million) and the Éducation et Enseignement superior portfolio ($78.5 million) and including them in the 2015-2016 expenditures of the other portfolios.


Debt reduction 3.4Reducing the debt burden is a priority. It is a matter of intergenerational equity. The government is maintaining its debt reduction objectives and continuing efforts in that regard by making deposits in the Generations Fund.

The Québec government set debt reduction objectives that have been included in the Act to reduce the debt and establish the Generations Fund. For fiscal 2025-2026:

— the gross debt cannot exceed 45% of GDP;

— the debt representing accumulated deficits cannot exceed 17% of GDP.

The gross debt burden is declining. As at March 31, 2016, it was 53.8%, a 1.3-percentage-point decrease over March 31, 2015.

As at March 31, 2016, the debt representing accumulated deficits stood at 31.8% of GDP, also a decrease over March 31, 2015.

CHART A.10

Gross debt as at March 31

CHART A.11

Debt representing accumulated deficits as at March 31

(percentage of GDP) (percentage of GDP)

55.153.8

53.752.9

51.650.0

48.647.9

47.246.4

45.745.0

42

44

46

48

50

52

54

56

58

2014 2016 2018 2020 2022 2024 20260

Objective

32.831.8

30.528.9

27.325.6

24.022.6

21.219.8

18.417.0

14

16

18

20

22

24

26

28

30

32

34

36

2014 2016 2018 2020 2022 2024 2026

Objective

0

B.1

Section B B THE QUÉBEC ECONOMIC PLAN

Introduction .......................................................................................... B.3

1. Key actions for the development of our economy and our public services ....................................................................... B.5

1.1 Additional investments in health, education and regional economies ............................................................................................ B.6

1.1.1 Strengthening of health funding ............................................. B.7

1.1.2 Additional investments in education and higher education ................................................................................ B.8

1.1.3 Additional support for the economy and the implementation of government priorities .............................. B.11

1.2 Public capital investment ................................................................... B.14

1.3 Complete elimination of the health contribution as of January 1, 2017 ........................................................................ B.18

2. The government’s record concerning its actions to spur the economy .................................................................................B.21

2.1 Record concerning the reduction of the tax burden on individuals .......................................................................................... B.23

2.2 Concrete actions to develop the Québec economy ........................... B.24

2.2.1 Easing the tax burden on corporations, in particular SMBs .................................................................................... B.24

2.2.2 Initiatives to foster Québec’s economic development .......... B.28

The Québec Economic Plan B.3

B

SECT

ION

INTRODUCTION

In the Québec Economic Plan of budgets 2014-2015, 2015-2016 and 2016-2017, the government presented a responsible plan for ensuring a return to balanced public finances and the development of the Québec economy.

The government’s action has been successful.

— A balanced budget was achieved in 2015-2016, as planned.

— The economy continues to grow, buoyed by consumer and business confidence, despite an uncertain environment.

Responsible spending management and faster economic growth enable the government to maintain a balanced budget over the period covered by the financial framework.

The government wants all Quebecers to benefit from this sound management of public finances.

This section presents:

— new actions to strengthen the funding of public services and spur the economy;

— The government is announcing additional investments that will reach $2.2 billion over the next three years to strengthen the funding of public services, particularly health and education, support regional economic development and increase the Québec Infrastructure Plan.

— The government is also announcing an additional reduction of the tax burden on individuals.

— the government’s record concerning its actions to spur the economy.

— Together, the actions implemented by the government since 2015 represent a reduction of the tax burden on Quebecers of more than $4 billion over five years.

— The reduction of the tax burden on businesses stemming from the measures announced since June 2014 totals nearly $1.7 billion between 2016-2017 and 2020-2021.


B

SECT

ION

1. KEY ACTIONS FOR THE DEVELOPMENT OF OUR ECONOMY AND OUR PUBLIC SERVICES

The year 2015-2016 marked the return to a balanced budget, after six consecutive years of deficits.

— The actual results for 2015-2016 show a budget surplus of $2.2 billion.

These results flow from responsible spending management and the economy’s good performance, which supported revenue growth.

Given the improvement of public finances, $2.2 billion will be invested in services within the next three years. Coupled with the reduction of the tax burden, these additional investments will reach $2.4 billion.


— additional investments in health and education, and to spur regional economies, of more than $500 million annually, which will reach $1 765 million within the next three years;

— a $400-million increase in the Québec Infrastructure Plan in 2017-2018.

Moreover, the government is announcing the complete elimination of the health contribution as of January 1, 2017, which represents an additional impact of $253 million.

— Overall, elimination of the health contribution represents tax relief of $759 million a year.

TABLE B.1

Additional investments from 2016-2017 to 2019-2020 – October 2016 Update (millions of dollars)

2016-2017 2017-2018 Cumulative(1)

Strengthening the funding of public services

– Health and social services 100 300 1 000




Subtotal 235 910 2 165

A

Complete elimination of the health contribution as of January 1, 2017 53 179 253

TOTAL 288 1 089 2 418

(1) From 2016-2017 to 2019-2020.

The Québec Economic Plan B.6 October 2016 Update

Additional investments in health, education and 1.1regional economies

With the October 2016 Update of the Québec Economic Plan, the government is strengthening the funding of the state’s priority missions by announcing investments to add new services:

— $100 million in 2016-2017 and $300 million a year as of 2017-2018 in health to prioritize home care and residential care for seniors;

— $35 million in 2016-2017 and $110 million a year as of 2017-2018 in education and higher education to increase student success;

— $100 million a year as of 2016-2017 to boost the economy in all regions of Québec.

Overall, these investments total $510 million in 2017-2018 and will reach nearly $1.8 billion within the next three years.

TABLE B.2

Additional investments from 2016-2017 to 2019-2020 (millions of dollars)

2016-2017 2017-2018 2018-2019 2019-2020 Total

Program spending

Health and social services 100 300 300 300 1 000

Education and higher education 35 110 110 110 365

Regional economic development 100 100 100 100 400

TOTAL 235 510 510 510 1 765


B

SECT

ION

Strengthening of health funding 1.1.1

The government has undertaken a major reform aimed at improved access to health care and social services and better organization of these services.

The October 2016 Update provides for immediate additional investments of $300 million on an annual basis in health and social services. These investments will go to improving access to, and the quality of, health care and social services, particularly in the following sectors:

— home care;




— intermediate care.



The Minister of Health and Social Services and the Minister for Rehabilitation, Youth Protection, Public Health and Healthy Living will present the details of these new investments and of the development of new services at a later date.

TABLE B.3

Santé et Services sociaux – Program spending (millions of dollars)

2015-2016 2016-2017 2017-2018

Actual results


October 2016


October 2016

Health and social services 32 760

33 739 100 33 839

34 564 300 34 864

% change 1.6

3.0(1)

3.3(1)

2.4

3.0

(1) Excluding transfers from the provision for francization of the Ministère de l’Immigration, de la Diversité et de l’Inclusion.


Additional investments in education and higher education 1.1.2

To build on the efforts made, the October 2016 Update of the Québec Economic Plan provides for additional investments of $35 million in 2016-2017 and $110 million in 2017-2018 and 2018-2019 to add new education and higher education services.

— Thus, $255 million is added to the $500 million in investments provided for in the Plan for Success in Education and Higher Education, announced in the Québec Economic Plan of March 2016.






— supporting college and university networks in developing measures to assist special needs students;



Details of these investments will be presented at a later date by the Minister of Education, Recreation and Sports and the Minister responsible for Higher Education.

TABLE B.4

Additional investments in student services (millions of dollars)

2016-2017 2017-2018 2018-2019 Total

Budget 2016-2017 164 168 168 500

October 2016 Update 35 110 110 255

TOTAL 199 278 278 755


B

SECT

ION

Portfolio program spending objective

With these additional investments, spending growth in the Éducation et Enseignement supérieur portfolio will reach:

— 3.5% in 2017-2018, an increase of 0.5 percentage point compared to Budget 2016-2017.

TABLE B.5

Éducation et Enseignement supérieur – Program spending (millions of dollars)

2015-2016 2016-2017 2017-2018

Actual results


October 2016


October 2016

Education and higher education 16 603 17 245 35 17 280 17 769 110 17 879

% change 0.8(1)

4.4(2)

4.6(2)

3.0

3.5

(1) Excluding the impact of strike days. (2) Excluding transfers from the provision for francization of the Ministère de l’Immigration, de la Diversité et de

l’Inclusion.


Reminder of the Plan for Success in Education and Higher Education

The Plan for Success in Education and Higher Education, announced in March 2016, provides for additional investments of $500 million over the next three years to improve student services.

Reduce school dropout

– Provide an innovative learning environment and support young people to prevent school dropout.

Increase physical activity

– Give as many students as possible the desire to succeed, in particular through physical activity and stronger links with civil society partners.

Additional investments in higher education

– Strengthen links between the education and higher education networks and businesses to better meet labour market needs.

Additional investments in direct student services (millions of dollars)

2016-2017-

2017-2018-

2018-2019- Total

Acting early and in the right place 97 101 102 300

Giving students the desire to succeed and strive for excellence 40 40 40 120

Pursuing innovation in education and higher education 27 27 27 80

TOTAL 164 168 168 500

Investment breakdown

Preschool, elementary and secondary education(1) 109 113 113 335

Higher education 55 55 55 165

Note: Totals may not add due to rounding. (1) Also includes measures respecting recreational activities, sports and the outdoors.

An additional amount of $700 million is also provided for in the Plan for Success in Education and Higher Education to continue investments in the renovation and upgrade of educational institutions.

– These investments are aimed at providing students with more stimulating learning environments to foster the desire to succeed, in particular by building new school gymnasiums.


B

SECT

ION

Additional support for the economy and the implementation 1.1.3of government priorities

As part of the Québec Economic Plan, the government introduced many initiatives to foster economic growth in all regions of Québec, in particular through:

— deployment of the Plan Nord;

— the launch of the Maritime Strategy, by the year 2030;

— support for the forestry sector;

— the coming into effect of the Capital Mines Énergie fund;

— implementation of the Digital Economy Action Plan;

— the signing of the Municipal Partnership Agreement for the 2016-2019 period;

— extension of local investment funds.

Apart from these initiatives, the government bolstered its support for key sectors that generate substantial economic spinoffs in all regions of Québec, such as the tourism, cultural, agri-food and social economy sectors.

These initiatives, which often flow from regional consultations, enable the needs and problems expressed by the regions to be addressed.


Additional investments of $400 million for all of Québec’s regions

The October 2016 Update provides for immediate additional investments of $100 million annually to support regional economic development. The additional investments will total $400 million over four years.

TABLE B.6

Support for regional economic development (millions of dollars)

2016-2017 2017-2018 2018-2019 2019-2020 Total

Additional investments 100 100 100 100 400

Through these new amounts, the government will offer the regions, including the Capitale-Nationale region and the region of the metropolis, further financial means to support their economic development. The $100 million made available as of 2016-2017 will enhance, among other things, the government’s actions to foster the regions’ outreach and the carrying out of economic development projects in Québec’s regions.

In subsequent years, the amounts will enable the government to, among other things, put in place two priority measures for the regions:

— provide specific support for the regions to take charge of their economic development without the creation of new administrative structures;


The other regional economic development initiatives to be funded through these new amounts will be announced soon by the government.


B

SECT

ION

Specific support for the regions so they can take charge of their economic development

Several regional actors have the expertise necessary to direct actions toward stimulating economic activity and diversifying the economy in their region. Being well aware of their specific realities, they are often in the best position to determine their economic development priorities.

The government intends to provide the regions with new financial tools that will enable economic development projects to be carried out regionally.

— These new tools will enable economic development projects to be rolled out throughout Québec, by acting as a lever for private capital investment.

The envelope will result in more independence by bringing decision-making centres closer to the regions, which will be responsible for prioritizing the projects to be funded.

With these amounts, the government is laying the foundations of the new support for economic development in all regions of Québec and recognizing the important role played by local governments.

Foster regional tourism

Festivals and events, because they are tourism-related, can be a catalyst for positioning a region on the Québec and national stage, sometimes even on the international stage. Festivals and events are therefore an important economic lever for the regions, fostering job creation and diversification of the economy.

Accordingly, the government intends to support the development of these tourist attractions and thus increase their outreach.


Public capital investment 1.2

Additional investments of $400 million in public infrastructure

To meet Québec’s significant needs respecting quality public infrastructure, the government will maintain a high level of public capital investment under the Québec Infrastructure Plan (QIP).

— Capital investments are expected to be $10.0 billion in 2017-2018, an increase of $400 million over the investments planned in March 2016.

TABLE B.7

Level of investment under the QIP in 2017-2018 (billions of dollars)

2017-2018

Investments planned under the 2016-2026 QIP 9.6

Increase in investments 0.4

Investments planned under the 2017-2027 QIP 10.0

2017-2027 Québec Infrastructure Plan

The government is announcing investments of $89.1 billion under the 2017-2027 QIP.

These investments will be earmarked first and foremost for the replacement of outdated infrastructure, economic development projects and sports infrastructure.

— In this context, the Sports and Physical Activity Development Fund will see its envelope increased.

The government is therefore confirming that, to meet Québec’s needs, high levels of capital investment will be maintained, without losing sight of taxpayers’ ability to pay and the debt reduction objectives.


B

SECT

ION

CHART B.1

Investments under the 2017-2027 Québec Infrastructure Plan (billions of dollars)

Furthermore, apart from the government’s investments under the QIP, substantial infrastructure investments are also made by government enterprises.

In 2017-2018, government enterprises will invest an anticipated $4.0 billion. Taking into account the $10.0 billion under the QIP, public capital investments for 2017-2018 are expected to total $14.0 billion.

2.8

4.5

8.9 9.2 9.6 9.6 10.0 9.69.0 8.9 8.6 8.6 8.6 8.6 8.6 8.6

Av. 97-98to 01-02

Av. 02-03to 06-07

Av. 07-08to 13-14

2014-2015

2016-2017

2018-2019

2020-2021

2022-2023

2024-2025

2026-2027

QIP 2017-2027: 89.1


An increase in public capital stock in the economy

Over the next ten years, the level of Québec government investments will average nearly $9 billion a year, thus remaining much higher than pre-2008 levels.

Government investments represented 2.5% of GDP in 2015-2016, a ratio that is expected to hold in 2016-2017.

— In 2015, the Québec government’s share of total public investments reached almost 60%.

Such investment targets reflect the importance the government places on public infrastructure. Indeed, the QIP contributes directly to the increase in public capital stock in the economy. Public capital stock is a key determinant of productivity and economic growth.

— Public capital stock in real terms rose from $60.3 billion in 2000 to $97.2 billion in 2014. With ongoing public investments, it will remain high and is forecast at $99.4 billion in 2016.

— This growth will lift public capital stock to 29.0% of real GDP in 2016.

CHART B.2

Annual public capital investments of the Québec government

CHART B.3

Change in public capital stock

(percentage of GDP) (percentage of GDP, in real terms)

Sources: Institut de la statistique du Québec, Secrétariat du Conseil du trésor and Ministère des Finances du Québec.


2.5

1.7

3.1

0

1

2

3

4

2006-2007

2009-2010

2012-2013

2015-2016

2018-2019

29.0

28.6

33.5

22.5

31.8

34.5

22.2

26.5

15

20

25

30

35

40

1961 1972 1983 1994 2005 2016

Québec

Canada


B

SECT

ION

Economic impacts of public capital investment in Québec

Substantial amounts are earmarked for public capital investments. These investments will be a powerful driver of economic activity in all regions of Québec.

Capital investments in all sectors of the economy will help build a prosperous economy over the medium and long term. More specifically, investments in transportation infrastructure will facilitate trade, and investments in education will contribute to workforce training, research and innovation, which are key determinants of productivity.

Projected capital investments of $14.0 billion in 2017-2018 under the QIP and by government enterprises will:

– generate spinoffs equivalent to 2.5% of real GDP;

– create or maintain over 81 000 jobs, including 48 000 direct jobs.

Impacts of capital investments 2017-2018

Investments under the 2017-2027 QIP $10.0 billion

Investments by government enterprises $4.0 billion

Total investments $14.0 billion

Number of jobs created or maintained 81 430

Impact on GDP 2.5%


Complete elimination of the health contribution 1.3as of January 1, 2017

One of the commitments of the government was to eliminate the health contribution during the current mandate.

Since the Québec Economic Plan of March 2015, the government has undertaken to gradually reduce the health contribution, while ensuring the budget is balanced.

Elimination of the health contribution as of 2017

The government is maintaining its commitment to reduce the tax burden on Quebecers while maintaining a balanced budget. The health contribution will therefore be eliminated as of January 1, 2017.

Thus, 2.3 million taxpayers with income over $41 560 will benefit from the elimination of the health contribution one year earlier than planned.

CHART B.4

Illustration of the elimination of the health contribution – 2017 (dollars)

Note: Expected thresholds for 2017.

0100200300400500600700800900

1 0001 100

15 000 35 000 55 000 75 000 95 000 115 000 135 000 155 000 175 000

Hea

lth c

ontr

ibut

ion

Net income

Initial health contribution ($100 / $200 / $1 000)

Budget 2016-2017 ($0 / $70 / $800)

October 2016 Update (complete elimination)

$200

$70

$800

$100

$135 060$41 560

$1 000


B

SECT

ION

A reduction of the tax burden of $3.2 billion

Moving up the elimination of the health contribution to 2017 will have a total impact of $253 million over fiscal years 2016-2017 to 2018-2019.

Taking into account the reductions announced in previous budgets, the elimination of the health contribution represents a $759-million reduction of the tax burden annually. Over a five-year period, Quebecers will save $3.2 billion through the reduction of the health contribution.

TABLE B.8

Financial impact of the elimination of the health contribution (millions of dollars)

2016-2017-

2017-2018-

2018-2019-

2019-2020-

2020-2021- Total

Relief already provided for −211 −520 −733 −759 −759 −2 982

Complete elimination as of January 1, 2017(1) −53 −179 −21 — — −253

REDUCTION OF THE TAX BURDEN −264 −699 −754 −759 −759 −3 235

(1) Impact in 2018-2019 attributable to payments of the health contribution, made as of July 2018, for the 2017 taxation year.


Tax relief for 4.5 million Quebecers Elimination of the health contribution will reduce the tax burden by a maximum of:

— $100 for 2.1 million persons earning between $18 705 and $41 560;

— $200 for 2.2 million taxpayers with income over $41 560 and below or equal to $135 060;

— $1 000 for the 150 000 individuals with income over $135 060.

TABLE B.9

Tax relief stemming from the elimination of the health contribution

Net income

Number of taxpayers

affected

Maximum reduction

granted ($)

Earlier elimination

of the health contribution

($million)

Total for the elimination

of the health contribution

($million)

$18 705 to $41 560(1) 2 114 189 100 — 196

$41 560 to $135 060 2 197 338 200 150 433

Over $135 060 148 782 1 000 103 130

TOTAL 4 460 309 — 253 759

(1) Taxpayers with income below $18 705 are exempt from the health contribution.

83%

17%


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2. THE GOVERNMENT’S RECORD CONCERNING ITS ACTIONS TO SPUR THE ECONOMY

Since Budget 2014-2015, the government has had a vision for meeting the challenge of economic growth, as laid out in the Québec Economic Plan.

As part of the March 2016 Québec Economic Plan, the government built on these efforts through new initiatives to support economic growth particularly by:

— easing the tax burden on individuals;

— fostering economic development.

The October 2016 Update is an opportunity to report on the status of the principal initiatives of the Québec Economic Plan that are under way.

Government investments as part of the Québec Economic Plan

Since Budget 2014-2015, the cost to the government of the initiatives already announced as part of the Québec Economic Plan totals over $8 billion.

TABLE B.10

Cost of the initiatives already announced in the Québec Economic Plan (millions of dollars)

Cost of initiatives Budget 2014-2015 816 Update on Québec’s Economic and Financial Situation, fall 2014 195 New and improved tax holiday for large investment projects 10(1) Budget 2015-2016(2) 3 393 Budget 2016-2017 3 647 Subtotal 8 061 October 2016 Update(3) 653 TOTAL – PLAN ÉCONOMIQUE DU QUÉBEC 8 061

(1) Represents the cost for the first five years. (2) Including the investment to continue the Bombardier C Series program. (3) Including the impact of the complete elimination of the health contribution as of January 1, 2017 and the additional

support for regional economic development.

Moreover, as part of the October 2016 Update, the government is announcing additional investments of $2.4 billion to:

— strengthen the funding of public services;

— reduce the tax burden.


Impact on the Québec economy

The measures already announced in the Québec Economic Plan will support investments of close to $35 billion in the economy, that is:

— $21.8 billion, through the series of actions preceding the initiatives in Budget 2016-2017;

— $12.8 billion from the new measures announced as part of the Québec Economic Plan of Budget 2016-2017.

When fully implemented, these measures announced in the Québec Economic Plan will contribute to the creation and maintenance of over 25 000 jobs in Québec, in all sectors of the economy.

TABLE B.11

Economic support provided for in the Québec Economic Plan (millions of dollars)

Sustained

investments

Budget 2014-2015 7 169

Update on Québec’s Economic and Financial Situation, fall 2014 735

New and improved tax holiday for large investment projects 4 035

Budget 2015-2016(1) 9 893

Subtotal 21 832

Budget 2016-2017 12 804

TOTAL – QUÉBEC ECONOMIC PLAN 34 636

(1) Including the investment to continue the Bombardier C Series program.


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Record concerning the reduction of the tax burden on 2.1individuals

The Québec government has taken a number of actions to reduce the tax burden on Quebecers, while actively encouraging individuals to work, so that everyone is wealthier and has a higher standard of living.

Since Budget 2015-2016, the government has announced a number of measures to reduce the tax burden on individuals, particularly:

— complete elimination of the health contribution as of 2017;

— introduction of the tax shield;

— enhancement of the tax credit for experienced workers;

— enhancement of the work premiums.

Taken together, the government’s actions represent a total permanent reduction of the tax burden on individuals of more than $4 billion over five years. Quebecers will already receive tax relief of almost $394 million for 2016-2017. Next year, the tax relief will reach $871 million.

TABLE B.12

Tax relief granted to Quebecers since Budget 2015-2016 (millions of dollars)

2016-2017-

2017-2018-

2018-2019-

2019-2020-

2020-2021- Total

Gradual elimination of the health contribution −264.4 −698.9 −753.7 −759.2 −759.2 −3 235.4

Introduction of the tax shield −60.6 −60.7 −60.7 −60.9 −60.9 −303.8

Enhancement of the tax credit for experienced workers −26.8 −69.6 −96.7 −96.4 −96.4 −385.9

Enhancement of work premiums −41.9 −41.9 −41.9 −41.9 −41.9 −209.5

TOTAL −393.7 −871.1 −953.0 −958.4 −958.4 −4 134.6


Concrete actions to develop the Québec economy 2.2The Québec Economic Plan proposes actions to meet the challenges of economic growth in Québec and take advantage of the opportunities afforded by the changing global economy.

For example, it aims to create an environment conducive to economic growth and job creation by, among other things, ensuring a stable business environment for investors. In that regard, the Québec Economic Plan provides for:

— easing the tax burden on corporations, in particular SMBs;

— initiatives to foster the development of the Québec economy.

Easing the tax burden on corporations, in particular SMBs 2.2.1

Since Budget 2014-2015, the government has undertaken to ease the tax burden on corporations through measures of general application benefiting as many businesses as possible, in order to boost job creation, innovation and investment.

Taking into account the initiatives that will come into effect on January 1, 2017, the reduction in the tax burden on businesses stemming from the measures of general application announced since June 2014 will represent $173.3 million in 2016-2017, $231.5 million in 2017-2018 and, when fully implemented, almost $520 million per year, including nearly $315 million for SMBs.

TABLE B.13

Financial impact of the corporate tax measures of general application announced in the Québec Economic Plan (millions of dollars)

2016-2017-

2017-2018-

2018-2019-

2019-2020-

2020-2021- Total

Initiatives already in effect −158.1 −175.1 −187.2 −202.9 −216.2 −939.5

Initiatives in effect as of 2017 −15.2 −56.4 −135.0 −239.2 −301.4 −747.2

TOTAL −173.3 −231.5 −322.2 −442.1 −517.6 −1 686.7


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Initiatives for all Québec businesses

Several of the initiatives of general application announced with respect to the corporate tax system to foster economic growth have been implemented by the government:

— reduction of the tax rate for manufacturing SMBs from 8% to 4%;

— reduction in the Health Services Fund (HSF) contribution rate for the primary and manufacturing sectors;

— tax holiday from the HSF contribution for hiring specialized workers in SMBs applicable until the end of 2020;

— enhanced tax holiday for large investment projects;

— additional deduction for transportation costs of manufacturing SMBs.

These initiatives already in effect, which are aimed at improving the overall competitiveness of the corporate tax system, represent an easing of the tax burden of almost $160 million in 2016-2017, and of over $215 million a year when fully implemented.

Additional initiatives applicable as of 2017

Beginning in 2017, Québec corporations will be able to receive additional tax relief totalling more than $300 million on full implementation of the measures, namely:

— reduction of the tax rate for SMBs in the primary sector from 8% to 4%;

— gradual reduction of the HSF contribution rate for SMBs in all sectors of the economy;

— gradual reduction of the general corporate tax rate over four years from 11.9% to 11.5%;

— maintenance and extension of the regional investment tax credit;

— introduction of a tax cut for innovative corporations aimed at supporting the marketing and manufacturing in Québec of innovations designed by Québec businesses.

Taking into account these initiatives, corporations in all sectors and in all regions of Québec will receive tax relief totalling almost $520 million annually on full implementation of the initiatives.


A reduction of the tax burden on SMBs of over $1.3 billion by 2021

Since Budget 2014-2015, the government has taken actions to make many improvements to the taxation of SMBs, in order to provide them with a fiscal environment that enables them to grow, innovate and be competitive.

Thus, the government announced:

– a reduction of the tax rate for manufacturing SMBs from 8% to 4%, as of April 1, 2015;

– a reduction of the tax rate for SMBs in the primary sector from 8% to 4%, as of January 1, 2017;

– an additional deduction for transportation costs of manufacturing SMBs as of June 5, 2014, and enhancement of the deduction as of January 1, 2015;

– a tax holiday from the contribution to the Health Services Fund (HSF) as of June 5, 2014 and until 2020 for hiring specialized workers in SMBs;

– a reduction of the HSF contribution for SMBs in the primary and manufacturing sectors from 2.7% to 1.6%, as of January 1, 2015;

– a gradual reduction, as of January 1, 2017, of the HSF contribution for the services sector from 2.7% to 2.25% by 2019, a measure financed in part by a refocusing of the small business deduction (SBD) on job-creating SMBs;

– an additional reduction of the HSF contribution for all SMBs to 1.45% for the primary and manufacturing sectors and 2.0% for the services sector, by 2021.

By 2020-2021, these actions to reduce the tax burden on SMBs will total over $1.3 billion.

Impact of improvements to the tax system for SMBs announced since Budget 2014-2015 (millions of dollars)

Total cumulative impact

by 2020-2021

Reductions of the HSF contribution for all SMBs 1 722

Reduction of the tax rate for SMBs in the primary and manufacturing sectors 346

Additional deduction for transportation costs of manufacturing SMBs 106

Refocusing of the SBD on job-creating SMBs −794

TOTAL 1 380


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TABLE B.14 Financial impact of the corporate tax measures of general application announced in the Québec Economic Plan (millions of dollars)

2016- 2017-

2017- 2018-

2018- 2019-

2019- 2020-

2020- 2021-

Initiatives already in effect

Reduction of the tax rate for manufacturing SMBs −35.5- −36.9- −38.1- −39.3- −39.8-

Reduction of the HSF contribution rate for the primary and manuracturing sectors −73.6- −76.0- −78.5- −81.1- −83.8-

Holiday from the HSF contribution for hiring specialized workers in SMBs −33.1- −43.7- −50.0- −56.4- −63.0-

Enhanced tax holiday for large investment projects 0.0- −1.1- −2.1- −6.6- −10.0-

Additional deduction for transportation costs of manufacturing SMBs −15.9- −17.4- −18.5- −19.5- −19.6-

Subtotal – Initiatives already in effect −158.1- −175.1- −187.2- −202.9- −216.2-

Initiatives in effect as of 2017

Reduction of the tax rate for SMBs in the primary sector −2.4- −22.6- −27.8- −28.3- −28.7-

Reduction of the HSF contribution rate for all sectors(1) −3.5- −9.2- −33.9- −46.9- −78.6-

Reduction of the general corporate tax rate −6.6- −36.0- −83.0- −122.3- −124.2-

Maintenance and extension of the regional investment tax credit 0.0- 28.0- 40.0- −3.2- −22.8-

Tax cut for innovative corporations −2.7- −16.6- −30.3- −38.5- −47.1-

Subtotal – Initiatives in effect as of 2017 −15.2- −56.4- −135.0- −239.2- −301.4-

TOTAL −173.3- −231.5- −322.2- −442.1- −517.6- (1) Net of the refocusing of the small business deduction.


Initiatives to foster Québec’s economic development 2.2.2

With the Québec Economic Plan, the government is putting in place the conditions necessary to support Québec’s economic development. In that regard, it is acting on several fronts, in particular by providing substantial support for investment projects by way of:

— financial transactions by Investissement Québec;

— initiatives aimed at spurring private investment, including the electricity discount to encourage investment in the manufacturing and natural resource processing sectors.


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Financial transactions by Investissement Québec

To support business development, the government acts, in particular, through Investissement Québec, its financing arm.

Investissement Québec’s financial transactions with businesses can take the form of non-refundable financial contributions, loans, loan guarantees and equity stakes, drawn from its own equity or as mandatary of the government.

Between April 1, 2014 and June 30, 2016, Investissement Québec carried out financial transactions totalling more than $4.7 billion:

— nearly $1.2 billion for the period from April 1, 2014 to March 31, 2015;

— over $2.8 billion for the period from April 1, 2015 to March 31, 2016;

— close to $0.7 billion for the period from April 1, 2016 to June 30, 2016.

These financial transactions supported projects valued at nearly $18.5 billion that will contribute to creating or supporting more than 28 000 jobs.

TABLE B.15

Financial transactions by Investissement Québec – April 1, 2014 to June 30, 2016 (millions of dollars, unless otherwise indicated)

Transactions

Projects(1)

Jobs(1)

Number Value Value

Number

April 1, 2014 to March 31, 2015(2),(3) 1 363 1 162 7 849

11 563

April 1, 2015 to March 31, 2016(3) 1 309 2 880 7 796

12 970

April 1, 2016 to June 30, 2016(3) 432 693 2 841

3 610

TOTAL 3 104 4 735 18 486 28 143

(1) The value of the projects and the number of jobs do not equal the sum of their components. They were adjusted to avoid double-counting projects funded through both Investissement Québec’s own equity and the Economic Development Fund. Projects were carried out and jobs were created over a three-year period; jobs were protected for a maximum of two years.

(2) The Economic Development Fund data for fiscal 2014-2015 includes equity stakes in mining and hydrocarbon sector before the creation of the Mining and Hydrocarbon Capital Fund, which is to become the Capital Mines Énergie fund.

(3) The financing value of the government’s Economic Development Fund-enabled interests in investment funds is excluded.

Source: Investissement Québec.


Examples of projects supported by the government

Kruger Products

The government announced a $39.5-million loan to Kruger Products through Investissement Québec. This government funding will enable Kruger to modernize its Crabtree plant in order to increase its competitiveness by cutting its operating costs. The current project will consolidate some 600 jobs and help strengthen Kruger Products’ Québec expertise in the tissue products manufacturing sector.

Bioénergie AE Côte-Nord Canada

Financial assistance of $32 million was granted to Bioénergie AE Côte-Nord Canada to establish a forest waste biofuel production plant in Port-Cartier.

Brome Lake Ducks

The government announced loans totalling more than $13 million—a $5.6-million loan from Investissement Québec and a $7.6-million loan through the economic diversification fund of the Des Sources RCM—to Brome Lake Ducks to support the carrying out of an investment project that will enable the company to create 100 jobs and maintain its position as a leader in Canada’s agrifood processing industry.

TMI Climate Solutions

The government announced $3.8 million in financial support for TMI Climate Solutions to establish a plant in Pointe-Claire, in the Montréal region. TMI Climate Solutions’ new plant will offer hydronic solutions primarily for the aerospace and automobile industries. This project will create 250 jobs over the next three years.

Fruit d’Or

The government announced a $3.6-million loan through Investissement Québec and a $2.5-million loan from the economic diversification fund for the Centre-du-Québec and Mauricie regions, for Fruit d’Or. This investment will enable the company to acquire specialized equipment and expand its Villeroy plant, which mostly produces frozen berries.

Bridgestone Canada

The government announced support of $54 million through Investissement Québec for Bridgestone Canada, to enable the company to modernize and automate its Joliette plant. The financial assistance is comprised of a loan of $44 million and a non-refundable financial contribution of $10 million. The investment will enable the company to improve its productivity and increase its plant’s production capacity.


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Examples of projects supported by the government (cont.)

Bombardier

The government invested $1.3 billion in the form of an equity participation in a new limited partnership, in order to continue Bombardier’s C Series program. The investment will enable the retention of 1 700 existing jobs, the creation of 800 jobs and the maintenance of Montréal’s position as a centre of excellence in the field of aeronautics.

Endowment of $15 million to develop Québec intellectual property in the video game industry

Since the fall 2015 launch of the endowment to develop Québec intellectual property in the video game industry, the government has made commitments exceeding $2 million in three business projects: Studio Qi, Studio Sauropode and Trailblazer Games. With the involvement of video game businesses, the leveraging generated by the government’s investment will enable an injection of more than $6 million in these projects.

Investments through the Capital Mines Énergie fund1

Investments totalling approximately $175 million have been confirmed since April 1, 2016 for projects in the mining and energy sectors, including:

– $125 million for Tata Steel Minerals Canada’s Directing Shipping Ore (DSO) project in Schefferville, evaluated at close to $1.5 billion;

– $20 million for the resumption of operations at the Bloom Lake Mine by Champion Iron Mines Limited and its subsidiary Minerai de fer Québec;

– Another $8.5 million for a natural gas exploration program on the Bourque property, for a total of $15 million.

1 As part of Budget 2016-2017, it was announced that the Mining and Hydrocarbon Capital Fund would change names to become the Capital Mines Énergie fund.


Initiatives to foster private investment

The Québec Economic Plan provides for important initiatives to stimulate private investment.

One of the key measures in the Québec Economic Plan consists in implementing an electricity discount to foster investment in the manufacturing and natural resource processing sectors.

— The parameters and terms of the discount were approved by the government and were recently posted on the website of the Ministère des Finances du Québec.1

The Québec Economic Plan also provides for the implementation of a number of major strategies to speed up private investment. Several of them are in progress:

— Québec’s Maritime Strategy, with a budget envelope of over $1.5 billion for the implementation of the strategy’s first action plan, covering the 2015-2020 period;

— the Plan Nord, implemented by the Société du Plan Nord, has an envelope of more than $450 million for the next five years;

— the digital economy action plan, which includes budgetary and fiscal measures totalling close to $200 million over five years;

— the Québec Aerospace Strategy 2016-2026, providing for investments of $510 million for the first five years;

— the Québec Aluminum Development Strategy, which has $32.5 million at its disposal for the first three years of its implementation;

— the government social economy action plan, providing for investments of more than $100 million over five years.

1 See www.finances.gouv.qc.ca/en/Department677.asp.

http://www.finances.gouv.qc.ca/en/Department677.asp


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Examples of concrete actions to stimulate private investment

Renovation

– Introduction of the RénoVert tax credit for the period from March 18, 2016 to March 31, 2017. The tax credit aims, in particular, to reduce greenhouse gas emissions in the home renovation sector.

Venture capital and investment funds

– Announcement of several venture capital and investment funds since Budget 2014-2015:

▪ Teralys Capital Innovation Fund, capitalized at $375 million, to invest in growing tech companies;

▪ Anges Québec Capital fund, capitalized at $85 million, to support Québec entrepreneurship;

▪ the Fonds pour les femmes entrepreneurs FQ, capitalized at $19 million, to encourage female entrepreneurship;

▪ Fonds InnovExport, capitalized at $30 million and intended exclusively for innovative businesses with potential to export their products.

– Creation, in November 2015, of a $15-million endowment for investments in collaboration with Québec businesses in the video game industry. This endowment is intended to develop Québec intellectual property in the video game industry.

Maritime Strategy

– Announcement of 13 industrial port areas and creation of 13 local committees to draw up development plans for each of the areas.

– Introduction of the maritime transportation investment support program (PSIITM), with an envelope of $200 million.

▪ Since the implementation of the PSIITM in fall 2015, investments of nearly $9 million have supported six projects worth a total of approximately $27.5 million.

Plan Nord

– Acquisition by Investissement Québec and the Société du Plan Nord of infrastructures to ensure access to the new multi-user dock at the Sept Îles port, in the Pointe-Noire sector.

▪ Resumption of operations in summer 2016 and first ship transporting iron ore loaded at the Pointe-Noire dock by the Société ferroviaire et portuaire de Pointe-Noire, a limited partnership.

– Investments through the Fonds d’initiatives du Plan Nord of $1.6 million since April 1, 2016, to support 29 innovative projects with a structuring effect worth a total of approximately $9 million.


Examples of concrete actions to stimulate private investment (cont.)

Aerospace

– A strategic investment of $1.3 billion in a new limited partnership to continue Bombardier’s C Series program.

– Announcement, on October 6, 2016, of five projects selected (Bombardier, CAE, Esterline CMC Electronics, TeraXion and Thales Canada) in conjunction with second phase of the green aircraft catalyst project (SA2GE), following the call for project proposals launched on October 14, 2015, for investment totalling $80 million.

Alcoholic beverages

– Renewal of the program to support the positioning of Québec alcoholic beverages in the Société des alcools du Québec network (PAPAQ), with an envelope of up to $5 million a year.

– In May 2016, An Act respecting development of the small-scale alcoholic beverage industry, aimed at supporting small-scale producers of alcoholic beverages in all regions of Québec, assented to by the government.

C.1

Section C C THE QUÉBEC ECONOMY:

RECENT DEVELOPMENTS AND OUTLOOK FOR 2016 AND 2017

1. The economic situation in Québec .............................................. C.3

1.1 Acceleration in economic growth ......................................................... C.3

1.2 Growth driven by consumption and a recovery in investment ............. C.8

1.3 Continued job creation ......................................................................... C.9

1.4 Household consumption expenditure, the main driver of economic growth ............................................................................ C.12

1.5 Recovery in investment is underway ................................................. C.14

1.6 Québec exports remain at record highs ............................................ C.19

1.7 Change in nominal GDP .................................................................... C.25

1.8 Comparison with private sector forecasts .......................................... C.26 1.9 Five-year economic outlook for 2016-2020 ....................................... C.28

2. The situation of Québec’s main economic partners ..................C.29

2.1 The economic situation in Canada .................................................... C.30

2.2 The economic situation in the United States ..................................... C.38

3. Evolution of financial markets ....................................................C.49

4. The international economic context ...........................................C.55

5. Changes in the prices of the main metals in Québec ................C.61

6. Main risks that may influence the forecast scenario .................C.65

The Québec Economy: Recent Developments and Outlook for 2016 and 2017 C.3

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1. THE ECONOMIC SITUATION IN QUÉBEC

Acceleration in economic growth 1.1Québec is enjoying favourable economic conditions:

— sound public finances are bolstering consumer and business confidence;

— The Index of Consumer Confidence, measured by the Conference Board of Canada is at its highest level since 2007.

— For the first time in 16 years, Québec businesses are the most optimistic among all the provinces, according to the Canadian Federation of Independent Business.

— job creation is continuing, particularly full-time employment and private-sector jobs;

— In the first nine months of 2016, 44 200 full-time jobs were created.

— low oil prices are benefiting consumers and the Québec manufacturing sector, while the low dollar is boosting exports.

These conditions will translate to an acceleration in economic growth in Québec. Following 1.1% growth in real gross domestic product (GDP) in 2015, the October 2016 Update of the Québec Economic Plan forecasts an economic growth rate of 1.4% in 2016 and 1.5% in 2017.

— This means that 2016 will be the seventh consecutive year of economic growth since the 2008-2009 recession.

CHART C.1

Economic growth in Québec (real GDP, percentage change)


1.1

1.41.5

2015 2016 2017

The Québec Economic Plan C.4 October 2016 Update

Acceleration in growth in Québec despite a slowdown among its main partners

Relative to the Québec Economic Plan of March 2016, growth forecasts in the October 2016 Update have been adjusted downwards slightly for most countries and regions of the world owing to developments in the global economy.

— In Québec, real GDP growth is expected to accelerate from 1.1% in 2015 to 1.4% in 2016 and 1.5% in 2017.

— These are downward adjustments of 0.1 percentage point (pp) relative to the forecasts in the Québec Economic Plan of March 2016. The adjustments are not as big as those made to the outlook for Canada and the United States.

— In Canada, economic growth is projected to remain at 1.1% in 2016, the same pace as in 2015. The negative impacts of low oil prices are felt by oil-producing provinces in particular. In 2017, Canada’s real GDP growth is expected to be 1.9%.

— These are downward adjustments of 0.2 pp for 2016 and 2017 relative to the forecast in the Québec Economic Plan of March 2016.

— In the United States, after expanding by 2.6% in 2015, the economy is projected to slow to 1.5% growth in 2016 and accelerate to 2.1% in 2017.

— The U.S. economy saw a disappointing first-semester performance in 2016. Growth forecasts have been revised downward by 0.8 pp for 2016 and 0.2 pp for 2017.

TABLE C.1

Economic growth outlook (real GDP, percentage change and percentage point adjustment relative to the Québec Economic Plan of March 2016)

2015 2016 2017

Québec

– October 2016 Update 1.1 1.4 1.5

– Adjustment −0.1 −0.1

Canada

– October 2016 Update 1.1 1.1 1.9


United States

– October 2016 Update 2.6 1.5 2.1


World

– October 2016 Update 3.2 3.0 3.2

– Adjustment −0.1 −0.1 Sources: Institut de la statistique du Québec, Statistics Canada, IHS Global Insight and Ministère des Finances du

Québec.


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Economic growth translated to continued improvement in Quebecers’ standard of living

Québec’s economic growth in recent years has driven steady improvement in the standard of living, measured by real GDP per capita. Since 2007, Québec’s standard of living has improved at a similar rate to that of its main trading partners.

— The 2008-2009 recession was not as severe in Québec as in Canada and the United States.

— Consequently, Quebecers saw only a slight decline in their standard of living in 2009 (−0.9%), compared to significant declines in Canada (−4.1%), Ontario (−4.9%) and the United States (−4.8%).

Québec, Ontario, Canada and the United States have all been gaining ground since 2010. In Québec, economic growth rapidly raised the standard of living to above its 2007 level and it has continued to rise.

— From 2007 to 2016, real GDP per capita rose by 3.4% in Québec, compared to 2.9% in Canada, 3.7% in Ontario and 4.2% in the United States.

CHART C.2

Standard of living (real GDP per capita, index 2007 = 100)

(1) For 2016, Conference Board of Canada real GDP forecasts for Ontario and Ministère des Finances du Québec forecasts for Québec, Canada and the United States.

Sources: Institut de la statistique du Québec, Statistics Canada, Ontario Ministry of Finance, Conference Board of Canada, IHS Global Insight and Ministère des Finances du Québec.

99.1

QC: 103.4

95.9

CA: 102.9

U.S.: 104.2

94

96

98

100

102

104

106

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Québec CanadaOntario United States

U.S.: 95.2

ON: 103.7

ON: 95.1

(1)


Productivity and employment gains will be the primary drivers of growth

The October 2016 Update of the Québec Economic Plan forecasts Québec real GDP growth of 1.4% in 2016 and 1.5% in 2017. The key factors of economic growth, as measured by the increase in real GDP, are as follows:

— demographic growth, indicated by changes in the population aged 15-64, who constitute the main pool of potential workers;

— employment growth, reflected in an increased rate of employment, that is, the ratio of workers to the population aged 15-64;

— improved productivity, i.e. increased production per worker.

Prior to 2014, the increase in GDP was based more or less equally on the three factors listed above. However, demographics recently stopped contributing to growth.

— An increase in the employment rate and growth in productivity will be the main drivers of economic growth going forward.

TABLE C.2

Contribution of economic growth factors in Québec (average annual percentage change and contribution in percentage points)

Historical Forecast

1982-2007-

2008-2013- 2014 2015 2016 2017

2018-2020-

Real GDP (percentage change) 2.1 1.2- 1.5 1.1 1.4 1.5 1.5-

Growth factors (contribution):

Potential labour pool(1) 0.6 0.6- −0.1 −0.1 −0.1 −0.1 −0.2-

Employment rate(2) 0.6 0.4- 0.0 1.1 0.8 0.7 0.7-

Productivity(3) 0.8 0.3- 1.6 0.2 0.7 0.9 1.0-

Note: Totals may not add due to rounding. (1) Population 15-64 years of age. (2) Total number of workers out of the population 15-64 years of age. (3) Real GDP per worker. Sources: Institut de la statistique du Québec, Statistics Canada and Ministère des Finances du Québec.


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Confidence in the Québec economy is strengthening

Several indicators show that consumer and investor confidence is getting stronger.

Job creation continued in 2016, with job gains mainly in full-time employment and the private sector.

— Compared to the same period in 2015, 44 200 full-time jobs and 30 500 jobs in the private sector were created in the first nine months of 2016.

The robust job creation has fuelled consumer spending.

— In the first two quarters of 2016, household consumption expenditure rose by 1.8% in real terms, outstripping GDP growth.

The strong labour market was reflected in consumer confidence.

— The Index of Consumer Confidence, measured by the Conference Board of Canada, stood at 129.0 points in Québec in September, a record high since 2007.

Furthermore, responsible management of public finances and the Québec government’s sound financial position boosted business confidence.

— In September 2016, Québec businesses were the most optimistic among the provinces for the first time in 16 years, according to the Canadian Federation of Independent Business’ Business Barometer Index.

Moreover, the optimism of small businesses spurred an upturn in business investment.

— Non-residential business investment in real terms was 0.5% higher in the second quarter of 2016 than in the previous quarter.

TABLE C.3

Change in selected economic indicators in Québec (percentage change in real terms, unless otherwise indicated)

2016

2015 2016(1) Q1 Q2 Q3(1)

Real GDP 0.7 0.2 n/a- 1.1 1.3--

Creation of full-time jobs (thousands) 14.6 19.2 0.7- 45.0 44.2--

Household consumption 0.8 0.2 n/a- 1.3 1.8--

Consumer confidence (points, 2014 = 100) 94.3 115.6 127.8- 102.8 112.6--

Business confidence (points) 64.2 61.4 65.4- 57.9 63.6--

(1) Cumulative for available periods. Sources: Institut de la statistique du Québec, Statistics Canada, Conference Board of Canada, Canadian

Federation of Independent Business.


Growth driven by consumption and a recovery 1.2in investment

The forecast real GDP growth of 1.4% in 2016 and 1.5% in 2017 will be driven primarily by higher household consumption and a recovery in non-residential business investment.

— Household consumption will remain robust thanks to continued job creation, high consumer confidence and low energy prices.

— Non-residential business investment renewed with growth in the second quarter of 2016, after remaining weak since 2013. A stable and predictable business climate contributed to the upturn, which is expected to strengthen in the coming quarters.

— In addition, spending and investment by all governments will help sustain growth.

Furthermore, after several years of strong growth, the volume of exports is expected to remain at peak levels.

— Exports got off to a slow start in 2016 due, in particular, to a slowdown among Québec’s main trading partners.

— In the coming quarters, Québec exports will benefit from the weak Canadian dollar and strengthening of economic activity in the United States.

TABLE C.4

Real GDP and its major components (percentage change and contribution in percentage points)

2015 2016 2017

Contribution of domestic demand 0.5 1.2 1.4

Household consumption 1.3 1.9 1.8

Residential investment −0.6 0.8 −1.2

Non-residential business investment −4.8 −1.9 3.2

Government spending and investment 0.4 0.4 0.6

Contribution of the external sector 0.6 0.6 0.0

Total exports 2.3 0.2 2.2

Total imports 0.8 −0.9 2.1

Contribution of inventories −0.1 −0.3 0.2

REAL GDP 1.1 1.4 1.5 Note: Totals may not add due to rounding. Sources: Institut de la statistique du Québec, Statistics Canada and Ministère des Finances du Québec.


C

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Continued job creation 1.3The labour market performed well in 2015, with the creation of 37 300 jobs, including 28 400 payroll jobs in the private sector and 45 000 full-time jobs. The high number of full-time jobs created bears witness to businesses’ optimism over Québec’s economic outlook.

Employment growth will continue with the acceleration in economic activity.

— In 2016, 29 000 new jobs should be added, a 0.7% increase over the previous year.

— In 2017, another 26 100 jobs should be created, for an increase of 0.6%.

In addition, the unemployment rate is expected to continue falling, reflecting the robust labour market.

— After standing at 7.6% in 2015, the unemployment rate is projected to fall to 7.2% in 2016 and 6.9% in 2017.

CHART C.3

Job creation in Québec

CHART C.4

Unemployment rate in Québec (thousands) (per cent)

Sources: Statistics Canada and Ministère des Finances du Québec.


4 059.7

4 097.0

4 126.0

4 152.1

2014 2015 2016 2017

+29.0

+26.1

+37.3 7.3 7.2

8.6

8.0 7.97.7 7.6 7.7 7.6

7.2

6.9

2007 2009 2011 2013 2015 2017


Overview of job creation in the first nine months of 2016: high number of full-time time jobs concentrated in the private sector

Québec gained 21 500 jobs in the first nine months of 2016 compared to the same period in 2015. All of the jobs created were full-time and concentrated in the private sector, which bears witness to businesses’ optimism over Québec’s economic outlook. Since the beginning of the year:

– full-time employment grew by 44 200;

– private-sector payroll jobs rose by 30 500.

Québec, British Columbia and Ontario are the only three provinces in Canada on track to see overall employment growth in 2016.

– Furthermore, in the first nine months of 2016, Québec created the second-highest number of full-time jobs of all the provinces.

Québec’s unemployment rate returned to the levels seen before the 2008-2009 recession

Québec’s unemployment rate gradually fell from 8.6% in 2009 to 7.6% in 2015. The average unemployment rate for the first nine months of 2016 was 7.3%.

– The unemployment rate dropped to 6.9% in September, its lowest level since the last recession (6.8% in September 2007).

The continued decline in the unemployment rate is a reflection of greater use of the available labour pool.

Creation of full-time jobs in Canada in 2016(1)

Unemployment rate in Québec

(per cent) (per cent, monthly data)

(1) Cumulative for the nine months available in 2016, compared to the same period in 2015.



2.2

1.3 1.2

−0.4−0.5−0.6−1.0

−1.7

−2.7

−3.6BC QC ON NS NB MB SK PE NL AB

7.9

6.8

8.98.8

8.1

6.9

6

7

8

9

2007 2009 2011 2013 2015


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Sustained growth in employment since May 2014

The Québec labour market has been robust since May 2014. According to the results of Statistic Canada’s Labour Force Survey, 127 800 jobs have been created in Québec since May 2014, including:

– 125 200 full-time jobs, i.e. 98% of total job creation;

– 97 600 private sector jobs, i.e. 76% of total job creation.

Québec stands out, accounting for nearly 50% of private sector job creation in Canada since May 2014.

– Québec ranks first among the provinces, ahead of Ontario and British Columbia, with respect to job creation in the private sector.

Private sector job creation in Canada since May 2014 (private sector jobs created, thousands)


97.6

70.863.0

6.8 3.6 0.8

−0.6 −1.6 −6.1

−36.6

QC ON BC NB MB SK PE NL NS AB


Household consumption expenditure, the main driver of 1.4economic growth

Household consumption expenditure will be the main driver of economic growth in Québec. After increasing by 1.3% in real terms in 2015, this expenditure is expected to accelerate to 1.9% growth in 2016 and 1.8% growth in 2017.

— Consumer confidence reached record levels in Québec in 2016, reflecting household optimism about the economic outlook.

— Moreover, households continue to benefit from low energy prices, which increase their purchasing power.

Nominal growth in household disposable income, expected to be 4.0% in 2016 and 3.2% in 2017, will support consumer spending.

— Sustained job creation, particularly full-time jobs, will lead to faster wage growth.

— The reduction in the tax burden through elimination of the health contribution and payment of the new Canada Child Benefit will spur growth in household disposable income.

CHART C.5

Household consumption expenditure in Québec

CHART C.6

Household disposable income in Québec

(percentage change, in real terms) (percentage change, in nominal terms)



1.8

1.5

1.3

1.9

1.8

2013 2014 2015 2016 2017

2.9

2.2

2.8

4.0

3.2

2013 2014 2015 2016 2017


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Québec consumers are confident about the economic outlook

The Conference Board of Canada’s Index of Consumer Confidence has risen significantly in Québec since the start of 2016.

– The index for Québec rose to 129.0 points in September 2016.

– Such a high level of confidence has not been seen since November 2007.

In the first nine months of 2016, the Index of Consumer Confidence for Québec averaged 112.6 points.

– By comparison, the index averaged 101.9 points in 2013.

A similar improvement was not seen in Canada.

– The consumer confidence index for Canada averaged 95.7 points in 2016, below the levels in 2015 (98.2 points) and 2014 (100.0 points).

The strong improvement in Québec consumer confidence reflects Quebecers’ optimism about the economic growth outlook.

– It points to continued growth in Québec household consumption over the coming quarters.

Change in the Index of Consumer Confidence (points, 2014 = 100)

Source: Conference Board of Canada.

129.0

103.0

70

80

90

100

110

120

130

140

2012 2013 2014 2015 2016

Québec Canada


Recovery in investment is underway 1.5

Non-residential business investment picking up

The period of weak non-residential business investment that began in 2013 recently turned around.

— After contracting for several quarters, non-residential business investment rose by 0.5% in real terms in the second quarter of 2016.

— The observed improvement in consumer and business confidence fostered the upturn.

The recovery was supported by investments in machinery and equipment, which have been increasing since the beginning of the year.

— In real terms, business investment in machinery and equipment rose by 0.2% in the first quarter and 1.7% in the second quarter of 2016.

CHART C.7

Business investment in machinery and equipment in Québec

CHART C.8

Non-residential business investment in Québec

(quarterly percentage change, in real terms)

(quarterly percentage change, in real terms)



–5.1

–3.3

0.2

1.7

Q3 Q4 Q1 Q2

2015 2016

–2.6

–1.8

–0.1

0.5

Q3 Q4 Q1 Q2

2015 2016


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Recovery in business investment preceded by renewed investment in machinery and equipment

Following three consecutive years of contraction, the quarterly growth rate indicates that business investment is rebounding.

— In real terms, non-residential business investment as a whole is expected to continue picking up gradually in the second half of 2016 and increase by 3.2% in 2017.

The revival in non-residential business investment was preceded by an increase in machinery and equipment investment since the beginning of 2016.

— Machinery and equipment investment serves primarily to help businesses boost productivity.

— Businesses generally make greater use of their existing capital endowment before increasing their production capacity substantially.

— This intensive use of machinery is reflected in the industrial capacity utilization rate in Canada’s manufacturing sector, which averaged 82.8% in 2016, the highest level since 2007.

CHART C.9

Total non-residential business investment in Québec

CHART C.10

Industrial capacity utilization rate in Canada’s manufacturing sector

(percentage change, in real terms) (per cent)


(1) Cumulative for available quarters. Source: Statistics Canada.

9.3 9.1

–7.9

–11.0

–4.8–1.9

3.2

2011 2012 2013 2014 2015 2016 2017

82.6 82.8

76.1

72.0

77.3

79.780.7

79.781.4

82.482.8

2006 2008 2010 2012 2014 2016(1)


Recovery in investment supported by a favourable economic and budgetary situation

A number of factors supported the recovery in investment over the last few quarters.

— Sound public finances bolstered investor confidence in Québec’s economic outlook.

— In September, the Canadian Federation of Independent Business’ (CFIB) Business Barometer Index, which measures small and medium-sized business (SMB) confidence, reached 67.1 points in Québec, making it the highest ranking in the country for the first time in 16 years.

— According to CFIB, one normally sees an index level of between 65 and 70 when the economy is growing at its potential.

— Furthermore, several indicators suggest that production capacity is being used more intensively.

— Québec household consumption continued to rise, in particular due to robust job creation.

— Strong consumption in the United States and a low Canadian dollar boosted Québec exports.

CHART C.11

Canadian Federation of Independent Business’ Business Barometer Index (points)

Source: Canadian Federation of Independent Business.

63.0

67.165.4

59.0

50

55

60

65

70

2013 2014 2015 2016

Québec Canada


C

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Residential investment trending in pace with Quebecers’ needs

In 2016 and 2017, residential investment in real terms is expected to remain at similar levels to those registered in the last few years, that is, nearly $22 billion. These levels match Quebecers’ needs.

In fact, housing starts are currently trending in pace with household formation in Québec.

— Roughly 36 300 new units should be built in 2016, followed by 34 400 units in 2017, levels that are in line with the increase in the number of households.

Investment in renovation is expected to increase in real terms by 0.8% in 2016 and 2.0% in 2017.

— This type of investment is helped by the RénoVert tax credit introduced by the Québec government in March 2016.

Furthermore, still-low interest rates will continue to boost residential investment and facilitate access to home ownership.

CHART C.12

Residential investment in Québec

CHART C.13

Housing starts and household formation in Québec

(billions of 2007 dollars) (thousands)


Sources: Institut de la statistique du Québec, Statistics Canada, Canada Mortgage and Housing Corporation and Ministère des Finances du Québec.

11.6

21.0 21.6

0

5

10

15

20

25

2000 2004 2008 2012 2016

47.4

37.8 38.8 37.936.3

34.4

43.7

40.0 39.5 39.538.2

36.0

2012 2013 2014 2015 2016 2017

Housing startsHousehold formation


Government investments remain at high levels

Québec’s public administration sector, including the federal and provincial governments and municipalities, will maintain a high level of infrastructure investment.

Investment in infrastructure is an important economic engine in Québec, giving Quebecers and businesses alike access to quality infrastructure.

— Between 2007 and 2015, the total value of infrastructure investment by all levels of government rose by more than 40%.

— A total of $17.5 billion was invested in infrastructure in 2015.

— The value of investments by all levels of government is expected to be $17.1 billion in 2016 and $17.6 billion in 2017.

More specifically, the Québec government will maintain a high level of investment under the Québec Infrastructure Plan (QIP), at nearly $90 billion over ten years. In addition, the major investments under the QIP will be bolstered by the funding provided under the federal government’s infrastructure plan.

CHART C.14

Government investments in Québec (billions of dollars, in nominal terms)


9.0 9.210.3

11.5 11.512.4

15.117.0 16.9 17.3 17.0 16.7 17.3 17.5 17.1 17.6

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


C

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Québec exports remain at record highs 1.6Québec exports rose 4.5% in 2014 and 2.3% in 2015 in real terms. They will remain at record levels in 2016.

— In early 2016, exports temporarily showed signs of slowing down due to:

— the difficulties experienced in Canada in the second quarter of 2016, in particular owing to the wildfires in Alberta;

— slower economic growth in the United States in the first half of the year, accompanied by a decline in private investment. Historically, Québec’s goods exports to the United States are tied to U.S. investment trends.

These negative factors will dissipate over the coming quarters, with the Canadian and U.S. economies expected to gain traction in the second half of 2016.

— Furthermore, the low Canadian dollar will continue to make Québec exports more competitive in international markets.

Consequently, Québec exports are forecast to grow in real terms by 0.2% in 2016 and 2.2% in 2017.

CHART C.15

Québec’s total exports

CHART C.16

Québec international goods exports and private investment in the United States

(billions of 2007 dollars) (annual percentage change, in real terms)



146.1 147.3

153.9

157.4 157.7

161.1

2012 2013 2014 2015 2016 2017

+2.3 %

+2.2 %

+4.5 %

-30

-20

-10

0

10

20

30

2000 2003 2006 2009 2012 2015

Private investment in the U.S.

Québec exports


Québec exports to the United States at high levels

After contracting during the 2008-2009 recession, Québec’s international exports of goods to the United States, Québec’s main international trading partner, picked up sharply.

– The value of goods exports to the United States rose by 13.0% in 2014 and 12.3% in 2015. The increase in 2015 represented the fifth consecutive year of export growth.

– In 2015, the value of exports surpassed the levels seen prior to the 2008-2009 recession.

Québec exports to the U.S. market are expected to remain at high levels in the coming quarters.

– The anticipated upturn in U.S. economic growth in the second half of the year, along with a weak Canadian dollar, should support export growth in 2016 and 2017.

Québec’s international exports of goods to the United States (billions of dollars, in nominal terms)

(1) Cumulative for the months available. Source: Institut de la statistique du Québec.

17.0

63.5

52.1

40.2

53.0

59.555.8

0

10

20

30

40

50

60

70

1988 1992 1996 2000 2004 2008 2012 2016(1)


C

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Weak Canadian dollar curbs imports

Total imports are expected to fall by 0.9% in real terms in 2016 and then return to growth in 2017, increasing by 2.1%.

— In 2016, a weak Canadian dollar will continue to curb imports by making foreign goods more expensive.

— In 2017, imports will get a bigger boost from growth in non-residential business investment in Québec.

Contribution of the external sector to economic growth

Net exports, which account for changes in exports and imports, are projected to contribute 0.6 percentage point to real GDP growth in 2016.

— The positive contribution of net exports will result from an increase in exports and a decrease in imports.

In 2017, stronger growth in imports, tied to renewed investment and replenished inventories, is expected to mitigate the external sector’s contribution to Québec’s economic growth.

CHART C.17

Québec imports

CHART C.18

Québec exports and imports (percentage change, in real terms) (percentage change, in real terms)



0.8

–0.9

2.1

2015 2016 2017

2.3

0.2

2.2

0.8

–0.9

2.1

2015 2016 2017

Exports

Imports


Low oil prices affect consumer prices

Like several other economies, Québec is currently in a period of low inflation. Falling energy prices have put a drag on consumer price growth in several countries since 2015.

In Québec, the consumer price index (CPI) is expected to rise by 0.7% in 2016, after increasing by 1.1% in 2015.

— The low price of oil should translate to a 5.7% decrease in the CPI’s energy component in 2016.

— The consumer price index excluding energy should increase by 1.4% in 2016.

In 2017, the CPI is projected to rise by 1.7%.

— The anticipated gradual rebound in oil prices will drive a 2.3% increase in the energy component.

— In addition, the weak Canadian dollar, which raises the price of imported products, will help support price growth.

The CPI will thus remain below 2.0% for the fifth year in a row.−

CHART C.19

Change in the consumer price index in Québec (percentage change)


2.10.7 1.4 1.1 0.7

1.73.4

0.6 0.9

−10.2

−5.7

2.3

2012 2013 2014 2015 2016 2017

Total Energy


C

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The cost of living rose less in Québec than elsewhere in Canada

Lower inflation in Québec

Since the beginning of 2016, inflation has been lower in Québec than in Canada and Ontario.

A comparison of the first eight months of 2016 against the same period in 2015 shows that the consumer price index (CPI) rose by 0.8% in Québec versus 1.5% in Canada and 1.7% in Ontario.

In Québec, the currently low rate of inflation is not synonymous with economic hardship. Household consumption, one of the determinants of inflation, has been strong since the beginning of the year.

– After two quarters in 2016, Québec household consumption is up 1.8% in real terms, compared to the same period in 2015.

Lower increase in the cost of living in Québec

In any given region, inflation depends on a range of factors, including application of the various tariffs and regulations introduced by governments.

Moreover, four factors specific to Québec, Canada and Ontario could largely explain the inflation gaps between these jurisdictions:

– electricity;

– home ownership;

– automobile insurance;

– tuition fees.

Change in total CPI and selected components in 2016(1) (percentage change)

(1) Average for the first eight months of 2016, compared to the same period in 2015. Source: Statistics Canada.

0.8 1.2 0.9

−6.1

1.11.5

6.3

1.9

−0.4

2.81.7

16.0

2.6

−2.1

4.0

Total CPI Electricity Home ownership Automobileinsurancepremiums

Tuition fees

Québec Canada Ontario


The cost of living rose less in Québec than elsewhere in Canada (cont)

Price of electricity

In April 2016, Hydro-Québec increased its electricity rates by just 0.7%. This was the lowest rate hike in four years. The increase in electricity rates was much higher In Canada and Ontario.

– A comparison of the first eight months of 2016 against the same period in 2015 shows that the electricity component of the CPI rose by 1.2% in Québec versus 6.3% in Canada and 16.0% in Ontario.

Home ownership

One of the components of the CPI relates to the cost of owning a home. Variations in the home ownership component depend mainly on housing prices and interest rates.

In recent years, housing prices have surged in some markets, such as Vancouver and Toronto, whereas they have remained relatively flat in Québec. This trend has a significant influence on the CPI.

– A comparison of the first eight months of 2016 against the same period in 2015 shows that the home ownership component of the CPI rose by 0.9% in Québec versus 1.9% in Canada and 2.6% in Ontario.

Automobile insurance premiums

Given the improvement in Québec’s road safety record in recent years, the Société de l’assurance automobile du Québec (SAAQ) reduced the insurance contributions included in driver’s licences and vehicle registrations by a significant amount.

The amount of the contribution was reduced from $64 to $55 for a driver’s licence and from $120 to $64 for a vehicle registration. This is a 35% decrease. The substantial reduction impacted total automobile insurance costs in Québec.

– A comparison of the first eight months of 2016 against the same period in 2015 shows that the automobile insurance component of the CPI decreased by 6.1% in Québec versus 0.4% in Canada and 2.1% in Ontario.

Tuition fees

Québec also set itself apart from Canada and Ontario in the tuition component of the CPI.

– A comparison of the first eight months of 2016 against the same period in 2015 shows that tuition fees rose by 1.1% in Québec versus 2.8% in Canada and 4.0% in Ontario.


C

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Change in nominal GDP 1.7Following 2.0% growth in 2015, nominal GDP is expected to increase by 2.6% in 2016 and 3.3% in 2017.

Nominal GDP growth will result from:

— faster growth in real GDP, which will increase by 1.4% in 2016 and 1.5% in 2017;

— increases in the GDP deflator of 1.2% in 2016 and 1.8% in 2017.

Note that the GDP deflator, the index that measures changes in GDP prices, is determined by two key factors:

— domestic demand prices, an important indicator of which is the CPI;

— the ratio between export prices and import prices, that is, the terms of trade.

The modest increase in the GDP deflator in 2016 is primarily attributable to low energy costs.

— A gradual increase in the price of energy products in 2017 will enable more sustained growth in GDP prices.

TABLE C.5

Economic growth in Québec (percentage change)

2015 2016 2017

Real GDP 1.1 1.4 1.5

Price – GDP deflator 1.0 1.2 1.8

Nominal GDP 2.0 2.6 3.3 Sources: Institut de la statistique du Québec, Statistics Canada and Ministère des Finances du Québec.


Comparison with private sector forecasts 1.8The Ministère des Finances du Québec’s economic growth forecast for 2016 and 2017 is cautious. It is similar to the average private sector forecast.

— For 2016, the projected 1.4% growth in real GDP is the same as the average private sector forecast.

— For 2017, the projected 1.5% increase in real GDP is below the average private sector forecast of 1.6% growth.

CHART C.20

Economic growth in Québec in 2016

CHART C.21

Economic growth in Québec in 2017

(real GDP, percentage change) (real GDP, percentage change)

Source: Ministère des Finances du Québec summary as of October 7, 2016, which includes the forecasts of 11 private sector institutions.

Source: Ministère des Finances du Québec summary as of October 7, 2016, which includes the forecasts of 11 private sector institutions.

1.41.2

1.41.6

Ministèredes

Financesdu Québec

Low Average High

Private sector

1.5 1.41.6

1.9

Ministèredes

Financesdu Québec

Low Average High

Private sector


C

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TABLE C.6

Economic outlook for Québec – Comparison with the Québec Economic Plan of March 2016 (percentage change, unless otherwise indicated)

2015 2016 2017

Output

Real gross domestic product 1.1 1.4 1.5

– March 2016 1.1 1.5 1.6

Nominal gross domestic product 2.0 2.6 3.3

– March 2016 2.0 3.2 3.3

Components of GDP (in real terms)

Household consumption 1.3 1.9 1.8

– March 2016 1.4 1.9 1.7

Government spending and investment 0.4 0.4 0.6

– March 2016 0.3 0.2 0.3

Residential investment −0.6 0.8 −1.2

– March 2016 0.9 0.1 −0.7

Non-residential business investment −4.8 −1.9 3.2

– March 2016 −4.7 0.0 2.8

Exports 2.3 0.2 2.2

– March 2016 1.8 2.8 2.6

Imports 0.8 −0.9 2.1

– March 2016 0.7 1.5 1.9

Labour market

Job creation (thousands) 37.3 29.0 26.1

– March 2016 37.3 29.8 29.2

Unemployment rate (%) 7.6 7.2 6.9

– March 2016 7.6 7.5 7.2

Other economic indicators (in nominal terms)

Household consumption (excluding food and rent) 1.8 2.8 3.2

– March 2016 2.2 3.4 3.7

Wages and salaries 2.1 2.9 3.0

– March 2016 2.1 3.1 3.1

Household income 3.0 3.0 3.3

– March 2016 3.2 3.1 3.2

Net operating surplus of corporations −3.0 0.3 5.4

– March 2016 −5.0 5.9 6.0 Sources: Institut de la statistique du Québec, Statistics Canada and Ministère des Finances du Québec.


Five-year economic outlook for 2016-2020 1.9The Ministère des Finances du Québec’s five-year forecast is cautious. It is in line with the average private sector forecast for real GDP growth, price increases and nominal GDP growth.

— For real GDP, the Ministère des Finances du Québec forecasts average growth of 1.5% from 2016 to 2020, a similar growth rate to the average private sector forecast.

— For nominal GDP, the Ministère des Finances du Québec forecasts average growth of 3.1% from 2016 to 2020, compared to the average 3.2% growth rate forecast by the private sector.

TABLE C.7

Québec economic outlook – Comparison with the private sector (percentage change)

2015 2016 2017 2018 2019 2020 Average

2016-2020

Real GDP

Ministère des Finances du Québec 1.1 1.4 1.5 1.6 1.5 1.4 1.5

Private sector average — 1.4 1.6 1.6 1.5 1.4 1.5

Price change(1)



Nominal GDP



Note: Totals may not add due to rounding. (1) GDP deflator. Source: Ministère des Finances du Québec summary as of October 7, 2016, which includes the forecasts

of 11 private sector institutions.


C

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ION

2. THE SITUATION OF QUÉBEC’S MAIN ECONOMIC PARTNERS

The Québec economy is open to the world. In 2015, total exports accounted for over 46% of Québec’s nominal GDP.

— While Québec has diversified trade in recent years, Canada and the United States remain its main trading partners.

Québec’s economic activity is influenced by the situation of its main trading partners

Economic activity in Québec is influenced by the situation of its main trading partners, in particular through exports.

— Québec exports to the United States slowed in early 2016 due to a slowdown in U.S. economic activity. They are expected to pick up in the second half of the year with firmer growth in the United States and a weak Canadian dollar;

— exports to the rest of Canada are gradually gaining momentum, whereas the Western provinces are still adjusting to the low energy prices;

— exports to the rest of the world are growing at a moderate pace, tied to growth in the global economy.

CHART C.22

Share of exports in Québec’s GDP, by destination

CHART C.23

Change in real GDP

(percentage of nominal GDP, 2015) (annual percentage change)

Note: Figures have been rounded off. Sources: Institut de la statistique du Québec, Statistics

Canada and Ministère des Finances du Québec.


18.120.7

3.4 4.4

Canada UnitedStates

Europe Others

38.8

-5

-4

-3

-2

-1

0

1

2

3

4

5

2002 2005 2008 2011 2014 2017

Québec

Canada

UnitedStates


The economic situation in Canada 2.1Canada’s real GDP growth is expected to remain at 1.1% in 2016, the same pace of growth as in 2015.

— Whereas the economic situation in the oil-producing provinces was already difficult, Canada’s economy stumbled temporarily in the second quarter of 2016 as a result of the wildfires in Alberta, which seriously hampered oil production.

— In the second quarter of 2016, Canada’s real GDP contracted by 0.4%.

— However, the weak oil prices and Canadian dollar are supporting economic activity in the other provinces.

In 2017, Canada’s real GDP growth is expected to accelerate to 1.9%.

— Provinces that do not produce oil will continue to see healthy real GDP growth thanks to low energy costs, a weak Canadian dollar and stronger growth in the United States.

— Furthermore, a slight uptick in oil prices should drive a gradual recovery in economic activity in oil-producing provinces.

— In addition, stimulus measures introduced by the federal government should provide a further boost to economic growth in 2017.

CHART C.24

Economic growth in Canada (real GDP, percentage change)


1.3

2.1

1.7

2.22.5

1.1 1.1

1.9

2012 2013 2014 2015 2016 2017

Québec Economic Plan of March 2016 October 2016 Update


C

SECT

ION

Canada’s two-tiered economy

In 2016, low oil prices and a weak Canadian dollar benefited provinces that do not produce oil, especially Québec, Ontario and British Columbia.

In contrast, the protracted weakness in oil prices since the second half of 2014 triggered a significant deterioration in the economic situation in the oil-producing provinces, that is, Alberta, Saskatchewan and Newfoundland and Labrador.

This divergence is reflected in a number of economic indicators. More specifically:

– job losses have been mounting in the oil-producing provinces since mid-2015, whereas the other provinces have experienced continued employment growth;

– retail sales have been sliding since January 2015 in the oil-producing provinces, but increasing in the other provinces;

– consumer confidence has waned significantly in the Prairie Provinces. According to the Conference Board of Canada, the confidence index in these provinces fell from 104.0 points in January 2014 to 63.7 points in September 2016;

– housing starts dropped by 33.1% in the oil-producing provinces during the first nine months of 2016, after already falling by 13.4% in 2015 over the previous year.

Change in retail sales Change in employment (annual percentage change, in nominal terms) (index, January 2014 = 100)

Note: The oil-producing provinces are Alberta, Saskatchewan and Newfoundland and Labrador.


Note: The oil-producing provinces are Alberta, Saskatchewan and Newfoundland and Labrador.


8.9

−3.0

2.3

3.63.7

-8

-4

0

4

8

12

Jan. 14 Jan. 15 Jan. 16

Producing provincesOther provincesCanada

2.3 100.6

102.4

102.1

99

100

101

102

103

Jan-14 Jan-15 Jan-16

Producing provincesOther provincesCanada

Jan. 14 Jan. 15 Jan. 16


Labour market buoyed by job creation in provinces that do not produce oil

In 2016, Canada is expected to create 108 000 jobs, a 0.6% increase over the previous year. Overall, Canada’s unemployment rate is projected to edge up from 6.9% in 2015 to 7.0% in 2016.

— Strengthening of economic activity in provinces that do not produce oil translates to robust employment growth in these regions.

— Québec, Ontario and British Columbia are the only provinces on track for employment growth in 2016.

— Labour market conditions remain difficult in the oil-producing provinces.

In 2017, a general upturn in Canada’s economy should further support job creation. Employment is forecast to expand by 0.8%, adding nearly 153 000 new jobs and pushing the unemployment rate down to 6.9%.

The outlook for job creation takes into account demographic factors, in particular slowing growth of the labour pool (population aged 15-64) across Canada.

— Over the last ten years, the population aged 15-64 grew by an average of nearly 185 000 people per year. Over the next five years, this age group is expected to expand by an average of around 55 000 people per year.

CHART C.25

Job creation in Canada

CHART C.26

Unemployment rate in Canada (percentage change) (per cent)



1.3

1.5

0.6

0.8

0.6

0.8

2012 2013 2014 2015 2016 2017

7.3

7.1

6.9 6.9

7.0

6.9

2012 2013 2014 2015 2016 2017


C

SECT

ION

Household consumption remains sustained

Household consumption expenditure will be the main driver of Canada’s economic growth. It is projected to rise in real terms by 2.2% in 2016 and 2.0% in 2017, after increasing by 1.9% in 2015.

— Still, these increases are lower than in previous years and reflect the economic difficulties faced by the oil-producing provinces.

— Low energy prices as well as the new Canada Child Benefit will bolster the purchasing power and consumption of every Canadian household.

— However, job losses in the oil sector will limit growth in wages and salaries and have a dampening effect on consumer spending in the coming years.

— Moreover, consumer spending across Canada will be supported by employment growth in provinces that do not produce oil.

CHART C.27

Household consumption expenditure in Canada

CHART C.28

Wages and salaries in Canada

(percentage change, in real terms) (percentage change, in nominal terms)



1.9

2.42.6

1.92.2

2.0

2012 2013 2014 2015 2016 2017

4.3

3.6 3.7

2.6

1.8

3.0

2012 2013 2014 2015 2016 2017


Slowdown in the residential sector

Residential investment in Canada is expected to rise by 2.3% in 2016 and contract by 5.0% in 2017.

Canada’s housing market has been surprisingly strong since the beginning of 2016, fuelled by robust activity in the Vancouver and Toronto markets.

— In the first nine months of 2016, average housing starts were up 40.4% in British Columbia and 11.4% in Ontario over the same period in 2015.

— The increases were offset by a 38.0% decrease in housing starts in Alberta and a 2.8% decline in Saskatchewan since the beginning of the year.

Canada’s residential sector will likely decelerate in 2017.

— The demand for new housing has been largely filled already in the major urban centers of Toronto and Vancouver.

— British Columbia recently introduced an additional property transfer tax for foreign nationals and foreign corporations that buy real estate within the Greater Vancouver Regional District.

— Furthermore, on October 3, 2016, the Department of Finance Canada announced a series of new measures to stabilize the Canadian residential sector.

CHART C.29

Housing starts in Canada

CHART C.30

Residential investment in Canada (thousands) (percentage change, in real terms)

Sources: Canada Mortgage and Housing Corporation and Ministère des Finances du Québec.


214.8

187.9 189.3

195.5192.6

173.9

2012 2013 2014 2015 2016 2017

5.6

−0.4

2.53.8

2.3

−5.02012 2013 2014 2015 2016 2017


C

SECT

ION

The energy sector will continue dampening business investment in Canada

In 2015, non-residential business investment contracted 10.3% in real terms. The sharp drop in oil prices drove a 22.0% downturn in investment in the energy sector. A further 6.6% decline in non-residential business investment is anticipated in 2016, followed by an increase of 3.1% in 2017.

— Investment in the energy sector is expected to drop by 14.3% in 2016. The protracted weakness in oil prices, overcapacity in the mining, oil and gas sector, as well as lower profits for mining and oil and gas companies, will likely delay investment in the energy sector.

— In turn, lower energy costs, a depressed Canadian dollar and stronger foreign demand put greater pressure on manufacturing production capacity. However, the positive impact on manufacturing investment is gradually being seen.

A gradual rebound in oil prices in 2017 should allow for an upturn in energy investment. The combined effect of the rebound in oil prices and recovery in investment in Canada’s manufacturing sector is expected to put total non-residential investment on the growth path again.

CHART C.31

Non-residential business investment in Canada

CHART C.32

Non-residential business investment in the energy sector in Canada

(percentage change, in real terms) (percentage change, in real terms)

Sources: Statistics Canada and Ministère des

Finances du Québec. Sources: Statistics Canada and Ministère des

Finances du Québec.

6.8

0.7

–0.5

–10.3

–6.6

3.1

2012 2013 2014 2015 2016 2017

9.312.4

4.7

–22.0

–14.3

4.0

2012 2013 2014 2015 2016 2017


Slowdown in export growth

Growth in Canadian exports in real terms is expected to slow to 0.5% in 2016 and accelerate to 2.6% in 2017.

— Weak U.S. economic activity in the first half of 2016, in particular the downturn in private investment, slowed Canadian export growth at the beginning of the year.

— The expected revival of economic growth in the United States as well as the low Canadian dollar should provide Canada’s exports with an added boost in the second half of 2016.

Canada’s imports are expected to fall by 1.3% in 2016 in real terms.

— The import decline is primarily attributable to the downturn in energy investment and the depressed dollar, which makes imported products costlier.

— In 2017, an acceleration in Canada’s economic activity, especially the recovery in non-residential business investment, should provide greater support for import growth.

CHART C.33

Canadian exports

CHART C.34

Canadian imports (percentage change, in real terms) (percentage change, in real terms)



2.6 2.8

5.3

3.4

0.5

2.6

2012 2013 2014 2015 2016 2017

3.6

1.51.8

0.3

−1.3

2.5

2012 2013 2014 2015 2016 2017


C

SECT

ION

Low energy prices continue to affect nominal GDP growth in 2016

After increasing by just 0.5% in 2015, Canada’s nominal GDP is expected to expand by 1.5% in 2016 and then accelerate to 3.9% growth in 2017.

The sharp drop in oil prices as well as the Canadian dollar’s depreciation had a significant influence on Canada’s GDP deflator in 2015. The effects have lasted into 2016.

— On the one hand, low oil prices pushed down the value of Canadian exports, Canada being a net exporter of petroleum products. On the other, the low Canadian dollar drove up import prices.

— In addition, the drop in energy prices continued to put downward pressure on domestic demand prices.

In 2017, the anticipated gradual recovery in oil prices will have a positive effect on the GDP deflator through both domestic demand prices and export prices.

— Furthermore, an acceleration in the real economy will provide additional support to nominal GDP growth.

CHART C.35

Nominal GDP in Canada (percentage change)


3.0

3.8

4.3

0.5

1.5

3.9

2012 2013 2014 2015 2016 2017


The economic situation in the United States 2.2Following a 2.6% increase in 2015, the U.S. real GDP growth rate is projected to slow to 1.5% in 2016 and then accelerate to 2.1% in 2017.

— These are downward adjustments of 0.8 pp in 2016 and 0.2 pp in 2017 relative to the forecasts contained in the Québec Economic Plan of March 2016.

The adjustments are primarily attributable to disappointing growth in the first half of 2016 due to a decline in business investment and a significant correction to the pace of inventory accumulation. However, the U.S. economy is expected to rebound in the second half of the year.

Growth buoyed by domestic demand In 2016 and 2017, U.S. economic growth will be buoyed by an increase in domestic demand under the influence of:

— robust growth in consumer spending, fuelled by continued job creation and faster wage growth;

— a gradual rebound in business investment, as the negative effects of low oil prices on the energy sector are expected to dissipate;

— continued expansion of residential investment, spurred by more robust household formation and the low inventory of homes for sale.

However, a strong U.S. dollar and more moderate global economic growth will continue to limit the contribution of net exports to U.S. real GDP growth.

CHART C.36

Economic growth in the United States (real GDP, percentage change)

Sources: IHS Global Insight and Ministère des Finances du Québec.

2.3 2.3

1.7

2.42.6

1.5

2.1

Québec Economic Plan of March 2016October 2016 Update

2013 2014 2015 2016 2017


C

SECT

ION

Disappointing start to 2016 in the United States

The U.S. economy grew at a much slower pace in the first half of 2016. Real GDP increased at an annualized rate of 0.8% and 1.4% in the first and second quarters, respectively, after growing by 2.6% in 2015.

– The slowdown occurred despite robust growth in consumption and is primarily attributable to a contraction in investment and a slower pace of inventory accumulation.

Weak business investment

Business investment was down 3.4% in the first quarter and edged up just 1.0% in the second quarter of 2016, primarily as a result of:

– increased concerns among businesses, leading them to put off some of their investment projects;

– continually low oil prices, which still weighed on energy investment.

Slower pace of inventory accumulation

U.S. business inventory shrank in the second quarter, the fifth consecutive decline in its contribution to growth. The decline was a major factor in the weakness of economic activity in the second quarter, shaving 1.2 percentage points from GDP growth on an annualized basis.

– The slower pace of inventory accumulation is a temporary factor.

The U.S. economy is expected to see stronger growth in the second half of the year, propelled by an upturn in business investment and a positive contribution by inventory to growth.

Economic growth in the United States

Business investment in the United States

(per cent, at an annualized rate) (per cent, at an annualized rate)

Source: IHS Global Insight. Sources: IHS Global Insight and Ministère des Finances du Québec.

2.0

2.6

2.0

0.9 0.8

1.4

Q1 Q2 Q3 Q4 Q1 Q2

2015 2016

1.3 1.6

3.9

−3.3 −3.4

1.0

4.4

7.9 7.7

−0.6−2.1

3.9

Q1 Q2 Q3 Q4 Q1 Q2

Total investmentExcluding the energy sector

2015 2016


A new growth path for the U.S. economy

Between 1990 and 2007, U.S. economic growth averaged 3.0% per year.

– Growth was supported by a significant increase in the working-age population as well as an improvement in labour productivity through the adoption of information technologies in the workplace.

Structural factors have hampered growth since the 2008-2009 recession Since the end of the 2008-2009 recession, the U.S. economy has grown at an average rate of 2.2%, a slower pace than prior to the recession.

– Growth in the working-age population is decelerating. The contribution of the potential labour pool to real GDP growth fell from an average of 1.2 percentage point (pp) from 1990-2007 to 0.5 pp from 2010-2015.

– At the same time, the contribution of labour productivity to real GDP growth shrank from 1.6 pp to 0.9 pp between those same periods.

Furthermore, a large part of the post-recession economic growth was attributable to the ground made up by the labour market, with nearly 8 million U.S. jobs having been lost during the recession.

Demographic factors will continue to curtail U.S. real GDP growth in future. In addition, as the under-utilized labour pool shrinks, employment gains will become harder to make. Lastly, without major new technology breakthroughs, productivity growth will remain slightly below the levels seen in the 1990s.

– Based on these trends and according to several forecasters, U.S. economic growth is projected to be around 2.0% per year over the long term.

Breakdown of average annual U.S. real GDP growth, by growth factors (average annual percentage change and contribution in percentage points)

Note: Totals may not add due to rounding. Sources: IHS Global Insight and Ministère des Finances du Québec.

1.20.5 0.5 0.4 0.3

0.2

0.81.3

0.70.5

1.6

0.9

–0.2

1.01.3

Average1990-2007

Average2010-2015

2016 2017 Average2018-2025

Productivity

Employement rate

Potential workforce

3.0

2.21.5

2.1 2.0


C

SECT

ION

Consumer spending spurred by favourable conditions

Household consumption expenditure rose by 3.2% in 2015 and is expected to increase by 2.7% in 2016 and 2.5% in 2017.

The expenditure growth will be driven by an increase in real personal disposable income of approximately 2.7% per year over the same period, outstripping the average increase of 2.0% since the recession ended.

— More jobs will be created over the next two years and there will be more sustained increases in hourly wages.

In addition, U.S. household consumption is continuing to reap the benefits of several positive factors.

— American consumers are less in debt, with the ratio of household financial obligations to disposable personal income falling to 15.4% in the second quarter of 2016, below the average ratio of 16.5% registered since the beginning of the 1980s.

— Household net worth stood at 6.4 times personal disposable income in the second quarter of 2016, which is near the pre-recession peak.

— Consumer confidence remained high, with the index averaging above 100 points in the third quarter of 2016.

CHART C.37

Consumption and personal disposable income in the United States

CHART C.38

Consumer confidence in the United States

(percentage change, in real terms) (index, 1985 = 100, quarterly data)



−1.6

1.91.5

2.5

-3

-2

-1

0

1

2

3

4

5

2009 2011 2013 2015 2017

ConsumptionPersonal disposable income

2.7

110

30

81

101 101

20

40

60

80

100

120

2006 2009 2012 2015


Labour market sees more moderate gains

After peaking at 2.9 million new jobs in 2015, job creation is expected to slow to 2.5 million in 2016 and 1.6 million in 2017, an annual increase of 1.7% and 1.1%, respectively.

— Nonetheless, since the start of 2016 job creation has remained robust, with an average of 178 000 jobs being added each month.

The pace of hiring is expected to continue slowing, however, with the significant decline in the under-utilized labour pool.

— Job creation will continue in 2016 and 2017, averaging more than 100 000 new jobs each month. This is the level of job creation needed for the unemployment rate to remain flat.

— American workers will benefit from the tighter job market, with employers offering higher wages as an incentive.

— After increasing by 2.1% in 2015, hourly wages in the private sector are projected to rise by 2.2% in 2016 and 2.6% en 2017.

CHART C.39

Job creation in the United States

CHART C.40

Unemployment rate and hourly wage in the United States

(annual change, in millions) (per cent, annual data)



1.5

–0.8

–5.9

–1.0

1.62.2 2.2 2.6 2.9

2.51.6

2007 2009 2011 2013 2015 2017

4.6

9.6

7.4

4.8

2.6

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1.5

3.5

5.5

7.5

9.5

11.5

13.5

2007 2009 2011 2013 2015 2017

Unemployement rate (l.s.)

Hourly wage ‒ private sector (r.s.)


C

SECT

ION

Business investment expected to rebound in 2017

Following 2.1% growth in 2015, U.S. real business investment is forecast to decline 0.3% in 2016. The downturn will be temporary, however. Business investment should renew with growth in 2017 and rise by 3.9%.

— On the other hand, investment in the non-energy sector is projected to grow by 1.5% in 2016 and 2.6% in 2017.

Since the beginning of the year, business investment has been negatively affected by the impact of low oil prices on energy investment and the heightened uncertainty among businesses, leading them to put off some of their investment projects.

Business investment is expected to return to growth in the second half of 2016 and continue in 2017, driven by:

— still-robust household consumption expenditure, which will encourage businesses to invest in order to meet demand;

— overall improvement in business confidence;

— the gradual increase in oil prices, which should stop the decline in energy investment. Furthermore, the number of new oil wells operating in the United States has been increasing since June 2016.

CHART C.41

Business investment in the United States

CHART C.42

Investment in the non-energy sector(1) in the United States

(percentage change, in real terms) (percentage change, in real terms)


(1) Business investment excluding energy installations. Sources: IHS Global Insight and Ministère des

Finances du Québec.

5.9

–0.7

–15.6

2.5

7.79.0

3.56.0

2.1

–0.3

3.9

2007 2009 2011 2013 2015 2017

6.3

−1.1

−14.8

1.8

6.68.8

3.66.1

4.31.5 2.6

2007 2009 2011 2013 2015 2017


Residential sector still making a significant contribution

After increasing by 11.7% in 2015, U.S. residential investment is expected to continue rising at a sustained pace, that is, 5.5% in 2016 and 5.7% in 2017.

More specifically, housing starts should continue climbing, to stand at 1.2 million units in 2016 and 1.4 million units in 2017. The growth will be supported primarily by:

— household formation, which is projected to reach nearly 1.2 million in 2016 and 1.3 million in 2017;

— mortgage rates, which will remain low despite the anticipated continuation of monetary tightening in the United States;

— the low inventory of homes for sale, which at the beginning of the year was at its lowest point since 2005. This situation should encourage construction companies to pick up the pace of new-home building.

CHART C.43

Residential investment in the United States

CHART C.44

Housing starts and household formation in the United States

(percentage change, in real terms) (millions)



−18.8

−24.0−21.2

−2.5

0.5

13.511.9

3.5

11.7

5.5 5.7

2007 2009 2011 2013 2015 2017

1.4

0.9

0.6 0.60.8

1.0

1.2 1.4

0.0

0.5

1.0

1.5

2.0

2007 2009 2011 2013 2015 2017

Housing starts

Household formation


C

SECT

ION

Moderate growth in government spending

After increasing by 1.8% in 2015, spending in real terms by all levels of government in the United States is projected to grow by 1.1% in 2016 and 0.9% in 2017.

Most of the public spending growth will result from:

— a 0.8% increase in federal government spending in real terms in 2016 and 2017 under the terms of budget agreements that temporarily raise discretionary spending, especially for transportation, education and defence;

— higher spending by state and local governments, with increases of 1.2% in 2016 and 0.9% in 2017. This spending will be supported by increased revenues generated by an improvement in the labour market and higher real estate prices.

An increase in public investment is also anticipated in the coming years. Note that the share of public investment in U.S. GDP fell to 3.4% in 2015, the lowest level in over 60 years.

The Congressional Budget Office, a federal agency that provides non-partisan analysis to Congress, estimates that the federal budget deficit will rise from 2.5% of GDP in 2015 to 3.2% of GDP in 2016 and 3.1% of GDP in 2017.

CHART C.45

Government spending in the United States(1)

CHART C.46

Government investments in the United States

(percentage change, in real terms) (percentage of GDP, in nominal terms)

(1) Total spending on goods and services by all levels of government.


Sources: U.S. Census Bureau and Ministère des Finances du Québec.

1.6

2.83.2

0.1

–3,0

–1,9

–2,9

–0,9

1.81.1 0.9

2007 2009 2011 2013 2015 2017

7.1

5.2

4.5

3.4

1

2

3

4

5

6

7

8

1955 1965 1975 1985 1995 2005 2015


Export growth slowed by global economic conditions and the strong U.S. dollar

Following a 0.1% increase in 2015, exports are forecast to fall by 0.1% in 2016 and then rise by 2.0% in 2017. Since 2015, growth in U.S. exports has been limited by:

— the strength of the U.S. dollar, which nearly reached a 13-year high at the start of 2016 and makes U.S. exporting firms less competitive in the international market;

— weak growth among several of the United States’ trading partners, in particular Latin America and European Union member states.

Imports, on the other hand, are projected to increase by 1.3% in 2016 and 4.9% in 2017, following 4.6% growth in 2015. Imports will benefit from:

— robust U.S. consumption, which drives higher demand for imported goods;

— the strong U.S. dollar, which reduces the price of imported goods and services.

Net exports are expected to make a negative contribution to economic growth in 2016 and 2017 with import growth outstripping export growth.

CHART C.47

Change in U.S. exports and imports CHART C.48

Price of imports(1) and U.S. dollar exchange rate(2)

(percentage change, in real terms) (indexes)


(1) 2009 = 100 (2) U.S. dollar exchange rate against the major

currencies, weighted by trade. March 1973 = 100 Sources: Bloomberg, IHS Global Insight and Ministère

des Finances du Québec.

3.4 3.5

4.3

0.1

−0.1

2.02.2

1.1

4.4 4.6

1.3

4.9

2012 2013 2014 2015 2016 2017

Exports

Imports

60

65

70

75

80

85

90

9590

95

100

105

110

115

120

125

2011 2012 2013 2014 2015

Import prices (left scale)

U.S. dollar (right scale,inverted)


C

SECT

ION

Nearly three-quarters of Québec’s international exports of goods are shipped to the United States

The vast majority (72.5% in 2015) of Québec’s international exports of goods are shipped to the United States.

– The share of exports to the United States far outstrips that of exports to China (3.3%), France (1.9%), the United Kingdom (1.8%) and Mexico (1.6%).

Québec exports are destined mainly for the Northeast, Midwest and some southern states Most of Québec’s merchandise exports to the United States are shipped to the northeastern states (38.1% of all exports to the U.S.).

– Their geographical proximity favours trade with these states.

The midwestern states of Ohio, Illinois and Michigan are also important markets for Québec goods, as are some of the southern states, including Texas, Tennessee and Georgia.

– The southern states account for nearly 30% of Québec’s exports to the United States, while the Midwest accounts for 23.9%.

– Exports to these states are boosted by the large population in these regions.

Over half of exports to the United States are from four industries Over 50% of Québec’s exports to the United States come from four industries: primary metal manufacturing (18.6%), paper and wood product manufacturing (13.0%), aerospace products and parts (11.7%) and petrochemicals (7.6%).

Regional breakdown of goods exported to the United States – 2015

Main types of goods exported to the United States – 2015

(percentage of total exports to the United States)

(percentage of total exports to the United States)

Sources: Institut de la statistique du Québec and Ministère des Finances du Québec.


Midwest 23.9 %Northeast

38.1 %

West 7.8 %

South30.2 % Others

49.1 %

Aerospace product and parts11.7 %

Primary metal manufacturing18.6 %

Wood product and paper manufacturing

13.0 %

Petrochemical7.6 %


Nearly three-quarters of Québec’s international exports of goods are shipped to the United States (cont)

The type of goods Québec exports to the United States can vary widely with the geographical destination.

Wide variation in exports according to the region

Primary products, such as metals, paper and wood product, as well as food, are mainly shipped to the northeastern and midwestern states.

– The Northeastern United States also receives a large share of the oil refined in Québec.

The southern states receive mostly manufactured goods, in particular aerospace products, machinery and chemical products.

Québec exports influenced by linkages between industries

Québec’s goods exports to different parts of the United States are determined by geographical proximity as well as by the presence of related sectors or even headquarters in certain states. For example:

– electricity exports are concentrated in Vermont, New York and Maine, primarily due to Québec’s geographical proximity to these states and the physical constraints of transporting electricity over long distances;

– the high demand for aluminum in Tennessee is tied to its automotive industry;

– exports of aerospace products to Connecticut, Texas and Ohio get a boost from the presence of the headquarters of companies operating in this sector, such as Pratt & Whitney, Bell Helicopter Textron and NetJets.

Exports to the United States by region and type of goods – 2015 (percentage of total exports to the United States)


38.1

30.2

23.9

7.8

Northeast South Midwest West

Petrochemical sector Aerospace Product and Parts ManufacturingOthers Wood product and paper manufacturingPrimary metal manufacturing


C

SECT

ION

3. EVOLUTION OF FINANCIAL MARKETS

Easing of financial volatility

The turmoil experienced in global financial markets at the beginning of 2016 eased over the course of the year. While the climate of uncertainty persists, global economic activity has shown signs of resilience in recent months.

— Growth was robust in China and India, with a year-over-year change in the second quarter of 6.7% and 7.1%, respectively.

— After reaching a low in February 2016, the global Purchasing Managers Index has shown a positive trend and risen gradually in recent months.

Financial markets reacted favourably to these statistics.

— Global stock markets rebounded during the summer and the volatility at the beginning of the year eased. June saw a temporary increase in instability, reflecting the uncertainty caused by Brexit.

— The price of Brent oil exceeded US$50 per barrel in early October, after dropping to US$28 in January. In addition, the Canadian dollar rose to around 76 U.S. cents after falling to 69 cents in January.

— Canadian and U.S. bond rates remained low, in a global context of weak interest rates, and even negative interest rates in the case of Europe and Japan.

CHART C.49

Evolution in the global Purchasing Managers Index

CHART C.50

Yields on 10-year government bonds – 2016

(diffusion index, monthly data) (per cent)

Source: Bloomberg. Source: Bloomberg.

55.5

50.8

51.7

50

51

52

53

54

55

56

Oct-13 Sep-14 Aug-15 Jul-16

Februrary 2016

Oct. 13 Sep. 14 Aug. 15 Jul. 16

1.7

1.0-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

Jan. Mar. May. Jul. Sep.

United States (left scale)

Canada (left scale)

Germany (right scale)

Jan. Mar. May Jul. Sep.


Federal Reserve expected to raise its key interest rate by year-end

The U.S. Federal Reserve (the Fed) has not changed its monetary policy since the beginning of 2016. The federal funds target rate has been within the 0.25%-0.50% range since December 2015.

— In June, the Fed refrained from raising its key interest rate, owing primarily to the economic and financial uncertainty caused by the United Kingdom European Union membership (Brexit) referendum.

— At its meeting in September, the Fed again maintained the status quo, but said that there were more cogent arguments for increasing the key interest rate.

The continued strong performance of the U.S. labour market, coupled with the improvement in the U.S. economy anticipated in the second half of the year, is expected to enable the Fed to raise its key interest rate in December 2016.

— The Fed will then likely continue to gradually tighten its monetary policy. Two rate increases are therefore anticipated in 2017.

Moreover, repeated decreases in neutral interest rate estimates will result in a weaker long-term key interest rate than in the past.

CHART C.51

U.S. Federal Reserve key interest rate projections(1)

CHART C.52

U.S. key interest rate

(per cent at year-end) (federal funds target rate, per cent)

(1) Median projection of the 17 participants in the Federal Open Market Committee.

Source: U.S. Federal Reserve.


1.38

2.38

3.253.50

0.63

1.13

1.88

2.88

2016 2017 2018 Long term

December 2015

September 2016 5.25

2.00

0.130.38

1.13

0

1

2

3

4

5

6

2006 2008 2010 2012 2014 2016


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Decline in the neutral rate since the recession

The neutral rate refers to the real interest rate, which is neither stimulative nor contractionary when the economy is operating at its potential. The neutral rate balances savings and investment levels in a full employment situation.

The neutral rate has declined since the recession

The neutral rate has declined significantly in a number of economies since the 2008-2009 recession, due primarily to the decrease in potential GDP growth, but also due to a higher savings rate and lower investment spending globally.

– According to the Bank of Canada, the nominal neutral rate is currently between 2.75% and 3.75% in Canada, whereas it stood between 4.50% and 5.50% prior to the 2008-2009 recession. That is a drop of nearly two percentage points.

– In the United States, the Federal Reserve’s September 2016 median projection puts the appropriate long-term key interest rate, which has also experienced a substantial decrease in recent years, at approximately 2.9%.

The lower neutral rate has major effects on the real economy

The lower neutral rate means that central banks must hold their key interest rates longer at below pre-recession levels. This leads to historically weak long-term interest rates.

– Low interest rates are good for borrowers, including households and governments. Lower financing costs should encourage consumption and investment.

– However, low rates negatively impact bank profitability. They pose a challenge for long-term investors such as pension plans and insurance companies, which must deal with necessarily smaller returns on bond holdings.

Rates of Canadian and U.S. 10-year bonds (per cent, monthly data)

Sources: Statistics Canada and IHS Global Insight.

1.3 1.2

5.1

2.4

1.5

2.9

1.7

1.0

1.6

2.2

2.8

3.4

4.0

4.6

5.2

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Canada

United States


The Bank of Canada continues to wait

In its September 7 announcement, the Bank of Canada (BoC) held its key interest rate at 0.50%, its level since July 2015. The bank was cautiously optimistic about the economic outlook for the country, but said that the risks surrounding developments in inflation had recently declined.

— Following the contraction of Canada’s GDP in the second quarter, the BoC anticipates renewed growth in the third quarter.

— According to the bank, economic activity is expected to be buoyed by the resumption of oil production and the rebuilding in Alberta, following the wildfires in May 2016, and by the payment of the new Canada Child Benefit, which should support household consumption.

Moderate global inflation and modest economic growth in Canada are expected to prompt the BoC to wait until the first quarter of 2018 to start raising its key interest rate.

Bond rates remain low

Bond rates in advanced economies have remained low in recent months, in a global context of weak interest rates. Canada’s bond rates are expected to rise only gradually in the coming quarters.

— Low or negative returns in Europe and Japan continue to limit the increase in Canadian and U.S. bond rates.

— In addition, Canada’s financial markets expect there will be an accommodative monetary policy for an extended period, despite the gradual increase in interest rates projected in the United States.

TABLE C.8

Canadian financial markets (average annual rate in per cent, unless otherwise indicated)

2015 2016 2017

Target for the overnight rate 0.6 0.5 0.5

– March 2016 0.5 0.6

3-month Treasury bills 0.5 0.5 0.6

– March 2016 0.5 0.7

10-year bonds 1.5 1.2 1.6

– March 2016 1.5 2.3

Canadian dollar (in U.S. cents) 77.5 75.8 76,7

– Mars 2016 70.6 71.9 Sources: Statistics Canada, Bloomberg and Ministère des Finances du Québec.


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The Canadian dollar will stay close to current levels

After averaging 90.2 U.S. cents in 2014 and 77.5 U.S. cents in 2015, the Canadian dollar is expected to average 75.8 U.S. cents in 2016 and rise slightly in 2017, averaging 76.7 U.S. cents.

Since the start of the year, the loonie has gained ground, after falling to a low of less than 70 U.S. cents in January. The dollar rose 16% between mid-January and early May, before stabilizing at around 76.5 U.S. cents in recent months.

— This rise is due in part to the depreciation of the U.S. dollar, while financial markets have significantly lowered their expectations regarding future increases in the key interest rate in the United States.

— In addition, the Canadian dollar was buoyed by the increase in oil prices during the first half of 2016.

The loonie could take a slight downturn by the end of the year, following the projected December 2016 rise in interest rates in the United States. It is expected to gradually appreciate as of 2017, owing particularly to an anticipated increase in oil prices.

CHART C.53

Canadian dollar exchange rate

CHART C.54

Canadian and U.S. dollar exchange rate(1) – 2016

(U.S. cents, annual average) (U.S. cents and index, March 1973 = 100)

Sources: Bloomberg and Ministère des Finances du Québec.

(1) Trade-weighted U.S. dollar exchange rate against major currencies.

Source: Bloomberg.

63.7

72.0

77.2

82.7

88.5

93.3

87.9

96.5101.3

96.6

90.2

77.575.8

76.7

2002 2005 2008 2011 2014 2017

68.6

79.8 86

88

90

92

94

96

9868

70

72

74

76

78

80

Jan Mar May Jul Sep

Canadian dollar (left scale)

U.S. dollar (right scale,inverted)

Jan. Mar. May Jul. Sep.


A slow, gradual rebalancing of the oil market

After falling to a low of less than US$30 per barrel in early 2016, Brent and West Texas Intermediate (WTI) oil prices averaged US$47 and US$45, respectively, in September.

— This rebound was fuelled by a decline in U.S. production, strengthening refinery demand, and supply disruptions in certain oil-producing countries.

— The higher refinery demand is due mainly to an increase in global refining capacity of 1.2 million barrels per day (mb/d) in 2015 and 1.5 mb/d in 2016, primarily in China and the United States.

However, a weak economic outlook and a persistent oversupply due to record levels of crude oil inventories will slow the rebalancing of oil supply and demand.

— This return to equilibrium is expected to occur gradually, which will cause a moderate rise in oil prices.

— The price of Brent oil is expected to average US$44 per barrel in 2016 and US$51 in 2017, while it is anticipated that the price of WTI oil will average US$42 per barrel in 2016 and US$49 in 2017.

CHART C.55

Change in Brent, WTI and WCS oil prices

CHART C.56

Oil production in the United States

(U.S. dollars per barrel) (millions of barrels per day, monthly data)


Source: U.S. Energy Information Administration.

100

5444

51

93

4942

49

74

3628 33

2014 2015 2016 2017

BrentWest Texas Intermediate (WTI)Western Canada Select (WCS)

9.6

8.4

6

7

8

9

10

2013 2014 2015 2016


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4. THE INTERNATIONAL ECONOMIC CONTEXT

Global economic growth was 3.2% in 2015. Growth rates of 3.0% in 2016 and 3.2% in 2017 are expected. The forecasts for 2016 and 2017 have been revised downward by 0.1 pp relative to the Québec Economic Plan of March 2016.

— The main reasons for the downward revisions are weaker-than-expected growth in the United States at the beginning of the year as well as the uncertainties arising from the United Kingdom’s withdrawal from the European Union (Brexit).

The global economy should therefore continue to expand and strengthen modestly in the second half of 2016 and in 2017.

— Advanced economies are likely to see continued growth as a result of low oil prices and the expansionary fiscal policies in certain countries.

— Expansion of emerging economies will be driven by the high growth still being seen in China and India. In addition, given the anticipated increase in oil prices, the economic difficulties experienced by some oil-producing countries are expected to alleviate.

Despite these favourable conditions, global economic growth remains subdued, primarily due to the effects of population aging.

CHART C.57

Global economic growth (real GDP in purchasing power parity, percentage change)

Sources: International Monetary Fund, IHS Global Insight, Eurostat and Ministère des Finances du Québec.

5.44.8

5.5 5.7

3.0

–0.1

5.4

4.23.5 3.3 3.4 3.2

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Québec Economic Plan of March 2016

October 2016 Update

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

3.1 3.0

2016

3.33.2

2017


Weak global trade growth since the recession

Growth in the volume of world trade has been sluggish since the 2008-2009 recession. According to the International Monetary Fund (IMF), the annual growth rate averaged just 2.9% between 2008 and 2015, compared to 7.3% from 2000 to 2007. The slowdown results from:

– weak global economic growth;

– the new phase of globalization, characterized in particular by a slowdown in offshoring of production to emerging economies with lower labour costs and by higher trade barriers.

Trade is adjusting to a new level of global economic growth

According to a recent IMF study, the more sluggish economic growth, especially in investment, resulted in slower growth in world trade.

– Growth in world real GDP fell from an average rate of 4.5% between 2000 and 2007 to 3.2% between 2008 and 2015.

– Investment growth also decreased, dropping from 4.9% to 3.0% for the same periods.

World trade in goods and services(1) Global business investment(1) (percentage change, in real terms) (percentage change, in real terms)

(1) Average growth rate of exports and imports. Sources: International Monetary Fund and

Ministère des Finances du Québec.

(1) World Economic Outlook, April 2016, International Monetary Fund.

Sources: International Monetary Fund and Ministère des Finances du Québec.

0.3

–10.5

2.6

-20

-15

-10

-5

0

5

10

15

20

2000 2003 2006 2009 2012 2015

Average 2008-2015 : 2.9

Average 2000-2007: 7.3

11.4

5.9

2.6

-10

-5

0

5

10

15

2000 2003 2006 2009 2012 2015

Average2000-2007: 4.9


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Continued growth in advanced economies

Advanced economies continue to expand despite a slowdown in 2016. The growth rate is expected to decrease from 2.1% in 2015 to 1.5% in 2016 and then rise to 1.7% in 2017. Growth in this group of countries will be driven mainly by low oil prices and the maintenance of accommodating financial conditions.

— In the United States, economic growth is expected to rebound in the second half of 2016, after getting off to a disappointing start.

— In Japan, growth will get a boost from the decision to defer the scheduled increase in the consumption tax, which will likely increase from 8% to 10% in 2019.

— In the euro area, growth will benefit, in particular, from the easing of credit conditions, with support from accommodative monetary policy, and budget measures implemented by a number of governments.

The United Kingdom will feel the negative effects of its withdrawal from the European Union, which could intensify business concerns. Against this backdrop, the rate of growth in UK real GDP is expected to slow to 1.9% in 2016 and 0.5% in 2017 (+2.2% in 2015).

— However, these effects should have a limited impact on the global economy, as the United Kingdom accounts for only 2.4% of global GDP.

CHART C.58

Growth of advanced economies

CHART C.59

Credit conditions in the euro area (growth in per cent and contribution in percentage points)

(share of banks that plan to tighten or ease credit conditions)

Note: Figures at the top indicate real GDP growth in purchasing power parity.

Sources: IHS Global Insight, International Monetary Fund and Ministère des Finances du Québec.

Source: Bloomberg.

1.1

0.40.6

1.0 1.1 0.9 0.9

0.6

0.80.6

0.91.0

0.6 0.8

1.7

1.2 1.2

1.92.1

1.51.7

2011 2012 2013 2014 2015 2016 2017

United States

Other advanced economies

-20

0

20

40

60

80

100

2006 2008 2010 2012 2014 2016

Business loansReal estate loansConsumer loans

Easing

Tightening


Alleviation of difficulties in commodity-exporting emerging economies

After standing at 4.0% in 2015, growth in emerging economies is projected to accelerate modestly to 4.1% in 2016 and 4.3% in 2017. Growth will be driven primarily by:

— improvement of the economic situation in commodity-producing countries, such as Brazil, Russia and some African countries, which will benefit from the modest rise in oil prices;

— continued high growth in China and India, where government action will spur growth in domestic demand.

Even with modest strengthening, emerging economies will grow at a slower pace than the average annual growth of 5.7% seen from 2010 to 2014.

— China’s transition to an economic growth model driven by consumption and services is ongoing.

— At the same time, the rate of growth in China is slowly decelerating, edging down from 7.3% in 2014 to 6.9% in 2015 and 6.7% in the first half of 2016.

CHART C.60

Growth in emerging economies CHART C.61

China real GDP and shares of the industrial and service sectors

(growth in per cent and contribution in percentage points)

(percentage of GDP, unless otherwise indicated)

Note: Figures at the top indicate real GDP growth in purchasing power parity.

Sources: IHS Global Insight, International Monetary Fund and Ministère des Finances du Québec.

Note: The total does not add up to 100% because the primary sector is not included.

(1) Annual percentage change. Sources: Bloomberg and International Monetary Fund.

3.1 2.5 2.0 1.6 1.0 1.1 1.4

0.70.6

0.80.9

0.9 1.0 1.0

2.5

2.22.2

2.12.1 2.0 1.9

6.3

5.35.0

4.64.0 4.1 4.3

2011 2012 2013 2014 2015 2016 2017

ChinaIndiaOther emerging economies

20

25

30

35

40

45

50

55

2

4

6

8

10

12

14

16

2007 2009 2011 2013 2015

Industry (right scale)Services (right scale)GDP growth (left scale)

(1)


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Growth outlook for the major economies

In Canada, real GDP growth is expected to remain at 1.1% in 2016, a similar pace to that in 2015. Oil-producing provinces are still experiencing economic difficulties, while manufacturing provinces are benefiting from the low Canadian dollar and oil prices. In 2017, economic growth is projected to increase to 1.9%. Gradually rising oil prices should drive a revival of energy investment.

In the United States, growth is expected to slow from 2.6% in 2015 to 1.5% in 2016 and then accelerate to 2.1% in 2017. After a disappointing start to the year, the U.S. economy should gain traction in the second half of 2016, supported mainly by domestic demand. On the other hand, the strong U.S. dollar as well as more moderate growth of several of the United States’ main trading partners will continue to limit the contribution of net exports to real GDP growth.

In the euro area, growth is expected to decelerate from 2.0% in 2015 to 1.5% in 2016 and 1.2% in 2017, primarily due to the slowdown in the United Kingdom, its main trading partner. However, domestic demand will continue to benefit from low oil prices.

In the United Kingdom, growth is projected to be 1.9% in 2016 and 0.5% in 2017, compared to 2.2% in 2015. The negative repercussions of the uncertainties arising from the United Kingdom’s withdrawal from the European Union are likely to put a drag on growth in the coming years, despite the recent easing of monetary policy.

In Japan, economic growth is projected to remain at 0.5% in 2016 and be 0.8% in 2017. It should be supported by the new US$270 billion economic stimulus plan announced by the Japanese government. In addition, the consumption tax increase, initially scheduled for April 2017, has been delayed to 2019. Japan’s economic expansion will nonetheless be strained by the negative impact of the strong yen.

In China, economic growth is likely to continue slowing and stand at 6.5% in 2016 and 6.2% in 2017 as the country transitions to a consumption- and service-driven growth model. However, the economy will get a boost from the government’s major investment plan and robust consumption.

In India, the economy is still seeing robust growth. Real GDP is forecast to rise by 7.6% in 2016 and 7.4% in 2017. Domestic demand will be helped by progress in the structural reforms, in particular government measures to relax foreign direct investment rules, and by monetary easing. In addition, exports could benefit from continued growth in the United States, a major market for India.


TABLE C.9

Global economic growth outlook (real GDP, annual percentage change)

Weight(1) 2015 2016 2017

World(2) 100.0 3.2 3.0 3.2

– March 2016 3.0 3.1 3.3

Advanced economies(2) 42.9 2.1 1.5 1.7

– March 2016 1.9 1.9 2.0

Canada 1.5 1.1 1.1 1.9

– March 2016 1.2 1.3 2.1

United States 15.9 2.6 1.5 2.1

– March 2016 2.4 2.3 2.3

Euro area 12.1 2.0 1.5 1.2

– March 2016 1.5 1.6 1.6

United Kingdom 2.4 2.2 1.9 0.5

– March 2016 2.2 2.2 2.1

Japan 4.3 0.5 0.5 0.8

– March 2016 0.4 0.9 0.7

Emerging and developing economies(2) 57.1 4.0 4.1 4.3

– March 2016 3.9 4.0 4.3

China 16.6 6.9 6.5 6.2

– March 2016 6.9 6.3 6.2

India(3) 6.7 7.6 7.6 7.4

– March 2016 7.5 7.5 7.2

(1) Weight in global GDP in 2014. (2) Data based on purchasing power parity. (3) For the fiscal year (April 1 to March 31). Sources: IHS Global Insight, International Monetary Fund, Datastream, Eurostat, Statistics Canada and Ministère

des Finances du Québec.


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5. CHANGES IN THE PRICES OF THE MAIN METALS IN QUÉBEC

After standing at its lowest level in late 2015, the world price index for metals from Québec (WPIMQ) rose appreciably during the first half of 2016. The index, which tracks prices for the principal metals mined in Québec along with aluminum, jumped 14.9% between December 2015 and September 2016 following an increase in each of its three components.

— The aluminum sub-index and the industrial metals sub-index rose by 6.6% and 29.4%, respectively, mainly as a result of the positive impact on demand of the economic support measures introduced by the Chinese government.

— The precious metals sub-index jumped 24.1% with low interest rates and the uncertain economic and political climate driving heightened demand for these metals as safe-haven investments.

— Furthermore, the 5.4% depreciation in the U.S. dollar since peaking in January also drove up metal prices, metals generally being traded in U.S. dollars.

Following several years of decline, the WPIMQ appears to be gaining traction with the downward adjustment in global production of metals and more sustained demand for certain metals.

CHART C.62

World price index for metals from Québec(1) (index, 2010 = 100, monthly data)

(1) The index includes the prices for the principal metals mined in Quebec (iron, nickel, zinc, copper, gold and silver) as well as aluminum. Prices used to calculate the index are expressed in U.S. dollars.

Sources: Institut de la statistique du Québec, Statistics Canada, Bloomberg, World Bank and Ministère des Finances du Québec.

0

50

100

150

200

2005 2010 2015 2020

TotalAluminum (Al)Industrial metals (IM)Precious metals (PM)

PM:Al:Total:

IM:

100.187.475.6

52.0

Forecasts


Price of aluminum benefits from an adjustment in global production

Global aluminum production was down 0.7% year-over-year in the first half of 2016. Chinese production fell by 1.8% during the same period, leading to a 9.2% decline in China’s aluminum exports.

— The adjustment boosted the price of aluminum, which has risen 8.1% since November and averaged US$1 594 per tonne in September.

— The price of aluminum also benefited from the positive impact on demand of China’s economic support measures as well as depreciation of the U.S. dollar.

Demand for aluminum will continue to grow in the coming years, driven primarily by the increasing use of this metal in the automotive sector and the fabrication of power cables.

— The price of aluminum is therefore expected to average US$1 600 per tonne in 2017, up from almost US$1 580 in 2016.

— After that, the price should continue to see slight rises. The ongoing construction of new aluminum smelters, particularly in China, will strain price growth for aluminum.

CHART C.63

Price of aluminum

CHART C.64

Aluminum production (U.S. dollars per tonne, monthly data) (percentage change)


(1) Production in the first half of 2016 relative to the same period in 2015.


3 078

1 344

2 672

2 054

1 474

1 594

1 000

1 500

2 000

2 500

3 000

3 500

2008 2010 2012 2014 2016

7.5

3.3 3.6

9.4 9.5

–0.7

11.2 12.2

8.8

21.1

17.6

–1.8

2011 2012 2013 2014 2015 2016

World

China

(1)


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Sharp rise in industrial metal prices in 2016

Industrial metal prices were in a trough at the beginning of the year as a result of market concerns over economic growth in China, the sharp drop in oil prices and the rise in the U.S. dollar. Since then, however, there has been a strong price appreciation.

— The price of iron ore jumped 19.2% in March, after the Chinese government announced a new five-year plan to boost economic growth by at least 6.5% per year between now and 2020. The price also benefited from a slight upturn in building construction in China.

— The price of nickel increased 14.9% in July, when the Philippine government announced that operation of a number of nickel mines was being suspended for environmental reasons.

— The price of zinc is up nearly 50% since January, benefiting from a 12.0% decrease in mine production after the first seven months of 2016, compared to the same period in 2015.

— The price of copper has also increased since the start of the year, but not as much as the price of most other metals because of the high volume of copper produced.

Industrial metal prices are expected to continue rising in the coming years, but gradually, given the moderate outlook for global economic growth.

CHART C.65

Recent price trend for certain industrial metals − 2016

CHART C.66

Building construction in China

(index, January 2016 = 100, monthly data) (surface area, percentage change)


(1) Cumulative for the first eight months of 2016 over the same period in 2015.

Source: National Bureau of Statistics of China.

136.2

119.8

150.6

105.7

80

100

120

140

160

Jan Mar May Jul Sep

Iron oreNickelZincCopper

13.2

16.1

9.2

1.3

4.6

2012 2013 2014 2015 2016

(1)


Low interest rates underpinned gold prices

Central banks’ highly accommodative monetary policies amid an uncertain economic and political climate spurred demand for gold as a safe haven and drove a sharp increase in its price since the start of 2016.

— The price of gold rose from US$1 070 an ounce in December 2015 to US$1 326 an ounce in September 2016, an increase of 23.9%.

Low interest rates, and even the negative interest rates imposed by a number of central banks in Europe and Japan, depressed the yield on government bonds.

— This situation makes gold more attractive as a safe-haven investment.

— As a result, demand for gold used for that purpose more than doubled between the second half of 2015 and the first six months of 2016, increasing from 452 to 1 064 tonnes during that period.

Whereas world production of gold remains relatively stable and global uncertainty is expected to continue to be contained, the price of gold should average around US$1 270 in 2016 and remain near that price in 2017.

CHART C.67

Price of gold

CHART C.68

Demand for gold as an investment (U.S dollars an ounce, monthly data) (tonnes)


Sources: World Gold Council and Ministère des Finances du Québec.

755

1 769 1 746

1 070

1 326

500

1 000

1 500

2 000

2008 2010 2012 2014 2016

478375

469 452

1 064

Jan. tojune

July todec.

Jan. tojune

July todec.

Jan. tojune

2015 20162014


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6. MAIN RISKS THAT MAY INFLUENCE THE FORECAST SCENARIO

The economic and financial forecasts used in the October 2016 Update of the Québec Economic Plan are based on several assumptions, some of which are associated with risks.

— A number of the risks are external. For example, some economic and financial variables, such as growth in the major economies, oil and other commodity prices, and even financial indicators, might trend in different directions than forecast.

— Other risks are internal and could drive some of Québec’s economic variables in a different direction than expected.

Since the release of the Québec Economic Plan of March 2016, some of the risks identified have intensified, while others have attenuated. And new risks have appeared, especially globally.

Widespread slowdown in the global economy

Since the release of the Québec Economic Plan of March 2016, the significant turmoil in financial markets of the beginning of the year has subsided.

The economic scenario used by the Ministère des Finances du Québec is based on the assumption that economic growth will gradually strengthen in the coming years. However, a turnaround in the current economic cycle is still possible, with the global economy still facing major challenges. For example:

— economic growth might slow in the United States and some emerging economies. Emerging economies are dealing with large debts and important industrial production overcapacities;

— financial markets could experience significant turbulence again, which could lead to greater risk aversion and an erosion of investor confidence in the economic outlook.

— the political climate could result in more protectionist measures in several regions of the world.

The Québec economy has favourable fundamentals, but could be negatively affected by such developments. For example, an increase in global uncertainties could affect a recovery in investment.


Increased political uncertainty

Middle East geopolitical conflicts continue, while political uncertainty has increased, especially in the United States and Europe.

— The economic scenario is based on the assumption that these elements will have limited influence on the global economic situation.

— If the political uncertainty were to increase as a result of, say, heightened conflict or an increase in protectionist measures, it could weaken the global economy even further.

Brexit – an unprecedented event

Brexit, an unprecedented event in Europe, is one of the risks that has materialized since March 2016.

— The uncertainty fuelled by Brexit mostly relates to the negotiations on the United Kingdom’s withdrawal from the European Union (EU) and the conditions that will be decided.

Thus far, the impact of Brexit on the global economy has been moderate and is expected to remain so. However, the potential economic and political implications of Brexit are numerous. Its negative effects on global economic growth may be more significant if, among other things:

— the British government is unable to reach an agreement with the EU, in which case UK trade with the EU would be limited;

— it takes longer to renegotiate deals with other states.

If this is the case, Brexit could put a drag on global trade and erode confidence as well as create turmoil in financial markets.

Wide fluctuations in oil prices

The outlook for oil prices in the October 2016 Update assumes that members of the Organization of Petroleum Exporting Countries (OPEC) will honour the preliminary agreement reached in Algiers in late September to curb oil production.

— If they do, it should buoy oil prices.

However, since some of the variables that cause oil prices to change are unknown, prices could fluctuate widely. For example:

— strict adherence to the terms of the OPEC agreement and the stance taken by other oil-producing countries, such as Russia, will have major consequences for the market’s rebalancing and future oil price trends;

— weaker growth in the global economy and a quicker rebound in U.S. oil production could drive up global supply, which would translate in lower than expected oil prices.


C

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Wide price fluctuations, which would result in different oil price trends than those forecast, could influence the global growth outlook as well as the outlooks for the Canadian and Québec economies.

Unexpected developments in the Canadian economy

Certain risks associated with the economic situation in Canada may influence the growth outlook for Québec.

— Some of these risks could have a downward effect on Canada’s economic growth, in particular the softwood lumber dispute, the persistently low oil prices and the anticipated slowdown in the real estate sector.

— Other risks could cause Canada’s economy to grow at a faster pace than expected.

Softwood lumber dispute with the United States

Last March, Canada and the United States undertook to renegotiate the softwood lumber trade agreement, which had expired.

— The previous deal, the Softwood Lumber Agreement (SLA), had been signed in 2006 following a long dispute over stumpage charges for timber harvested in Canadian Crown or public forests.

— The purpose of the SLA was to provide a framework for Canada-U.S. trade in softwood lumber. The agreement imposed quotas on Canadian companies exporting to the United States as well as lumber tariffs.

A new softwood lumber dispute between Canada and the United States puts production and jobs in Canada’s forest industry at risk, particularly in Québec and British Columbia.

Persistently low oil prices

Over the last few years, the drop in oil prices significantly hampered economic activity in Canada’s western provinces, slowing Canada’s overall economic growth.

Oil prices have been gradually increasing in 2016 and, based on the forecast scenario, should continue rising in 2017.

— If oil prices do not rise, renewed growth in real GDP in Canada’s oil-producing provinces will be delayed.

— However, provinces that do not produce oil would benefit from the low oil prices.


Canada’s residential sector might see a stronger slowdown

In 2016, residential investment in Canada was spurred by significant activity in the Vancouver and Toronto real estate markets. With the demand for new housing being mostly filled already, the residential sector is expected to see an adjustment in the coming years and return to levels more in line with demographics.

British Columbia recently introduced an additional property transfer tax for foreign nationals and foreign corporations that buy real estate within the Greater Vancouver Regional District.

— The goal of these new measures is to cool Vancouver’s real estate market.

In addition, on October 3, 2016, the Department of Finance Canada announced a series of new measures to stabilize the Canadian residential sector. The measures could have the effect of, among other things, curbing activity and price trends in Canada’s home-resale market.

— A sharper-than-expected slowdown would have a negative impact, particularly in provinces whose real estate market could undergo a correction.

— These effects could spill over to all of the provinces through economic and financial channels.

Higher global growth in some countries

Even though the global economy remains fragile, economic growth could be stronger than expected in certain countries or regions. For example:

— in the United States, a waning of economic and political uncertainties could spur a stronger than expected rebound in business investment;

— a significant improvement in the outlook for commodities could provide added support to economic growth in commodity-producing emerging economies, such as Brazil and Russia.

Stronger economic growth, especially in the United States, would have a positive impact on Québec’s international exports and economic growth.

D.1

Section D D THE GOVERNMENT’S DETAILED FINANCIAL

FRAMEWORK

Introduction .......................................................................................... D.3

1. Change in consolidated revenue and expenditure ..................... D.5

1.1 Change in the budgetary balance ........................................................ D.5

1.2 Change in consolidated revenue ......................................................... D.7

1.2.1 Own-source revenue excluding government enterprises .............................................................................. D.8

1.2.2 Revenue from government enterprises ................................ D.12

1.2.3 Revenues from federal transfers .......................................... D.14

1.3 Change in consolidated expenditure ................................................. D.15

1.3.1 Mission expenditures ............................................................ D.16

1.3.2 Debt service .......................................................................... D.18

2. Financial framework by sector ....................................................D.21

2.1 General Fund ..................................................................................... D.24

2.2 Special funds ..................................................................................... D.26

2.3 Specified purpose accounts ............................................................... D.29 2.4 Non-budget-funded bodies ................................................................ D.30

2.5 Health and social services and education networks .......................... D.31

2.6 Tax-funded expenditures ................................................................... D.32

APPENDIX 1: Sensitivity analysis of economic variables ................................. D.33

APPENDIX 2: Balanced Budget Act .................................................................. D.37

APPENDIX 3: Detailed consolidated financial framework ................................. D.41

The government’s detailed financial framework D.3

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INTRODUCTION

This section of The Québec Economic Plan – October 2016 Update presents the government’s detailed financial framework for 2016-2017 to 2018-2019.1

The information provided concerns:

— the detailed change in consolidated revenue and expenditure, as well as adjustments made since Budget 2016-2017;

— the change in the financial framework for each of the reporting entity’s sectoral components, particularly the General Fund, special funds, specified purpose accounts, non-budget-funded bodies and the health and social services and education networks.

The five-year financial framework, that is, the government’s financial forecasts up to 2020-2021, is presented in Section A of this document.

1 Throughout this section, the budgetary data for 2016-2017 and subsequent years are forecasts.


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1. CHANGE IN CONSOLIDATED REVENUE AND EXPENDITURE

Change in the budgetary balance 1.1The October 2016 Update of the Québec Economic Plan presents a financial framework with a balanced budget. Thanks to the improvement of results in 2015-2016, which provides fiscal room, the government is investing more in the state’s priority missions while keeping the budget balanced in 2016-2017 and subsequent years.

On the whole, growth of spending will remain at a pace compatible with that of revenue.

— In 2016-2017, consolidated revenue will grow by 2.2% and consolidated expenditure, by 3.8%.

— Consolidated revenue will stand at 2.7% in 2017-2018 and consolidated expenditure, 2.3%.

The government will continue to make deposits of dedicated revenues in the Generations Fund. Deposits will total $2.0 billion in 2016-2017 and $2.5 billion in 2017-2018.

TABLE D.1

Consolidated summary financial framework – October 2016 Update (millions of dollars)

2016-2017 2017-2018 2018-2019 Own-source revenue 82 070 84 271 86 800

% change 1.0 2.7 3.0 Federal transfers 20 264 20 828 21 448

% change 7.2 2.8 3.0

Consolidated revenue 102 334 105 099 108 248 % change 2.2 2.7 3.0

Mission expenditures −90 138 −92 346 −94 904 % change 4.2 2.4 2.8

Debt service −10 047 −10 149 −10 376 % change 0.4 1.0 2.2

Consolidated expenditure −100 185 −102 495 −105 280 % change 3.8 2.3 2.7

Contingency reserve −150 −150 −150

SURPLUS (DEFICIT) 1 999 2 454 2 818 BALANCED BUDGET ACT

Deposits of dedicated revenues in the Generations Fund −1 999 −2 454 −2 818



The Québec Economic Plan D.6 October 2016 Update

Adjustments for 2016-2017

Overall, the adjustments to the financial framework since Budget 2016-2017 leave the balance unchanged, thus maintaining a balanced budget.

More precisely, adjustments related to the economic situation improve the budgetary balance by $399 million, while other adjustments lead to a deterioration of an equivalent amount in the budgetary balance.

— The adjustments related to the economic situation stem from a $40-million improvement in consolidated revenue and a $359-million reduction in debt service.

— The other adjustments stem mainly from an adjustment in Hydro-Québec’s earnings, the complete elimination of the health contribution as of January 1, 2017, additional infrastructure spending in certain bodies and a $250-million reduction in the contingency reserve.

TABLE D.2

Adjustments for 2016-2017 to the financial framework since Budget 2016-2017 (millions of dollars) 2016-2017

Adjustments related to

the economy Other

adjustments (1) Total BUDGETARY BALANCE(2) – BUDGET 2016-2017 — Consolidated revenue

Own-source revenue excluding government enterprises

General Fund 122 —

122 Consolidated entities — −158

−158

Government enterprises −102 −178

−280 Own-source revenue 20 −336 −316 Federal transfers 20 64

84

Total consolidated revenue 40 −272 −232 Consolidated expenditure

Mission expenditures Program spending — —

—

Consolidated entities — −418

−418 Debt service 359 12

371

Total consolidated expenditure 359 −406 −47 Contingency reserve — 250

250

Deposits of dedicated revenues in the Generations Fund — 29

29

TOTAL 399 −399 — BUDGETARY BALANCE(2) – OCTOBER 2016 —

(1) Includes the actions of the Québec Economic Plan. (2) Budgetary balance within the meaning of the Balanced Budget Act.


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Change in consolidated revenue 1.2This section presents the updated consolidated revenue of the government and the change in this revenue for 2016-2017 to 2018-2019.

Consolidated revenue will total $102.3 billion in 2016-2017, that is, $82.1 billion in own-source revenue and $20.3 billion in revenue from federal transfers.

— Consolidated revenue is adjusted downward by $232 million compared with the forecast in Budget 2016-2017.

Revenue is expected to grow by 2.2% in 2016-2017, 2.7% in 2017-2018 and 3.0% in 2018-2019.

TABLE D.3

Change in consolidated revenue (millions of dollars)

Budget 2016-2017 October 2016 Update 2016-2017 Adjustments 2016-2017 2017-2018 2018-2019

Own-source revenue excluding government enterprises 77 536 −36 77 500 79 673 82 168

% change 2.9

1.7 2.8 3.1

Government enterprises 4 850 −280 4 570 4 598 4 632

% change −2.2

−8.8 0.6 0.7

Own-source revenue 82 386 −316 82 070 84 271 86 800

% change 2.6

1.0 2.7 3.0

Federal transfers 20 180 84 20 264 20 828 21 448

% change 5.7

7.2 2.8 3.0

TOTAL 102 566 −232 102 334 105 099 108 248

% change 3.2

2.2 2.7 3.0


Own-source revenue excluding government enterprises 1.2.1

Consolidated own-source revenue excluding government enterprises consists chiefly of tax revenue, which is made up of personal income tax, contributions for health services, corporate taxes, school property tax and consumption taxes. How it changes is closely tied to economic activity in Québec and to changes in the tax systems.

Consolidated own-source revenue excluding government enterprises also includes revenue from other sources, namely, duties and permits and miscellaneous revenue, such as interest, the sale of goods and services, as well as fines, forfeitures and recoveries.

Most consolidated own-source revenue excluding government enterprises is deposited in the General Fund to finance the state’s missions. The remainder of this revenue is paid, in particular, into special funds (for funding specific programs), the Generations Fund (for reducing the debt), as well as to non-budget-funded bodies and the health and social services and education networks (for funding their activities).


For fiscal 2016-2017, consolidated own-source revenue excluding government enterprises will total $77.5 billion, an increase of 1.7% compared to the revenue observed for fiscal 2015-2016.

Compared with the forecast in Budget 2016-2017, consolidated own-source revenue excluding government enterprises is adjusted downward by $36 million.

Tax revenue

Revenue from personal income tax is adjusted upward by $118 million for fiscal 2016-2017 compared with the forecast in Budget 2016-2017. This adjustment reflects essentially the recurrence of the higher level of tax payable for 2015. However, it is offset by lower-than-expected withholdings at source since the beginning of the fiscal year due to the lower-than-anticipated level of wages and salaries observed in 2016.

Contributions for health services are adjusted downward by $11 million for 2016-2017 owing to the anticipated level of wages and salaries and the complete elimination of the health contribution as of January 1, 2017. These factors are largely offset by the recurrence of higher-than-expected results in 2015-2016.


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TABLE D.4

Change in own-source revenue excluding government enterprises (millions of dollars)


Tax revenue Personal income tax 29 639 118 29 757 30 911 32 147

% change 4.1

3.5 3.9 4.0

Contributions for health services 6 463 −11 6 452 6 065 6 133

% change −0.5

−2.4 −6.0 1.1

Corporate taxes 6 565 178 6 743 7 017 7 252

% change 2.5

−3.9 4.1 3.3

School property tax 2 135 −13 2 122 2 208 2 293

% change 5.0

1.5 4.1 3.8

Consumption taxes 18 906 137 19 043 19 548 19 927

% change 2.7

2.8 2.7 1.9

Other revenue Duties and permits 3 763 −328 3 435 3 600 3 702

% change −0.5

−10.3 4.8 2.8

Miscellaneous revenue 10 065 −117 9 948 10 324 10 714

% change 2.9

5.9 3.8 3.8

TOTAL 77 536 −36 77 500 79 673 82 168

% change 2.9

1.7 2.8 3.1

Revenue from corporate taxes is adjusted upward by $178 million for fiscal 2016-2017. This adjustment reflects an increase in tax revenues that is in keeping with the favourable results observed in late 2015-2016, offset by lower growth of the net operating surplus of corporations in 2016 compared with the forecast in Budget 2016-2017.

Revenue from consumption taxes is adjusted upward by $137 million in 2016-2017. This adjustment arises mainly from the Québec sales tax owing to the recurrence of higher-than-expected results in 2015-2016 and favourable monitoring of tax revenues. These factors compensate for more moderate-than-expected growth of household consumption (excluding food and rent)2 in 2016 and 2017.

2 Given that food is zero-rated for the most part and that rent is exempt from the tax base,

consumption (excluding food and rent) is the economic variable that most faithfully represents the tax base for the Québec sales tax.


Other revenue

Revenue from duties and permits is adjusted downward by $328 million in 2016-2017, reflecting essentially the lower-than-expected revenue collected under Québec’s cap-and-trade system for greenhouse gas emission allowances.

In addition, miscellaneous revenue is adjusted downward by $117 million owing, in particular, to the fact that interest income and revenue from fines, forfeitures and recoveries are lower than anticipated.

Outlook for 2017-2018 and 2018-2019

Consolidated own-source revenue excluding government enterprises will increase by 2.8% in 2017-2018 and 3.1% in 2018-2019. This growth reflects essentially the acceleration of economic activity forecast for those years.

Tax revenue

Personal income tax, the government’s largest revenue source, will grow by 3.9% in 2017-2018 and 4.0% in 2018-2019, settling at $30.9 billion and $32.1 billion, respectively.

— This change reflects, in particular, growth in household income, indexation of the personal income tax system and the progressive nature of the tax system.

— It also reflects the contribution of pension income to the growth of income subject to tax, particularly income from private pension plans.

Contributions for health services will decrease by 6.0% in 2017-2018 and increase by 1.1% in 2018-2019, to $6.1 billion for those two years. This change reflects the fact that wages and salaries are expected to grow by 3.0% in 2017 and 2018. It also takes into account the impact of the reduction of the tax burden on individuals and SMBs.

— This change reflects, in particular, the complete elimination of the health contribution as of January 1, 2017 and the reduction of the Health Services Fund contribution rate announced for Québec SMBs.

Revenue from corporate taxes will grow by 4.1% in 2017-2018 and 3.3% in 2018-2019, to $7.0 billion and $7.3 billion, respectively.

— This change reflects essentially the projected growth of the net operating surplus of corporations, established at 5.4% in 2017 and 5.1% in 2018.


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The growth of 4.1% and 3.8% in revenue from the school property tax in 2017-2018 and 2018-2019, respectively, can be attributed mainly to the increase in the number of students, as well as the anticipated increase in property values on the territory of certain school boards.

Revenue from consumption taxes is expected to increase by 2.7% in 2017-2018 and 1.9% in 2018-2019, to $19.5 billion and $19.9 billion, respectively.

— This growth reflects primarily robust household consumption (excluding food and rent) of 3.2% in 2017 and 2018.

— In addition, the gradual elimination of restrictions on input tax refunds for large businesses, as of January 1, 2018, puts downward pressure on the growth of consumption tax revenue.

Other revenue

Revenue from duties and permits will grow by 4.8% in 2017-2018 and 2.8% in 2018-2019. This growth is explained, in particular, by the anticipated change in the revenue of special funds.

Miscellaneous revenue will rise by 3.8% in 2017-2018 and 2018-2019, primarily as a result of the investment income of the Generations Fund and the anticipated revenue of special funds, non-budget-funded bodies and the health and social services and education networks.


Revenue from government enterprises 1.2.2


For 2016-2017, revenue from government enterprises is adjusted downward by $280 million, to $4.6 billion.

This adjustment can be attributed to the reduced results outlook for Hydro-Québec, due, in particular, to lower-than-projected prices for exports, a lower-than-expected level of electricity consumption and the taking into account of the adjustment of the accounting impact related to the application of International Financial Reporting Standards (IFRS).3 This adjustment is offset in part by an increase in the results of other government enterprises, including Loto-Québec and Investissement Québec.

Outlook for 2017-2018 and 2018-2019

Revenue from government enterprises will stand at $4.6 billion in 2017-2018 and 2018-2019.

— For those years, the change reflects the increased results of government enterprises, including Hydro-Québec, Loto-Québec and the Société des alcools du Québec.

TABLE D.5

Change in revenue from government enterprises (millions of dollars)


Hydro-Québec 2 600 −375 2 225 2 250 2 325

Loto-Québec 1 147 19 1 166 1 180 1 204

Société des alcools du Québec 1 070 — 1 070 1 108 1 129

Others(1) 33 76 109 60 −26

TOTAL 4 850 −280 4 570 4 598 4 632

% change −2.2

−8.8 0.6 0.7

(1) Includes the forecast for other government enterprises, in particular Investissement Québec, and the anticipated impact of Hydro-Québec’s electricity discount of $42 million in 2017-2018 and $84 million in 2018-2019.

Note: This table is based on data available as at October 6, 2016, except in the case of revenue from Hydro-Québec, which reflects data presented by the enterprise on October 7 2016.

3 Since January 1, 2015, Hydro-Québec has determined its financial results using United States

generally accepted accounting principles (U.S. GAAP). Since the publication of Public Accounts 2014-2015, Hydro-Québec’s results have been consolidated in the government’s results following IFRS.


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Historic electricity trade agreement between Québec and Ontario

Hydro-Québec and Ontario’s Independent Electricity System Operator (IESO) have entered into an agreement to develop Québec and Ontario’s energy complementarities while reducing greenhouse gases. This agreement covers the period from 2017 to 2023. It confirms the close collaboration that exists between Québec and Ontario in regard to energy and the fight against climate change. The agreement is in keeping with Hydro-Québec’s Strategic Plan 2016-2020.

A three-fold agreement

Sale of 14 TWh by Hydro-Québec

First, the agreement provides for the sale of 2 TWh per year by Hydro-Québec for a total of 14 TWh over the period, that is, enough energy to power 75 000 homes. This energy will, in particular, enable Ontario to avoid using energy produced by natural gas-fired plants.

This represents close to 1% of Hydro-Québec’s production, that is, sales totalling $100 million per year.

500 megawatts of additional capacity

Second, Ontario will reserve 500 megawatts of capacity for Hydro-Québec in order to meet seasonal needs, thus ensuring that Hydro-Québec does not have to produce this energy during winter peak demand periods.

Management of surpluses

Lastly, Québec will collaborate with Ontario in order to help it manage its energy surpluses more effectively thanks to the storage capacity of Hydro-Québec’s reservoirs.


Revenues from federal transfers 1.2.3


In 2016-2017, revenues from federal transfers are expected to reach nearly $20.3 billion, which is $84 million more than forecast in Budget 2016-2017.

This increase, in 2016-2017, is explained essentially by an $83-million upward adjustment for other programs, which results, in particular, from the announcements made by the federal government concerning two labour market agreements.

Outlook for 2017-2018 and 2018-2019

In 2017-2018, federal transfers are expected to total more than $20.8 billion, which represents an increase of 2.8%. This growth results primarily from an anticipated increase of 5.3% in equalization revenue, attributed, in particular, to the projected increase in the equalization envelope and the adjustment, on the part of the recipient provinces, of the personal income tax and consumption tax bases.

In 2018-2019, federal transfers are expected to reach $21.4 billion. This represents an increase of 3.0% that can be explained, in particular, by transfer revenue increases for the Société d’habitation du Québec and the Société de financement des infrastructures locales du Québec due to the higher level of infrastructure work planned in 2018-2019 compared to 2017-2018.

TABLE D.6

Change in federal transfer revenues (millions of dollars)


Equalization 10 030 — 10 030 10 559 10 535

% change 5.3

5.3 5.3 −0.2

Health transfers 5 944 −2 5 942 6 080 6 259

% change 8.3

8.3 2.3 2.9

Transfers for post-secondary education and other social programs 1 629 3 1 632 1 660 1 701

% change 5.6

5.8 1.7 2.5

Other programs 2 577 83 2 660 2 529 2 953

% change 1.5

13.1 −4.9 16.8

TOTAL 20 180 84 20 264 20 828 21 448

% change 5.7

7.2 2.8 3.0


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Change in consolidated expenditure 1.3Consolidated expenditure consists primarily of program spending by government departments, spending by special funds, non-budget-funded bodies and public institutions of the health and social services and education networks, as well as debt service.

Consolidated expenditure will stand at $100.2 billion in 2016-2017. This represents an upward adjustment of $47 million compared with Budget 2016-2017.

— Program spending is unchanged compared with Budget 2016-2017.

— The $418-million upward adjustment in other consolidated expenditures is due mainly to:

— additional spending by the Société d’habitation du Québec for social infrastructure;

— an upward adjustment of infrastructure projects of the Société de financement des infrastructures locales du Québec;

— additional spending by the Economic Development Fund;

— increased spending on certain tax credits, in particular for child assistance and childcare expenses.

— In addition, spending on debt service will be $371 million lower.

Consolidated expenditure will stand at $102.5 billion in 2017-2018 and $105.3 billion in 2018-2019, representing growth of 2.3% and 2.7%, respectively.

TABLE D.7

Change in consolidated expenditure (millions of dollars)


Program spending(1) 68 238 — 68 238 70 406 72 339

% change 2,7

4,0 3,2 2,7

Other consolidated expenditures(2) 21 482 418 21 900 21 940 22 565

% change 1,5

5,1 0,2 2,8

Mission expenditures 89 720 418 90 138 92 346 94 904 % change 2,4

4,2 2,4 2,8

Debt service 10 418 –371 10 047 10 149 10 376

% change 3,6

0,4 1,0 2,2

TOTAL 100 138 47 100 185 102 495 105 280 % change 2,5

3,8 2,3 2,7

(1) Program spending includes transfers intended for consolidated entities. (2) Other consolidated expenditures include, in particular, consolidation adjustments.


Mission expenditures 1.3.1

Program spending

Thanks to the improvement of results in 2015-2016, the government is announcing additional investments of $235 million in 2016-2017 and $510 million per year as of 2017-2018 in direct services to the public:

— $300 million in health;

— $110 million in education and higher education;

— $100 million for regional economies.

These additional investments are funded in part by the use of spending provisions and the raising of the spending objective by $250 million as of 2017-2018.

TABLE D.8

Change in program spending (millions of dollars)

2016-2017 2017-2018 2018-2019

PROGRAM SPENDING – BUDGET 2016-2017 68 238 70 156 72 089

% change 2.7 2.8 2.8

Additional investments Investments in health 100 300 300

Investments in education and higher education 35 110 110

Investments to stimulate regional economies 100 100 100

Subtotal 235 510 510

Reduction of the Contingency Fund −235 −100 −100

Reduction of fiscal room — −160 −160

RAISING OF THE OBJECTIVE — 250 250

PROGRAM SPENDING – OCTOBER 2016 68 238 70 406 72 339

% change 4.0 3.2 2.7


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Change in mission expenditures


In 2016-2017, mission expenditures will stand at $90.1 billion, which corresponds to an upward adjustment of $418 million compared with the forecast in Budget 2016-2017. This adjustment stems, in particular, from increased spending on the Health and Social Services, Education and Culture, and Economy and Environment missions.

Outlook for 2017-2018 and 2018-2019

In 2017-2018 and 2018-2019, mission expenditures will amount to $92.3 billion and $94.9 billion, respectively.

Change in mission expenditures (millions of dollars)

Budget

2016-2017 October 2016 Update

2016-2017 Adjustments 2016- 2017-

2017-2018-

2018-2019-

Health and Social Services 38 372 145 38 517 39 514 40 749

% change 2,0

2,7(1) 2,6 3,1

Education and Culture 21 698 143 21 841 22 528 23 237

% change 3,3

3,6(1) 3,1 3,1

Economy and Environment 12 276 221 12 497 12 730 12 975

% change 1,2

6,8 1,9 1,9

Support for Individuals and Families 9 846 27 9 873 9 987 10 066

% change 1,3

3,8(1) 1,2 0,8

Administration and Justice 7 528 –118 7 410 7 587 7 877

% change 5,4

10,8 2,4 3,8

TOTAL 89 720 418 90 138 92 346 94 904

% change 2,4

4,2 2,4 2,8


(1) To assess growth in 2016-2017 based on comparable spending levels, the percent changes for that year were calculated by excluding, from 2015-2016 expenditures, transfers from the provision for francization attributed to the Health and Social Services mission ($12.2 million) and the Support for Individuals and Families mission ($75.0 million) and including them in the 2015-2016 expenditures of the Education and Culture mission.


Debt service 1.3.2


In 2016-2017, debt service is projected to stand at $10 billion, that is, $7.7 billion for direct debt service and $2.4 billion for interest on the liability related to the retirement plans of public and parapublic sector employees.

Compared with the March 2016 Budget, debt service is adjusted downward by $371 million in 2016-2017 mainly because of lower-than-expected interest rates and new actuarial valuations of the retirement plans, which lead to a lower level of interest on the retirement plans liability.

Outlook for 2017-2018 and 2018-2019

Debt service is expected to rise by 1.0% in 2017-2018 and 2.2% in 2018-2019 owing mainly to the anticipated increase in interest rates and the debt.

TABLE D.9

Change in debt service (millions of dollars)

Budget 2016-2017 October 2016 Update

2016-2017 Adjustments 2016-2017 2017-2018 2018-2019

Direct debt service 7 951 −281 7 670 8 050 8 575

Interest on the retirement plans liability(1) 2 475 −82 2 393 2 122 1 834

Interest on the employee future benefits liability(2) –8 −8 −16 −23 −33

TOTAL 10 418 −371 10 047 10 149 10 376

% change 3.6

0.4 1.0 2.2

(1) This corresponds to the interest on the obligations relating to the retirement plans of public and parapublic sector employees less the investment income of the Retirement Plans Sinking Fund.

(2) This corresponds to the interest on the obligation relating to the survivor’s pension plan less the investment income of the Fonds du Régime de rentes des survivants and the interest on the obligation relating to accumulated sick leave less the investment income of the Accumulated Sick Leave Fund.


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Proportion of revenue devoted to debt service

The proportion of revenue devoted to debt service has decreased since 2013-2014. It will be 9.8% in 2016-2017.

CHART D.1

Debt service (percentage of consolidated revenue)

14.2

12.1

10.0

11.4

9.8 9.6 9.6

8

9

10

11

12

13

14

15

16

17

2000-2001

2002-2003

2004-2005

2006-2007

2008-2009

2010-2011

2012-2013

2014-2015

2016-2017

2018-2019

2020-2021


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2. FINANCIAL FRAMEWORK BY SECTOR

The consolidated financial framework has several sectoral components included in the government reporting entity that reflect the financial organization of public and parapublic sector activities. Table D.10 presents the forecast revenue and expenditure of these different components for fiscal 2016-2017 to 2018-2019.4

Tables D.11 to D.17 present, for 2016-2017 to 2018-2019, transactions carried out by the General Fund, special funds, specified purpose accounts, non-budget-funded bodies and the health and social services and education networks, as well as tax-funded expenditures.

4 Financial transactions between entities in the government reporting entity are eliminated in order

to determine consolidated revenue and expenditure levels.


TABLE D.10

Financial framework for consolidated revenue and expenditure by sector (millions of dollars)

2016-2017 2017-2018 2018-2019 Revenue

General Fund 76 407 78 755 80 792 Special funds 13 357 13 265 13 629 Generations Fund 1 999 2 454 2 818 Specified purpose accounts 982 862 907 Non-budget-funded bodies 20 751 21 683 22 907 Health and social services and education networks 40 227 40 936 41 537 Tax-funded transfers(1) 6 458 6 482 6 549 Consolidation adjustments(2) −57 847 −59 338 −60 891

Total consolidated revenue 102 334 105 099 108 248 Expenditure

Mission expenditures General Fund (program spending) −68 238 −70 406 −72 339

Special funds −12 095 −12 089 −12 379 Specified purpose accounts −982 −862 −907 Non-budget-funded bodies −19 860 −20 990 −22 173 Health and social services and education networks –39 402 −40 036 −40 540 Tax-funded expenditures(1) −6 458 −6 482 −6 549 Consolidation adjustments(2) 56 897 58 519 59 983

Total mission expenditures −90 138 −92 346 −94 904 Debt service

General Fund −7 959 −7 961 −7 945 Consolidated entities(3) −2 088 −2 188 −2 431

Total debt service −10 047 −10 149 −10 376 Total consolidated expenditure −100 185 −102 495 −105 280 Contingency reserve −150 −150 −150

SURPLUS (DEFICIT) 1 999 2 454 2 818 BALANCED BUDGET ACT

Deposits of dedicated revenues in the Generations Fund −1 999 −2 454 −2 818


(1) Includes doubtful tax accounts. (2) Consolidation adjustments stem mainly from the elimination of reciprocal transactions between entities in different

sectors. (3) Includes consolidation adjustments. (4) Budgetary balance within the meaning of the Balanced Budget Act.


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Change in consolidated expenditure by sector

The following table shows the change in consolidated expenditure by sector for 2016-2017 to 2018-2019.

Change in consolidated expenditure by sector (millions of dollars)

2016-2017 2017-2018 2018-2019

Mission expenditures General Fund (program spending) −68 238 −70 406 −72 339

% change 4.0 3.2 2.7

Special funds −12 095 −12 089 −12 379

% change 8.4 0.0 2.4

Specified purpose accounts −982 −862 −907

% change −0.2 −12.2 5.2

Non-budget-funded bodies −19 860 −20 990 −22 173

% change 5.2 5.7 5.6

Health and social services and education networks −39 402 −40 036 −40 540

% change 2.3 1.6 1.3

Tax-funded expenditures(1) −6 458 −6 482 −6 549

% change −5.7 0.4 1.0

Consolidation adjustments(2) 56 897 58 519 59 983

Total mission expenditures −90 138 −92 346 −94 904

% change 4.2 2.4 2.8

Debt service General Fund −7 959 −7 961 −7 945

% change 0.1 0.0 −0.2

Consolidated entities(3) −2 088 −2 188 −2 431

% change 1.7 4.8 11.1

Total debt service −10 047 −10 149 −10 376

% change 0.4 1.0 2.2

TOTAL −100 185 −102 495 −105 280

% change 3.8 2.3 2.7

(1) Includes doubtful tax accounts. (2) Consolidation adjustments stem mainly from the elimination of reciprocal transactions between entities in

different sectors. (3) Includes consolidation adjustments.


General Fund 2.1The General Fund is used to finance nearly three quarters of the government’s consolidated expenditure.

The revenue of the General Fund, which consists of own-source revenue and federal transfers, will total $76.4 billion in 2016-2017 and increase by 3.1% in 2017-2018 and 2.6% in 2018-2019, to $78.8 billion and $80.8 billion, respectively.

The expenditure of the General Fund, which includes, in particular, program spending, will stand at $76.2 billion in 2016-2017 and grow by 2.8% in 2017-2018 and 2.4% in 2018-2019, to $78.4 billion and $80.3 billion, respectively.

TABLE D.11

Summary of the budgetary transactions of the General Fund (millions of dollars)

2016-2017 2017-2018 2018-2019

Revenue Income and property taxes 34 499 35 940 37 389


Duties and permits 289 291 288


Government enterprises 4 403 4 173 4 167


% change 1.4 2.8 3.1


% change 7.0 3.8 0.9

Total revenue 76 407 78 755 80 792

% change 2.6 3.1 2.6

Expenditure Program spending −68 238 −70 406 −72 339

% change 4.0 3.2 2.7

Debt service −7 959 −7 961 −7 945

% change 0.1 0.0 −0.2

Total expenditure −76 197 −78 367 −80 284

% change 3.5 2.8 2.4

Contingency reserve −150 −150 −150

SURPLUS (DEFICIT) 60 238 358


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Change in the revenue of the General Fund

The following table shows the revenue of the General Fund according to the reporting structure used in the monthly report on financial transactions.

Change in the revenue of the General Fund (millions of dollars)

2015-2016 2016-2017 % change

Own-source revenue excluding government enterprises

Income and property taxes Personal income tax 21 339 22 463 5.3

Contributions to the Health Services Fund 7 053 7 196 2.0

Corporate taxes 4 641 4 840 4.3

Consumption taxes 17 768 17 646 −0.7

Other revenue sources 1 685 1 635 −3.0

Total own-source revenue excluding government enterprises 52 486 53 780 2.5

Government enterprises 4 915 4 403 −10.4

Total own-source revenue 57 401 58 183 1.4

Federal transfers Equalization 9 521 10 030 5.3

Health transfers(1) 5 109 5 600 9.6

Transfers for post-secondary education and other social programs 1 542 1 632 5.8

Other programs 863 962 11.5

Total federal transfers 17 035 18 224 7.0

TOTAL 74 436 76 407 2.6

(1) In 2015-2016 and 2016-2017, $378 million and $342 million, respectively, from health transfers are allocated to the Fund to Finance Health and Social Services Institutions (FINESSS), which is a consolidated entity. These allocations have already been deducted from health transfers.


Special funds 2.2Special funds are entities set up by law to finance certain activities within government departments and bodies.

The activities of special funds may be funded, in particular, through tax revenues, fees, or transfers from program spending.

The following table shows the forecasts pertaining to special funds for 2016-2017 to 2018-2019.

TABLE D.12

Summary of the budgetary transactions of special funds(1) (millions of dollars)

2016-2017 2017-2018 2018-2019



Duties and permits 1 919 1 996 2 056



Québec government transfers 4 737 4 653 4 748


Total revenue 13 357 13 265 13 629

% change −0.3 −0.7 2.7

Expenditure Mission expenditures −12 095 −12 089 −12 379

% change 8.4 0.0 2.4

Debt service −1 474 −1 592 −1 873


% change 8.3 0.8 4.2

SURPLUS (DEFICIT) −212 −416 −623

(1) Excludes the Generations Fund.


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The revenue of special funds will amount to $13.4 billion for 2016-2017, $13.3 billion for 2017-2018 and $13.6 billion for 2018-2019. This represents a change of −0.3%, −0.7% and 2.7%, respectively.

— The slight change for 2016-2017 is due mainly to the decrease in revenue from duties and permits under Québec’s cap-and-trade system for greenhouse gas emission allowances.

— The change in revenue for 2017-2018 arises essentially from income and property taxes, following the complete elimination of the health contribution as of January 1, 2017.

The mission expenditures of special funds will stand at $12.1 billion in 2016-2017 and 2017-2018 and $12.4 billion in 2018-2019, representing growth of 8.4% in 2016-2017 and 2.4% in 2018-2019.

The growth in spending by special funds stems mainly from:

— the Land Transportation Network Fund, for funding road networks and public transit infrastructure;

— the Green Fund, given the deployment of the 2013-2020 Climate Change Action Plan (2013-2020 CCAP);

— the Northern Plan Fund, following a non-recurring payment in 2016-2017 to the Société du Plan Nord for the purchase of a limited partnership.


Generations Fund

Revenues dedicated to the Generations Fund will reach $2.0 billion in 2016-2017, $2.5 billion in 2017-2018 and $2.8 billion in 2018-2019.

Accordingly, as at March 31, 2019, the book value of the Generations Fund will be $15.8 billion.

TABLE D.13

Summary of the budgetary transactions of the Generations Fund (millions of dollars)

2016-2017 2017-2018 2018-2019

Revenue Consumption taxes Specific tax on alcoholic beverages 500 500 500


Duties and permits Water-power royalties 744 770 788

Mining revenues 74 121 239

Subtotal 818 891 1 027

Miscellaneous revenue Unclaimed property 40 15 15

Investment income 474 623 811


Government enterprises Indexation of the price of heritage electricity 167 210 250

Additional contribution from Hydro-Québec — 215 215


TOTAL REVENUE 1 999 2 454 2 818


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Specified purpose accounts 2.3A specified purpose account is a financial management mechanism that enables a government department to record separately sums paid into the Consolidated Revenue Fund by a third party under a contract or agreement that provides for the sums to be allocated to a specific purpose.

The following table shows the forecasts pertaining to specified purpose accounts for 2016-2017 to 2018-2019.

TABLE D.14

Summary of the budgetary transactions of specified purpose accounts (millions of dollars)

2016-2017 2017-2018 2018-2019

Revenue Miscellaneous revenue 168 164 163

Own-source revenue 168 164 163


Total revenue 982 862 907

% change −0.2 −12.2 5.2

Expenditure Mission expenditures −982 −862 −907

Total expenditure −982 −862 −907

% change −0.2 −12.2 5.2

SURPLUS (DEFICIT) — — —

The revenue and expenditure of specified purpose accounts will amount to $1.0 billion for 2016-2017 and $0.9 billion for 2017-2018 and 2018-2019.

The change in the revenue and expenditure of specified purpose accounts is explained chiefly by the expiry of certain agreements with the federal government.


Non-budget-funded bodies 2.4Non-budget-funded bodies were created to provide specific public services.

The following table shows the forecasts pertaining to non-budget-funded bodies for 2016-2017 to 2018-2019.

TABLE D.15

Summary of the budgetary transactions of non-budget-funded bodies (millions of dollars)

2016-2017 2017-2018 2018-2019

Revenue Consumption taxes 120 120 121

Duties and permits 468 482 491





Total revenue 20 751 21 683 22 907

% change 2.8 4.5 5.6


% change 5.2 5.7 5.6

Debt service −720 −691 −683


% change 4.4 5.3 5.4

SURPLUS (DEFICIT) 171 2 51

The revenue of non-budget-funded bodies will amount to $20.8 billion for 2016-2017, $21.7 billion for 2017-2018 and $22.9 billion for 2018-2019, representing an increase of 2.8%, 4.5% and 5.6%, respectively.

The mission expenditures of non-budget-funded bodies will stand at $19.9 billion in 2016-2017, $21.0 billion in 2017-2018 and $22.2 billion in 2018-2019, representing an increase of 5.2%, 5.7% and 5.6%, respectively.


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Health and social services and education networks 2.5Since April 1, 2015, the health and social services network has been made up of 34 public institutions. As for the education networks, they are made up of school boards, the Comité de gestion de la taxe scolaire de l’île de Montréal, CEGEPS, as well as the Université du Québec and its constituents.

The following table shows the forecasts pertaining to the health and social services and education networks for 2016-2017 to 2018-2019.

TABLE D.16

Summary of the budgetary transactions of the health and social services and education networks (millions of dollars)

2016-2017 2017-2018 2018-2019






Total revenue 40 227 40 936 41 537

% change 2.2 1.8 1.5


% change 2.3 1.6 1.3

Debt service −848 −905 −997


% change 2.4 1.7 1.5

SURPLUS (DEFICIT) −23 −5 —

The revenue of the health and social services and education networks will amount to $40.2 billion for 2016-2017, $40.9 billion for 2017-2018 and $41.5 billion for 2018-2019, representing a change of 2.2%, 1.8% and 1.5%, respectively.

The mission expenditures of the health and social services and education networks will stand at $39.4 billion in 2016-2017, $40.0 billion in 2017-2018 and $40.5 billion in 2018-2019, representing a change of 2.3%, 1.6% and 1.3%, respectively.


Tax-funded expenditures 2.6Refundable tax credits for individuals and corporations, which are similar to tax-funded transfer expenditures, are recorded in spending rather than as reductions in revenue. Expenditures related to doubtful tax accounts are added to these refundable tax credits.

Tax-funded expenditures will decrease by 5.7% in 2016-2017 in relation to the previous year and increase by 0.4% in 2017-2018 and 1.0% in 2018-2019. This change is explained, in particular, by certain measures announced in:

— Budget 2014-2015, including the revision of the rates of tax credits granted to corporations;

— the December 2014 Update on Québec’s Economic and Financial Situation, including the introduction of a minimum eligible expenditure threshold for R&D tax credits;

— Budget 2015-2016, including the measures intended to increase the effectiveness of the sectoral tax assistance granted to corporations and the introduction of the tax shield for individuals;

— Budget 2016-2017, including the improvements to work premiums for households without children and to the tax shield.

TABLE D.17

Summary of budgetary transactions relating to tax-funded expenditures (millions of dollars)

2016-2017 2017-2018 2018-2019

Revenue Personal income tax 4 459 4 526 4 613

Corporate taxes 1 715 1 681 1 661

Consumption taxes 284 275 275

Total revenue 6 458 6 482 6 549

% change −5.7 0.4 1.0

Expenditure −6 458 −6 482 −6 549

% change −5.7 0.4 1.0

SURPLUS (DEFICIT) — — —


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APPENDIX 1: SENSITIVITY ANALYSIS OF ECONOMIC VARIABLES

The financial framework’s forecasts incorporate certain components of uncertainty that do not depend on the government directly, but which may cause actual results to differ from the forecasts.

Sensitivity of the Québec economy to external shocks

The forecasts for the Québec economy are based on numerous analyses, including periodic assessments of the main economic statistics and the results obtained with various econometric models.

Given that the Québec economy is characterized by considerable openness to trade, Québec’s economic variables are influenced by several external factors. The most important of these factors are related to the activities of Québec’s main trading partners, the United States and the rest of Canada.


Impact of external variables on the Québec economy

An analysis conducted with a Structural VAR5 model has made it possible to estimate, on the basis of historical data, the sensitivity of Québec’s economic variables to certain important external variables.

— The findings show that a change of 1% in U.S. real GDP entails on average a change of 0.5% in Québec’s real GDP.

Moreover, the model makes it possible to quantify the extent to which the economy of Ontario influences that of Québec.

— Accordingly, a change of 1% in Ontario’s real GDP gives rise on average to a change of 0.4% in Québec’s real GDP.

— Ontario is the Canadian province with which Québec has the most commercial ties, in addition to having a similar economic structure. In 2012, exports to Ontario accounted for roughly 60% of Québec’s interprovincial exports.

TABLE D.18

Impact of external shocks on the growth rate of Québec’s real GDP

External shocks of 1% Maturity(1)

(quarters) Impact on Québec's real GDP

(percentage points) U.S. real GDP 2 0.5 Ontario real GDP 2 0.4

(1) Maturity corresponds to the number of quarters needed to record the greatest impact on Québec’s real GDP, presented in the right-hand column.

Sources: Institut de la statistique du Québec, Ontario Ministry of Finance, IHS Global Insight, Statistics Canada, Bloomberg and Ministère des Finances du Québec.

5 Vector autoregression. This econometric technique is used to estimate, on the basis of numerous

observations, the extent to which fluctuations in one economic variable affect another economic variable (impulse response function). The estimates were made using quarterly data from Statistics Canada's 1993 System of National Accounts (SNA 1993), for the 1981-2010 period.


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Sensitivity of own-source revenue to economic fluctuations

In general, the nominal GDP forecast is a very good indicator of growth in consolidated own-source revenue given the direct link between tax bases and nominal GDP.

— According to the overall sensitivity analysis, a change of 1 percentage point in nominal GDP has an impact of about $650 million on the government’s consolidated own-source revenue.

This sensitivity analysis is based on a revision of each tax base in proportion to the revision of nominal GDP.

— In reality, a change in economic outlook can have a greater impact on some economic variables, as well as greater repercussions on certain tax bases and smaller ones on others.

Sensitivity analyses set an average historical relationship between the change in consolidated own-source revenue and growth in nominal GDP. Accordingly, they may prove inaccurate for a given year depending on the economic situation and yet not lose their validity.

— Indeed, for a given year, economic fluctuations may have various impacts on revenue because of changes in the behaviour of economic agents.

— In these situations, the change in own-source revenue can be greater or lower than the change in nominal GDP.

TABLE D.19

Sensitivity of consolidated own-source revenue to major economic variables

Variables Growth forecasts

for 2016 Impacts for fiscal 2016-2017 Nominal GDP 2.6% A variation of 1 percentage point changes own-

source revenue by roughly $650 million. – Wages and salaries 2.9% A variation of 1 percentage point changes

personal income tax revenue by about $270 million.

– Employment insurance

0.0% A variation of 1 percentage point changes personal income tax revenue by roughly $6 million.

– Pension income 6.5% A variation of 1 percentage point changes personal income tax revenue by nearly $40 million.

– Net operating surplus of corporations

0.3% A variation of 1 percentage point changes corporate income tax revenue by roughly $30 million.

– Household consumption

2.9% A variation of 1 percentage point changes QST revenue by about $165 million.

– Residential investment 2.0% A variation of 1 percentage point changes QST revenue by approximately $20 million.


Sensitivity of debt service to a change in interest rates and exchange rates

A greater-than-anticipated rise in interest rates of 1 percentage point over a full year would increase the interest expenditure by roughly $250 million.

A change in the value of the Canadian dollar in relation to other currencies would have no impact on debt service because the government’s debt has no foreign currency exposure.


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APPENDIX 2: BALANCED BUDGET ACT

The Balanced Budget Act ensures the presentation of balanced budget forecasts. It provides for the allocation of any surpluses to a stabilization reserve in order to facilitate the Government’s multi-year budget planning.

Accordingly, if a budgetary deficit were recorded, the government would have the sums in the reserve at its disposal to balance its budget without requiring additional efforts such as spending reductions or revenue increases.

Budgetary balance within the meaning of the Balanced Budget Act

Under the Balanced Budget Act, the objectives of the Act are achieved if the budgetary balance, calculated in accordance with the Act, is zero or positive.

The budgetary balance within the meaning of the Balanced Budget Act corresponds essentially to the surplus or deficit presented in the Public Accounts (book balance) minus the amount of revenues dedicated to the Generations Fund and adjusted to take certain accounting changes into consideration.

The Act allows the stabilization reserve to be taken into account in order to assess the achievement of a balanced budget. Therefore, in a situation where the calculated budgetary balance would be a deficit, an equivalent amount could be used from the reserve to enable the government to present a zero budgetary balance and achieve a balanced budget, in accordance with the Act, without having to implement an offsetting financial plan. The budgetary balance thus obtained would correspond to the budgetary balance within the meaning of the Act after taking into account the stabilization reserve.


Table D.20 shows the components for establishing the budgetary balance within the meaning of the Act.

From 2006-2007 to 2008-2009, the budget remained balanced.

From 2009-2010 to 2014-2015, the budgetary balance was a deficit, as allowed under the Act.

Fiscal 2015-2016 marked the return to a balanced budget. The budgetary balance stood at $2 191 million.

For fiscal 2016-2017, as part of the October 2016 Update of the Québec Economic Plan, the government is providing for the maintenance of a balanced budget.

TABLE D.20

Budgetary balance within the meaning of the Balanced Budget Act (millions of dollars) Stabilization reserve

Fiscal year

Surplus (deficit) in the Public Accounts

Generations Fund

Budgetary balance

within the meaning of

the Act Allocations Uses

Budgetary balance

within the meaning of

the Act after reserve (1)

2006-2007 1 993 −584 1 409 1 300 (2) — 109 2007-2008 1 650 −449 1 201 1 201

— —

2008-2009 −1 258 −587 −1 845 109 (3) 1 845 — 2009-2010 −2 940 −725 −3 607(4) —

433 −3 174 (5)

2010-2011 −2 390 −760 −3 150 —

— −3 150 (5)

2011-2012 −1 788 −840 −2 628 —

— −2 628 (5)

2012-2013 −2 515 −961 −1 600(6) —

— −1 600 (5)

2013-2014 −1 703 −1 121 −2 824 —

— −2 824 (5)

2014-2015 136 −1 279 −725(4) —

— −725 (5)

2015-2016 3 644 −1 453 2 191 2 191

— — (1) The budgetary balance within the meaning of the Balanced Budget Act after reserve corresponds to the budgetary

balance that takes into account allocations to the stabilization reserve and uses of it in order to keep the budget balanced.

(2) In 2006-2007, only $1.3 billion was allocated to the stabilization reserve in accordance with the then current legislation. Under the Balanced Budget Act, the total surplus for each fiscal year is now allocated to the stabilization reserve.

(3) In accordance with section 32 of the Act (S.Q. 2009, chapter 38), the sum of $109 million, corresponding to the difference between the recorded surplus and the anticipated surplus for 2006-2007, was allocated to the stabilization reserve in 2008-2009.

(4) Includes accounting changes of $58 million in 2009-2010 and $418 million in 2014-2015, established in accordance with the Act.

(5) From 2009-2010 to 2014-2015, the budgetary balance within the meaning of the Act was a deficit, as allowed under the Act.

(6) The result of $1.9 billion stemming from Hydro-Québec’s extraordinary loss relative to the closure of the Gentilly-2 nuclear power plant is excluded from the calculation of the budgetary balance for 2012-2013, in accordance with the Act.


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Stabilization reserve

Under the Balanced Budget Act, a recorded surplus, or a budgetary balance that is greater than zero, must be allocated to the stabilization reserve.

The reserve must first be used to keep the budget balanced and, subsidiarily, it may be used to reduce the debt through deposits in the Generations Fund.

The balance of the stabilization reserve is adjusted on the basis of recorded surpluses allocated to the reserve or amounts used from the reserve for each fiscal year.

Due to the financial crisis and the global recession that caused a substantial deterioration of the government’s fiscal framework in 2008-2009 and 2009-2010, the government used the balance of the stabilization reserve in its entirety.

— In 2008-2009, $1 845 million was used to maintain a balanced budget and $132 million was deposited in the Generations Fund to reduce Québec’s debt.

— In 2009-2010, the remaining $433 million of the stabilization reserve was applied to reduce the budgetary deficit.

There were no transactions in the stabilization reserve from 2010-2011 to 2014-2015.

In 2015-2016, a recorded surplus of $2 191 million was allocated to the stabilization reserve in accordance with the Balanced Budget Act.

Since the balance of the stabilization reserve was zero at the beginning of fiscal 2015-2016, it amounted to $2 191 million as at March 31, 2016.

TABLE D.21

Transactions of the stabilization reserve (millions of dollars) Uses

Fiscal year

Balance, beginning

of year Allocations Balanced

budget Generations

Fund Balance,

end of year

2006-2007 — 1 300

— — 1 300

2007-2008 1 300 1 201

— −200 2 301

2008-2009 2 301 109 (1) −1 845 −132 433

2009-2010 433 —

−433 — —

2010-2011 to 2014-2015 — — — — —

2015-2016 — 2 191 — — 2 191

(1) This amount corresponds to the balance of the recorded surplus for fiscal 2006-2007.


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APPENDIX 3: DETAILED CONSOLIDATED FINANCIAL FRAMEWORK


TABLE D.22

Detailed consolidated financial framework (millions of dollars)

2016-2017

Consolidated Revenue Fund

A A A A A

General Fund

Special funds

Generations Fund

Specified purpose

accounts

Revenue

Personal income tax 22 463 1 205 — —

Contributions for health services 7 196 472 — —

Corporate taxes 4 840 188 — —

School property tax — — — —

Consumption taxes 17 646 2 442 500 —

Duties and permits 289 1 919 818 —


Government enterprises 4 403 — 167 —

Own-source revenue 58 183 8 205 1 999 168

Québec government transfers — 4 737 — —

Federal transfers 18 224 415 — 814

Total revenue 76 407 13 357 1 999 982

Expenditure

Mission expenditures −68 238 −12 095 — −982

Debt service −7 959 −1 474 — —

Total expenditure −76 197 −13 569 — −982

Contingency reserve −150

SURPLUS (DEFICIT) 60 −212 1 999 —

BALANCED BUDGET ACT

Deposits of dedicated revenues in the Generations Fund

−1 999

BUDGETARY BALANCE(3)

(1) Includes doubtful tax accounts. (2) Reclassification of abatements and consolidation adjustments resulting mainly from the elimination of reciprocal

transactions between entities in different sectors. (3) Budgetary balance within the meaning of the Balanced Budget Act.


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TABLE


2016-2017

A A A A A

Tax-funded expenditures (1)

Non-budget-funded bodies

Health and social services and education

networks Consolidation

adjustments (2) Consolidated

results

A

4 459

— — 1 630

29 757

—

— — −1 216

6 452

1 715

— — —

6 743

—

— 2 122 —

2 122

284

120 — −1 949

19 043

—

468 — −59

3 435

—

5 994 4 070 −4 123

9 948

—

— — —

4 570

6 458 6 582 6 192 −5 717 82 070

A —

13 022 33 748 −51 507

—

—

1 147 287 −623

20 264

6 458 20 751 40 227 −57 847 102 334

A

−6 458

−19 860 −39 402 56 897

−90 138

—

−720 −848 954

−10 047

−6 458 −20 580 −40 250 57 851 −100 185

−150

— 171 −23 4 1 999

A

A A

−1 999

—


TABLE D.23


2017-2018


A A A A A

General Fund

Special funds

Generations Fund

Specified purpose

accounts

Revenue


Contributions for health services 7 250 40 — —




Duties and permits 291 1 996 891 —






Total revenue 78 755 13 265 2 454 862

Expenditure


Debt service −7 961 −1 592 — —




BALANCED BUDGET ACT


−2 454

BALANCED BUDGET(3)




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TABLE Detailed consolidated financial framework (millions of dollars)

2017-2018

A A A A A






results

A

4 526

— — 1 538

30 911

—

— — −1 225

6 065

1 681

— — —

7 017

—

— 2 208 —

2 208

275

120 — −1 877

19 548

—

482 — −60

3 600

—

5 929 4 109 −4 082

10 324

—

— — —

4 598

6 482 6 531 6 317 −5 706 84 271

A —

14 028 34 328 −53 009

—

—

1 124 291 −623

20 828

6 482 21 683 40 936 −59 338 105 099

A

−6 482

−20 990 −40 036 58 519

−92 346

—

−691 −905 1 000

−10 149

−6 482 −21 681 −40 941 59 519 −102 495

−150

— 2 –5 181 2 454

A

A A

−2 454

—


TABLE D.24


2018-2019


A A A A A

General Fund

Special funds

Generations Fund

Specified purpose

accounts

Revenue


Contributions for health services 7 380 — — —




Duties and permits 288 2 056 1 027 —






Total revenue 80 792 13 629 2 818 907

Expenditure


Debt service −7 945 −1 873 — —




BALANCED BUDGET ACT


−2 818

BUDGETARY BALANCE(3)




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TABLE


2018-2019

A A A A A






results

A

4 613

— — 1 589

32 147

—

— — −1 247

6 133

1 661

— — —

7 252

—

— 2 293 —

2 293

275

121 — −1 933

19 927

—

491 — −160

3 702

—

6 074 4 182 −4 317

10 714

—

— — —

4 632

6 549 6 686 6 475 −6 068 86 800

A —

14 965 34 766 −54 479

—

—

1 256 296 −344

21 448

6 549 22 907 41 537 –60 891 108 248

A

−6 549

−22 173 −40 540 59 983

−94 904

—

−683 −997 1 122

−10 376

–6 549 –22 856 −41 537 61 105 −105 280

−150

— 51 — 214 2 818

A

A A

−2 818

—

E.1

Section E E THE QUÉBEC GOVERNMENT’S DEBT

1. Debt ................................................................................................. E.3

Gross debt ........................................................................................... E.4 1.1

Net debt ............................................................................................. E.11 1.2

Debt representing accumulated deficits ............................................ E.12 1.3

Debt reduction objectives .................................................................. E.13 1.4

Comparison of the debt of governments in Canada ......................... E.15 1.5

2. Financing and debt management................................................ E.19

Financing program ............................................................................ E.19 2.1

Financing strategy ............................................................................. E.21 2.2

Diversification by market ...................................................... E.21 2.2.1

Diversification by instrument ................................................ E.22 2.2.2

Diversification by maturity .................................................... E.23 2.2.3

Pre-financing ..................................................................................... E.25 2.3

Yield ................................................................................................... E.26 2.4

Debt management ............................................................................. E.27 2.5

Borrowings contracted ....................................................................... E.29 2.6

3. Information on the retirement plans and on funds deposited by the Ministère des Finances with the Caisse de dépôt et placement du Québec .................................. E.33

Retirement plans ............................................................................... E.33 3.1

Retirement plans liability ...................................................... E.35 3.1.1

Retirement Plans Sinking Fund ........................................... E.38 3.1.2

Generations Fund .............................................................................. E.43 3.2

Returns of the Caisse de dépôt et placement du Québec on 3.3funds deposited by the Ministère des Finances ................................ E.44

Retirement Plans Sinking Fund ........................................... E.44 3.3.1

Generations Fund ................................................................ E.46 3.3.2

Accumulated Sick Leave Fund ............................................ E.46 3.3.3

Interest on the retirement plans liability ............................................. E.48 3.4

E.2

4. Credit ratings ............................................................................... E.49

The Québec government’s credit ratings .......................................... E.49 4.1

Comparison of the credit ratings of the Canadian provinces ............ E.56 4.2

The Québec Government’s Debt E.3

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1. DEBT

Several concepts of debt are used to measure a government’s indebtedness. The following table presents data on Québec’s debt according to three concepts, namely, gross debt, net debt and debt representing accumulated deficits.

TABLE E.1

Debt of the Québec government as at March 31 (millions of dollars)

2015 2016 2017 2018 2019 2020 2021

GROSS DEBT(1) 203 957 203 347 208 061 211 838 213 619 213 770 214 138

% of GDP 55.1 53.8 53.7 52.9 51.6 50.0 48.6

Less: Financial assets, net of other liabilities −18 270 −18 322 −21 724 −23 909 −25 401 −26 603 −28 839

NET DEBT 185 687 185 025 186 337 187 929 188 218 187 167 185 299

% of GDP 50.2 49.0 48.1 46.9 45.5 43.8 42.0

Less: Non-financial assets −64 419 −67 095 −70 406 −74 452 −77 559 −79 730 −81 481

Plus: Stabilization reserve — 2 191 2 191 2 191 2 191 2 191 2 191

DEBT REPRESENTING ACCUMULATED DEFICITS(2) 121 268 120 121 118 122 115 668 112 850 109 628 106 009

% of GDP 32.8 31.8 30.5 28.9 27.3 25.6 24.0

(1) The gross debt excludes pre-financing and takes into account the sums accumulated in the Generations Fund. (2) According to the Act to reduce the debt and establish the Generations Fund, the debt representing accumulated

deficits is the accumulated deficits figuring in the government’s financial statements plus the balance of the stabilization reserve. Additional information with respect to the stabilization reserve can be found at annex 2 of section D.

The Québec Economic Plan E.4 October 2016 Update

Gross debt 1.1The gross debt represents the amount of debt issued on financial markets and the net liabilities in respect of the retirement plans and future benefits of public and parapublic sector employees, minus the balance of the Generations Fund.

As at March 31, 2016, the gross debt stood at $203 347 million, which is $610 million less than the level recorded as at March 31, 2015. This decrease in the gross debt in absolute terms is the first since the late 1950s.

The gross debt as a percentage of the economy fell from 55.1% of GDP as at March 31, 2015 to 53.8% of GDP as at March 31, 2016. This corresponds to a decrease of 1.3 percentage points and is a first since 2008-2009.

The gross debt will rise in absolute terms over the coming years, particularly because of capital investments, but its weight in the economy will continue to decline. The ratio of gross debt to GDP is expected to reach 48.6% as at March 31, 2021.

TABLE E.2

Gross debt as at March 31 (millions of dollars)

2015 2016 2017 2018 2019 2020 2021

Consolidated direct debt(1) 182 723 185 124 192 183 199 116 204 810 209 621 215 251

Plus: Net retirement plans liability 28 041 26 698 26 399 25 697 24 602 23 164 21 521

Plus: Net employee future benefits liability 131 47 — — — — —

Less: Generations Fund −6 938 −8 522 −10 521 −12 975 −15 793 −19 015 −22 634

GROSS DEBT(1) 203 957 203 347 208 061 211 838 213 619 213 770 214 138

% of GDP 55.1 53.8 53.7 52.9 51.6 50.0 48.6

(1) The consolidated direct debt and the gross debt exclude pre-financing.


E

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Retirement plans liability

The net retirement plans liability, which is included in the gross debt, is calculated by subtracting from the retirement plans liability the balance of the Retirement Plans Sinking Fund (RPSF), an asset established to pay the retirement benefits of public and parapublic sector employees.

The retirement plans liability represents the present value of the retirement benefits the government will pay to public and parapublic sector employees, taking into account the conditions of their plans and their years of service. This liability stood at $86 436 million as at March 31, 2016.

The government created the RPSF in 1993. As at March 31, 2016, the RPSF’s book value stood at $59 738 million.

Thus, the net retirement plans liability represented $26 698 million as at March 31, 2016.

Net retirement plans liability as at March 31, 2016 (millions of dollars)

Retirement plans liability

Government and Public Employees Retirement Plan (RREGOP) 54 903

Pension Plan of Management Personnel (PPMP) and Retirement Plan for Senior Officials (RPSO) 12 962

Other plans(1) 18 571

Subtotal 86 436

Less: Retirement Plans Sinking Fund (RPSF) −59 738

NET RETIREMENT PLANS LIABILITY 26 698

(1) The liability for the other plans takes into account the assets of the other plans, including those of the Pension Plan of the Université du Québec.


Employee future benefits liability

The government records in the gross debt the value of its commitments regarding future benefits programs for its employees, namely, programs for accumulated sick leave and for pensions paid to the survivors of government employees. These programs give rise to long-term obligations whose costs are covered in full by the government.

As at March 31, 2016, the employee future benefits liability stood at $1 475 million.

As at March 31, 2016, the value of the sums accumulated to pay for employee future benefits programs (Accumulated Sick Leave Fund and Survivor’s Pension Plan Fund) stood at $1 428 million.

Thus, the net employee future benefits liability was $47 million as at March 31, 2016.

Net employee future benefits liability as at March 31, 2016 (millions of dollars)

Employee future benefits liability

Accumulated sick leave 840

Survivor’s pension plan 421

Université du Québec programs 214

Subtotal 1 475

Less:

Accumulated Sick Leave Fund −989

Survivor’s Pension Plan Fund −439

Subtotal −1 428

NET EMPLOYEE FUTURE BENEFITS LIABILITY 47


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Generations Fund

The Generations Fund was created in June 2006, through the adoption of the Act to reduce the debt and establish the Generations Fund. The sums accumulated in the fund are dedicated solely to repaying the debt.

As at March 31, 2017, the book value of the Generations Fund is expected to stand at $10.5 billion.

The sums accumulated in the Generations Fund are expected to reach $22.6 billion as at March 31, 2021.

Generations Fund (millions of dollars)

2015- 2016

2016- 2017

2017- 2018

2018- 2019

2019- 2020

2020- 2021

Book value, beginning of year 6 938 8 522 10 521 12 975 15 793 19 015

Dedicated revenues

Water-power royalties

Hydro-Québec 641 647 673 689 709 731

Private producers 100 97 97 99 101 103

Subtotal 741 744 770 788 810 834

Indexation of the price of heritage electricity 98 167 210 250 335 435

Additional contribution from Hydro-Québec — — 215 215 215 215

Mining revenues 161 74 121 239 309 338

Specific tax on alcoholic beverages 100 500 500 500 500 500

Unclaimed property 55 40 15 15 15 15

Investment income 298 474 623 811 1 038 1 282

Total dedicated revenues 1 453 1 999 2 454 2 818 3 222 3 619

Deposit from the accumulated surplus of the Commission des normes du travail 131 — — — — —

Total deposits 1 584 1 999 2 454 2 818 3 222 3 619

BOOK VALUE, END OF YEAR 8 522 10 521 12 975 15 793 19 015 22 634


Factors responsible for the growth in the gross debt In 2016-2017, the gross debt will increase by $4.7 billion, mainly because of capital investments ($3.3 billion1) and investments, loans and advances ($3.4 billion). Deposits in the Generations Fund will help to reduce the gross debt by $2.0 billion.

CHART E.1

Factors responsible for the growth in the gross debt in 2016-2017 (millions of dollars)

(1) The government’s investments, loans and advances in 2016-2017 include the investment in Bombardier’s

C Series program (US$1 billion, or CAN$1.3 billion). (2) Other factors include, in particular, the change in other accounts, such as accounts receivable and accounts

payable.

The table on the next page shows the factors responsible for the growth in the government’s gross debt since March 31, 2000.

1 These are net capital investments, which consist of gross investments minus depreciation

expenses. Even though gross investments have an impact on the gross debt, net capital investments are presented in the factors responsible for the growth in the gross debt due to the fact that depreciation expenses are presented in the budgetary balance. In 2016-2017, gross capital investments will amount to $7 128 million and depreciation expenses to $3 817 million, so that net capital investments total $3 311 million.

3 311 3 365

0 37

−1 999

Net capitalinvestments

Investments, loansand advances

Budgetary (surplus)deficit

Other factors Generations Fund(2)

(1)

SECTION

E

E.9

The Québec Government’s Debt

TABLE E.3

Factors responsible for the growth in the Québec government’s gross debt (millions of dollars)

Debt, beginning

of year

Budgetary (surplus)

deficit

Investments, loans and advances

Net investment in the

networks(1) Net capital

investments(2) Other

factors(3)

Deposits in the Generations

Fund(4) Total

change Debt, end

of year % of GDP

With networks consolidated at modified equity value 2000-2001 116 761 −427 1 701 841 578 1 108 3 801 120 562 52.4 2001-2002 120 562 −22 1 248 934 1 199 −9 3 350 123 912 51.9 2002-2003 123 912 728 1 921 631 1 706 237 5 223 129 135 51.7 2003-2004 129 135 358 1 367 560 1 186 625 4 096 133 231 51.4 2004-2005 133 231 664 1 303 1 486 1 006 −796 3 663 136 894 50.4 2005-2006 136 894 −37 1 488 1 013 1 179 −809 2 834 139 728 49.9 2006-2007 139 728 −109 2 213 1 002 1 177 1 078 −584 4 777 144 505 49.7 2007-2008 144 505 — 2 658 487 1 457 767 −649 4 720 149 225 48.8 2008-2009 149 225 — 966 622 2 448 −28 −719 3 289 152 514 48.5 With networks consolidated line by line(5) 2009-2010 157 630 3 174 1 746 4 226 −2 733 −725 5 688 163 318 51.9 2010-2011 163 318 3 150 2 507 4 923 298 −760 10 118 173 436 52.9 2011-2012 173 436 2 628 1 861 5 071 1 228 −840 9 948 183 384 53.2 2012-2013 183 384 3 476(6) 659 4 863 445 −961 8 482 191 866 54.2 2013-2014 191 866 2 824 1 349 3 977 −788 −1 421 5 941 197 807 54.8 2014-2015 197 807 1 143 2 146 2 980 1 160 −1 279 6 150 203 957 55.1 2015-2016 203 957 −2 191 808 2 695 −338 −1 584 −610 203 347 53.8 2016-2017 203 347 — 3 365 3 311 37 −1 999 4 714 208 061 53.7 2017-2018 208 061 — 1 706 4 046 479 −2 454 3 777 211 838 52.9 2018-2019 211 838 — 1 499 3 107 −7 −2 818 1 781 213 619 51.6 2019-2020 213 619 — 1 646 2 171 −444 −3 222 151 213 770 50.0 2020-2021 213 770 — 1 786 1 751 450 −3 619 368 214 138 48.6

(1) The net investment in the networks includes mainly loans by Financement-Québec to the health and social services and education networks. Since 2009-2010, these items have been part of net capital investments.

(2) Investments made under private-public partnership agreements are included in net capital investments. (3) Other factors include, in particular, the change in other accounts, such as accounts receivable and accounts payable. (4) In 2015-2016, deposits in the Generations Fund include $1 453 million in dedicated revenues and $131 million from the accumulated surplus of the Commission des normes du travail. (5) The line-by-line consolidation of the health and social services and education networks raised the gross debt by $5 116 million as at March 31, 2009. This amount represents the debt

contracted by the networks in their own name, which was previously not included in the government’s debt. The data prior to 2009-2010 could not be restated and are thus not comparable. (6) Includes the loss of $1 876 million stemming from activities abandoned following the closure of Hydro-Québec’s Gentilly-2 nuclear power plant.


Gross debt burden

Between 1998 and 2009, the government’s gross-debt-to-GDP ratio fell significantly. While the gross debt was equivalent to 57.8% of GDP as at March 31, 1998, this ratio stood at 51.7% as at March 31, 2003 and 48.5% as at March 31, 2009. The line-by-line consolidation of the health and social services and education networks raised the gross-debt-to-GDP ratio to 50.1% as at March 31, 2009.

The increase in the ratio as of 2009 is due to the growth in capital investments and the 2008-2009 recession, which led to deficits from 2009-2010 to 2014-2015. The gross debt burden has decreased since March 31, 2016.

The following chart illustrates the importance of the Generations Fund. Without the deposits made in the Generations Fund, the ratio of gross debt to GDP would be much higher. As at March 31, 2021, the gross debt burden is projected to stand at 48.6%. Without the Generations Fund, the forecast would be 53.9%, or 5.3 percentage points of GDP higher.

This difference represents $23.6 billion. In other words, if the government had not created the Generations Fund in 2006, the gross debt forecast as at March 31, 2021 would be $23.6 billion higher,2 that is, $2 754 per capita. By reducing the debt, the Generations Fund is a powerful instrument of intergenerational equity.

CHART E.2

Gross debt as at March 31(1)

(percentage of GDP)

(1) The gross debt takes into account the debt that the health and social services and education networks have

issued in their own name. The data as of 2009 are not comparable with those for prior years, which do not include this debt.

2 The difference of $23.6 billion is $1 billion higher than the balance of the Generations Fund as at

March 31, 2021 ($22.6 billion) owing to the use of $1 billion from the Generations Fund in 2013-2014 to repay maturing borrowings.

57.8

51.7

48.5

56.4

53.953.8

48.6

42

44

46

48

50

52

54

56

58

60

50.1

20210

1998 2003 2009 2016

Without the Generations Fund

With the Generations Fund


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Net debt 1.2The net debt is equal to the Québec government’s liabilities less its financial assets. It represents the debt that has funded capital investments and current expenditures. The net debt is obtained by subtracting from the gross debt the government’s financial assets, net of other liabilities.

As at March 31, 2016, the net debt stood at $185 025 million, or 49.0% of GDP. As a proportion of GDP, the net debt began to decrease in 2013-2014 and will continue to fall over the coming years, to 42.0% as at March 31, 2021.

TABLE E.4

Factors responsible for the growth in the net debt (millions of dollars)

Debt, beginning

of year

Budgetary (surplus)

deficit Net capital

investments Other

Revenues dedicated to the

Generations Fund

Total change

Debt, end of year

% of GDP

2012-2013 167 700 3 476(1) 4 863 4 959(2) −961 12 337 180 037 50.9

2013-2014 180 037 2 824 3 977 −2 465(3) −1 121 3 215 183 252 50.7

2014-2015 183 252 1 143 2 980 −409(3) −1 279 2 435 185 687 50.2

2015-2016 185 687 −2 191 2 695 287(3) −1 453 −662 185 025 49.0

2016-2017 185 025 — 3 311 — −1 999 1 312 186 337 48.1

2017-2018 186 337 — 4 046 — −2 454 1 592 187 929 46.9

2018-2019 187 929 — 3 107 — −2 818 289 188 218 45.5

2019-2020 188 218 — 2 171 — −3 222 −1 051 187 167 43.8

2020-2021 187 167 — 1 751 — −3 619 −1 868 185 299 42.0

(1) Includes the loss of $1 876 million stemming from activities abandoned following the closure of Hydro-Québec’s Gentilly-2 nuclear power plant.

(2) The amount of $4 959 million in 2012-2013 is explained mainly by changes made to Hydro-Québec’s accounting policies. These changes led to a decrease in the value of the government’s investment in Hydro-Québec and thus an increase in the net debt.

(3) The amounts of −$2 465 million in 2013-2014, −$409 million in 2014-2015 and $287 million in 2015-2016 are explained mainly by the other comprehensive income items of government enterprises that lead to changes in the net debt. Comprehensive income can include, for example, exchange rate changes that have still not been realized. These elements do not have an impact on the net result of government enterprises, which influences the budgetary balance. However, they do have an impact on the net assets of government enterprises, which influences the government’s investment in these enterprises and thus the net debt.


Debt representing accumulated deficits 1.3The debt representing accumulated deficits corresponds to the difference between the Québec government’s liabilities and its financial and non-financial assets as a whole. This debt is calculated by subtracting financial assets, net of other liabilities, as well as non-financial assets from the gross debt. In accordance with the Act to reduce the debt and establish the Generations Fund, it is also increased by the stabilization reserve.3

As at March 31, 2016, the debt representing accumulated deficits stood at $120 121 million, or 31.8% of GDP. As a proportion of GDP, the debt representing accumulated deficits began to decrease in 2013-2014 and will continue to fall over the coming years, to 24.0% as at March 31, 2021.

TABLE E.5

Factors responsible for the growth in the debt representing accumulated deficits (millions of dollars)

Debt, beginning

of year

Budgetary (surplus)

deficit

Allocation to the

stabilization reserve

Accounting adjustments

Revenues dedicated

to the Generations

Fund Total

change Debt, end

of year % of GDP

2012-2013 115 220 3 476(1) — 4 880(2) −961 7 395 122 615 34.6

2013-2014 122 615 2 824 — −2 471(3) −1 121 −768 121 847 33.7

2014-2015 121 847 1 143 — −443(3) −1 279 −579 121 268 32.8

2015-2016 121 268 −2 191 2 191 306(3) −1 453 −1 147 120 121 31.8

2016-2017 120 121 — — — −1 999 −1 999 118 122 30.5

2017-2018 118 122 — — — −2 454 −2 454 115 668 28.9

2018-2019 115 668 — — — −2 818 −2 818 112 850 27.3

2019-2020 112 850 — — — −3 222 −3 222 109 628 25.6

2020-2021 109 628 — — — −3 619 −3 619 106 009 24.0

(1) Includes the loss of $1 876 million stemming from activities abandoned following the closure of Hydro-Québec’s Gentilly-2 nuclear power plant.

(2) The amount of $4 880 million in 2012-2013 is explained mainly by changes made to Hydro-Québec’s accounting policies. These changes led to a decrease in the value of the government’s investment in Hydro-Québec and thus an increase in the debt representing accumulated deficits.

(3) The amounts of −$2 471 million in 2013-2014, −$443 million in 2014-2015 and $306 million in 2015-2016 are explained mainly by the other comprehensive income items of government enterprises that lead to changes in the debt representing accumulated deficits. Comprehensive income can include, for example, exchange rate changes that have still not been realized. These elements do not have an impact on the net result of government enterprises, which influences the budgetary balance. However, they do have an impact on the net assets of government enterprises, which influences the government’s investment in these enterprises and thus the debt representing accumulated deficits.

3 Additional information with respect to the stabilization reserve can be found at annex 2 of

section D.


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Debt reduction objectives 1.4The Québec government has set debt reduction objectives that have been included in the Act to reduce the debt and establish the Generations Fund. For fiscal 2025-2026:

— the gross debt must not exceed 45% of GDP;

— the debt representing accumulated deficits must not exceed 17% of GDP.

CHART E.3

Gross debt as at March 31 CHART E.4

Debt representing accumulated deficits as at March 31

(percentage of GDP) (percentage of GDP)

To achieve these debt reduction objectives, the government established the Generations Fund in 2006. The main revenue sources dedicated to the Generations Fund are as follows:

— water-power royalties paid by Hydro-Québec and private producers of hydro-electricity;

— revenue generated by the indexation of the price of heritage electricity;

— all mining revenues;

— an amount derived from the specific tax on alcoholic beverages ($500 million per year as of 2016-2017);

— investment income that stays in the Generations Fund and thus accelerates debt reduction.

55.153.8 53.7

52.9

51.6

50.048.6

47.947.2

46.445.7

45.0

42

44

46

48

50

52

54

56

58

2014 2016 2018 2020 2022 2024 2026

Objective

0

32.831.8

30.528.9

27.3

25.624.0

22.621.2

19.818.4

17.0

14

16

18

20

22

24

26

28

30

32

34

36

2014 2016 2018 2020 2022 2024 20260

Objective


The Generations Fund is expected to amount to $22.6 billion as at March 31, 2021.

TABLE E.6

Generations Fund (millions of dollars)

2015- 2016

2016- 2017

2017- 2018

2018- 2019

2019- 2020

2020- 2021

Book value, beginning of year 6 938 8 522 10 521 12 975 15 793 19 015

Dedicated revenues

Water-power royalties

Hydro-Québec 641 647 673 689 709 731

Private producers 100 97 97 99 101 103

Subtotal 741 744 770 788 810 834

Indexation of the price of heritage electricity 98 167 210 250 335 435

Additional contribution from Hydro-Québec — — 215 215 215 215

Mining revenues 161 74 121 239 309 338

Specific tax on alcoholic beverages 100 500 500 500 500 500

Unclaimed property 55 40 15 15 15 15

Investment income 298 474 623 811 1 038 1 282

Total dedicated revenues 1 453 1 999 2 454 2 818 3 222 3 619

Deposit from the accumulated surplus of the Commission des normes du travail 131 — — — — —

Total deposits 1 584 1 999 2 454 2 818 3 222 3 619

BOOK VALUE, END OF YEAR 8 522 10 521 12 975 15 793 19 015 22 634


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Comparison of the debt of governments in Canada 1.5On the basis of gross debt and percentage of GDP, Québec is the second most heavily indebted province. With a gross-debt-to-GDP ratio of 55.0% as at March 31, 2016, Newfoundland and Labrador is the most heavily indebted province.

However, Québec is the most heavily indebted province on the basis of debt representing accumulated deficits.

CHART E.5

Gross debt and debt representing accumulated deficits as at March 31, 2016 (percentage of GDP)

(1) A negative entry means that the government has an accumulated surplus. (2) Data as at March 31, 2015 since the 2015-2016 public accounts of this province were not published by

October 19, 2016. Sources: Public accounts of the provinces and Annual Financial Report of the Government of Canada 2015-2016.

The table on the next page shows the debt of the federal government and each province as at March 31, 2016. Contrary to the net debt and the debt representing accumulated deficits, the gross debt cannot be observed directly in the public accounts of the other provinces. However, the public accounts show the components of gross debt, namely, the consolidated direct debt, the net retirement plans liability and the net employee future benefits liability. Therefore, it is possible to calculate the level of the gross debt according to the same concept used by Québec.

The debt concepts used in budget documents may also differ from one government to another. For instance, the commitment to reduce the debt burden of the federal government concerns the debt representing accumulated deficits, whereas Québec’s debt reduction objectives concern the gross debt and the debt representing accumulated deficits.

27.1 31.8 27.1 31.1

13.423.3

14.2

−1.4

18.8

−1.9

−13.7

55.0 53.847.3 47.0

41.1 40.9 39.9

27.3 25.4

18.4

9.3

N.L. Qué. Ont. Fed. Man. N.S. N.B. B.C. P.E.I. Sask. Alta.

Debt representing accumulated deficits Gross debt(1)

(2)

E.16

The Québec Economic Plan October 2016 Update

TABLE E.7

Debt of governments in Canada as at March 31, 2016 according to various concepts (millions of dollars)

N.L. Qué. Ont. Fed. Man. N.S. N.B. B.C. P.E.I.(1) Sask. Alta.

Consolidated direct debt 9 137 185 124 341 558 693 813 24 226 13 525 12 126 64 472 1 849 6 211 22 194

Net retirement plans liability 4 658 26 698 1 356 152 268 2 354 647 642 246 −385 7 922 10 566

Net employee future benefits liability 2 771 47 10 751 85 640 511 2 092 429 2 069 58 — —

Generations Fund — −8 522 — — — — — — — — —

Gross debt 16 566 203 347 353 665 931 721 27 091 16 264 13 197 66 787 1 522 14 133 32 760

% of GDP 55.0 53.8 47.3 47.0 41.1 40.9 39.9 27.3 25.4 18.4 9.3

Less: Financial assets, net of other liabilities −3 912 −18 322 −48 432 −237 970 −5 658 −1 167 463 −27 152 612 −6 234 −33 991

Net debt(2) 12 654 185 025 305 233 693 751 21 433 15 097 13 660 39 635 2 134 7 899 −1 231

% of GDP 42.0 49.0 40.9 35.0 32.5 37.9 41.3 16.2 35.5 10.3 −0.3

Less: Non-financial assets −4 484 −67 095 −102 536 −77 765 −12 621 −5 813 −8 958 −43 014 −1 003 −9 394 −47 311

Plus: Stabilization reserve — 2 191 — — — — — — — — —

Debt representing accumulated deficits(2) 8 170 120 121 202 697 615 986 8 812 9 284 4 702 −3 379 1 131 −1 495 −48 542

% of GDP 27.1 31.8 27.1 31.1 13.4 23.3 14.2 −1.4 18.8 −1.9 −13.7

(1) Data as at March 31, 2015 since the 2015-2016 public accounts of this province were not published by October 19, 2016. (2) A negative entry indicates that the government has net assets or an accumulated surplus. Sources: Public accounts of the provinces and Annual Financial Report of the Government of Canada 2015-2016.


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Public sector debt

The public sector debt includes the government’s gross debt as well as the debt of Hydro-Québec, the municipalities, universities other than the Université du Québec and its constituents, and other government enterprises. This debt has served, in particular, to fund public infrastructure, such as roads, schools, hospitals, hydroelectric dams and water treatment plants.

As at March 31, 2016, Québec’s public sector debt stood at $272 952 million, or 72.3% of GDP. These figures must be put into perspective for they do not take into account the economic value of certain assets held by the government, such as Hydro-Québec, the Société des alcools du Québec and Loto-Québec.

Public sector debt as at March 31 (millions of dollars)

2012 2013 2014 2015 2016

Government’s gross debt(1) 183 384 191 866 197 807 203 957 203 347

Hydro-Québec 38 514 39 631 40 361 41 662 43 843

Municipalities(2) 20 719 21 820 22 622 23 305 23 846

Universities other than the Université du Québec and its constituents(3) 1 797 1 739 1 610 1 624 1 608

Other government enterprises(4) 1 363 1 479 433 383 308

PUBLIC SECTOR DEBT 245 777 256 535 262 833 270 931 272 952

% of GDP 71.3 72.5 72.8 73.2 72.3

(1) The gross debt excludes pre-financing and takes into account the sums accumulated in the Generations Fund.

(2) These amounts correspond to the long-term debt contracted by municipalities in their own name. Part of this debt is subsidized by the government ($3 409 million as at March 31, 2016).

(3) These amounts correspond to the debt contracted by universities other than the Université du Québec and its constituents in their own name. Part of this debt is subsidized by the government ($692 million as at March 31, 2016).

(4) These amounts correspond to the debt of the Financing Fund to finance government enterprises and entities not included in the reporting entity.


E

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ION

2. FINANCING AND DEBT MANAGEMENT

Financing program 2.1The government’s financing program for 2016-2017 stands at $13 524 million, which is $454 million less than forecast in the March 2016 budget.

TABLE E.8

The government’s financing program in 2016-2017

(millions of dollars)

March 2016

Budget Revisions Revised program Realized(1)

To be realized

GENERAL FUND

Net financial requirements(2) 2 740 −826 1 914

Repayments of borrowings 9 322 493 9 815

Change in cash position(3) −7 584 −929 −8 513

Transactions under the credit policy(4) — −867 −867

Contributions to the Sinking Fund for borrowings — 2 175 2 175

GENERAL FUND 4 478 46 4 524

FINANCING FUND 9 000 −500 8 500

FINANCEMENT-QUÉBEC 500 — 500

TOTAL 13 978 −454 13 524(5) 12 306 1 218

Including: repayments of borrowings 13 835 631 14 466 Note: A negative entry indicates a source of financing and a positive entry, a financial requirement. (1) Borrowings contracted or negotiated as at October 19, 2016. (2) These amounts exclude the net financial requirements of consolidated entities funded through the Financing

Fund. They are adjusted to take into account mainly the non-receipt of revenues of the RPSF and of funds dedicated to employee future benefits.

(3) Corresponds to pre-financing carried out the previous year. (4) Under the credit policy, which is designed to limit financial risk with respect to counterparties, the government

disburses or receives amounts because of movements in exchange rates. These amounts have no effect on the debt.

(5) The financing program is less than repayments of borrowings primarily because of the level of pre-financing carried out in 2015-2016.


The financing program will amount to $15 271 million in 2017-2018 and $18 598 million in 2018-2019. In 2019-2020 and 2020-2021, it is expected to amount to $16 645 million and $15 506 million, respectively.

TABLE E.9

The government’s financing program, 2017-2018 to 2020-2021 (millions of dollars)

2017-2018 2018-2019 2019-2020 2020-2021

GENERAL FUND

Net financial requirements(1) 1 477 762 734 2 367

Repayments of borrowings 5 294 7 636 7 711 6 639

GENERAL FUND 6 771 8 398 8 445 9 006

FINANCING FUND 7 500 9 000 7 000 6 000

FINANCEMENT-QUÉBEC 1 000 1 200 1 200 500

TOTAL 15 271 18 598 16 645 15 506

Including: repayments of borrowings 10 693 15 819 13 453 10 429 Note: A negative entry indicates a source of financing and a positive entry, a financial requirement. (1) These amounts exclude the net financial requirements of consolidated entities funded through the Financing

Fund. They are adjusted to take into account mainly the non-receipt of revenues of the RPSF and of funds dedicated to employee future benefits.


E

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ION

Financing strategy 2.2The government aims to borrow at the lowest possible cost. To that end, it applies a strategy for diversifying sources of funding by market, financial instrument and maturity.

Diversification by market 2.2.1

Financing transactions are carried out regularly on most markets, namely, in Canada, the United States, Europe, Australia and Asia.

From 2006-2007 to 2015-2016, 15.3% of borrowings were contracted in foreign currencies. Nonetheless, the government keeps no exposure of its debt to these currencies (see section 2.5).

In 2016-2017, the government has thus far carried out 34.5% of its borrowings on foreign markets:

— US$2 900 million (CAN$3 693 million);

— AU$455 million (CAN$468 million);

— HK$540 million (CAN$89 million).

CHART E.6

Long-term borrowings by currency

(per cent)

Note: For 2016-2017, borrowings contracted or negotiated as at October 19, 2016.

84.4100.0

68.581.3

91.8 91.9 92.283.8

76.0 78.765.5

15.6 18.78.2 8.1 7.8

16.224.0 21.3

34.5

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

Canadian dollars Foreign currency

31.5


Diversification by instrument 2.2.2

To satisfy investors’ needs, an extensive array of financial products is used in the course of financing transactions.

Long-term instruments consist primarily of bond issues and variable interest rate notes.

In 2016-2017, bond issues have thus far represented 67.0% of the instruments used.

CHART E.7

Long-term borrowings contracted in 2016-2017 by instrument (per cent)

Note: Borrowings contracted or negotiated as at October 19, 2016. (1) These borrowings are from immigrant investors. The sums advanced by immigrant investors are lent to the

government through Investissement Québec. With the income generated by the investments, Investissement Québec funds two assistance programs for Québec businesses: the Business Assistance – Immigrant Investor Program and the Employment Integration Program for Immigrants and Visible Minorities.

(2) Savings products issued by Épargne Placements Québec.

Bond issues67.0%

Savings products(2)

2.2%

Variable interestrate notes

26.0%

Others(1)

4.8%


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Diversification by maturity 2.2.3

Maturities of new borrowings are distributed over time to obtain a stable refinancing profile and ensure the government’s regular presence on capital markets.

In 2016-2017, 36.9% of the borrowings contracted thus far had a maturity of less than 10 years, 49.4% a maturity of 10 years and 13.7% a maturity of 30 years or more.

CHART E.8

Long-term borrowings(1) contracted in 2016-2017 by maturity (per cent)

Note: Borrowings contracted or negotiated as at October 19, 2016. (1) Long-term borrowings correspond to borrowings with a maturity of more than one year.

This diversification is reflected on the maturity of the debt. As at March 31, 2016, the average maturity of the debt, that is of all borrowings contracted up to March 31, 2016, was 12 years.

Less than10 years36.9%

10 years49.4%

30 years or more13.7%


The following chart shows, for each year, the maturity of the long-term debt as at March 31, 2016. For example, repayments of borrowings will amount to $14 466 million in 2016-2017 and $10 693 million in 2017-2018. The maturity of the debt goes up to 2076-2077.

CHART E.9

Maturity of the long-term debt as at March 31, 2016


Note: Direct debt of the general fund, debt issued to make advances to the Financing Fund and debt of

Financement-Québec.

14 466

10 693

15 819

13 453

10 429 10 909 11 356

9 117

12 360

8 153

1 467

3 730

293

2016-2017

2017-2018

2018-2019

2019-2020

2020-2021

2021-2022

2022-2023

2023-2024

2024-2025

2025-2026

2026-2036

2036-2046

2046-2077

annual average


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Pre-financing 2.3The government carries out pre-financing to take advantage of favourable market conditions. These are borrowings that would normally be contracted during the subsequent fiscal year.

In 2015-2016, the government carried out pre-financing totalling $8.5 billion. The average for the past ten years is $5.7 billion per year.

CHART E.10

Pre-financing (millions of dollars)

6 069

2 413

8 161

4 283 4 518 4 4363 485

5 805

9 6448 513

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016


Yield 2.4The yield on the Québec government’s long-term securities is currently about 2.0%, while that on short-term securities is roughly 0.6%.

CHART E.11

Yield on the Québec government’s securities (per cent)

Sources: PC-Bond and Ministère des Finances du Québec.

In addition, the substantial increase in the spread between the yield on Québec and federal government securities, observed starting in the summer of 2008 during the financial crisis, has narrowed considerably since then. However, the level of the spread has not returned to the levels observed prior to 2008. The same situation has also been observed in the case of the other provinces.

CHART E.12

Yield spread on long-term (10-year) securities (percentage points)

Source: PC-Bond.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Long-term (10-year) securities

3-month Treasury bills

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2004 2005 2006 2007 2008 20092010 2011 2012 2013 2014 2015 2016

Québec-Canada

Ontario-Canada

2010 2011 2012 2013 2014 2015 2016

1.8

1.6

1.4

1.2

1.0

0.8

0.6

0.0

0.2

0.4


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Debt management 2.5The government’s debt management strategy aims to minimize the cost of the debt while limiting the risks related to fluctuations in foreign exchange and interest rates.

The government uses a range of financial instruments, particularly interest rate and currency swap agreements, to achieve desired debt proportions by currency and interest rate.

Proportion of the gross debt in foreign currency

As at March 31, 2016, the proportion of the government’s gross debt in foreign currency, after taking into account interest rate and currency swap agreements, was nil.4 This proportion has been nil since 2013.

CHART E.13

Proportion of the gross debt in foreign currency as at March 31 (per cent)

Note: Gross debt including pre-financing.

4 As at March 31, 2016, before taking into account interest rate and currency swap agreements, the

proportion of the gross debt was 82.7% in Canadian dollars, 8.8% in U.S. dollars, 5.9% in euros, 1.3% in Swiss francs and 1.3% in other foreign currencies (yen, Australian dollars, and pounds sterling).

3.3

0.50.2 0.0 0.0 0.0 0.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014 2015 2016

6.0

5.0

4.0

3.0

2.0

1.0

0.0


Proportion of the gross debt at variable interest rates

The government keeps part of its debt at variable interest rates and part at fixed interest rates.

After taking into account interest rate and currency swap agreements, the proportion of the gross debt at variable interest rates was 10.7% as at March 31, 2016.

CHART E.14

Proportion of the gross debt at variable interest rates as at March 31(1)

(per cent)

Note: Gross debt including pre-financing. (1) The debt at variable interest rates includes variable interest rate financial instruments as well as fixed interest rate

financial instruments that mature in one year or less.

27.9

20.9

12.0 12.8 11.9 11.8 10.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2010 2011 2012 2013 2014 2015 2016


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Borrowings contracted 2.6

TABLE E.10

Québec government Summary of long-term borrowings in 2016-2017

Currency $ million %

CANADIAN DOLLAR

Bond issues 5 175 42.1

Variable interest rate notes 2 021 16.4

Immigrant investors 596 4.8

Savings products issued by Épargne Placements Québec 264 2.2

Subtotal 8 056 65.5

OTHER CURRENCIES

U.S. dollar 3 693 30.0

Australian dollar 468 3.8

Hong Kong dollar 89 0.7

Subtotal 4 250 34.5

TOTAL 12 306 100.0 Note: Borrowings contracted or negotiated as at October 19, 2016.


TABLE E.11

Québec government Borrowings contracted in 2016-2017 – General fund(1)

Amount received in Canadian dollars(2)

Face value in foreign currency

Interest rate(3)

Date of issue

Date of maturity

Price to investor

Yield to investor(4)

(millions) (%) ($) (%)

398 — 3.00 April 1 2023-09-01 107.431 1.920

507 — 2.50 April 4 2026-09-01 101.432 2.344

35 AU$35 3.70 April 12 2026-05-20 102.008 3.463

2 518 US$2 000 2.50 April 20 2026-04-20 99.701 2.534

506 — 2.50 April 26 2026-09-01 101.194 2.369

58 AU$60 3.70 April 28 2026-05-20 101.237 3.553

89(5) HK$540 1.95(6) May 5 2021-05-05 100.000 1.950(7)

39 AU$40 3.70 May 9 2026-05-20 102.896 3.358

20 AU$20 3.70 May 9 2026-05-20 102.767 3.373

547 — 3.50 May 31 2048-12-01 109.282 3.048

515 — 2.50 June 13 2026-09-01 103.064 2.164

102 AU$100 3.70 June 30 2026-05-20 105.314 3.073

79 AU$75 3.70 July 19 2026-05-20 108.226 2.740

250(5) — Variable(8) July 19 2022-04-19 100.000 Variable(9)

524 — 2.50 July 19 2026-09-01 104.821 1.972


1 175 US$900 Variable(8) July 21 2019-07-21 100.000 Variable(9)





575 — 3.50 July 26 2048-12-01 114.921 2.796

102(5) — Variable(8) August 4 2022-04-19 100.244 Variable(9)

87 AU$80 3.70 August 10 2026-05-20 108.049 2.755

565 — 3.50 September 21 2048-12-01 112.951 2.880

522 — 2.50 September 27 2026-09-01 104.380 2.011

48 AU$45 3.70 October 13 2026-05-20 107.509 2.803

516 — 2.50 October 19 2026-09-01 103.105 2.149


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TABLE E.11 (cont.)

Québec government Borrowings contracted in 2016-2017 – General fund(1)

Amount received in Canadian dollars (2)


Interest rate(3)

Date of issue

Date of maturity

Price to investor


(millions) (%) ($) (%)

264(10) — Various Various Various Various Various

596(11) — Zero coupon Various Various Various Various

12 306

Note: Borrowings contracted or negotiated as at October 19, 2016. (1) Includes borrowings contracted by the general fund to make advances to the Financing Fund and

Financement-Québec. (2) Borrowings in foreign currency given in Canadian equivalent of their value on the date of borrowing. (3) Interest payable semi-annually except if another frequency is indicated in a note. (4) Yield to investor is determined on the basis of interest payable semi-annually except if another frequency is

indicated in a note. (5) Private borrowings. (6) Interest payable annually. (7) Yield to investor is determined on the basis of interest payable annually. (8) Interest payable quarterly. (9) Yield to investor is determined on the basis of interest payable quarterly. (10) Savings products issued by Épargne Placements Québec. (11) Immigrant investors.


TABLE E.12

Borrowings contracted in 2016 by Hydro-Québec

Amount received in Canadian dollars(1)


Interest rate(2)

Date of issue

Date of maturity

Price to investor


(millions) (%) ($) (%)

17 — 1.020 March 1 2019-03-01 100.000 1.020

5 — Zero coupon April 28 2022-04-15 89.049 1.963

996 — 1.000 May 25 2019-05-25 99.606 1.134

100 — Variable(4) August 26 2019-12-01 99.973 Variable(5)



2 018

Note: Borrowings contracted from January 1 to October 19, 2016. (1) Borrowings in foreign currency given in Canadian equivalent of their value on the date of borrowing. (2) Interest payable semi-annually except if another frequency is indicated in a note. (3) Yield to investor is determined on the basis of interest payable semi-annually except if another frequency is

indicated in a note. (4) Interest payable quarterly. (5) Yield to investor is determined on the basis of interest payable quarterly.


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3. INFORMATION ON THE RETIREMENT PLANS AND ON FUNDS DEPOSITED BY THE MINISTÈRE DES FINANCES WITH THE CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

Retirement plans 3.1The Québec government participates financially in the retirement plans of its employees.

These plans had 592 797 active participants and 366 719 beneficiaries as at December 31, 2015.

TABLE E.13

Retirement plans of public and parapublic sector employees as at December 31, 2015

Active

participants Beneficiaries

Government and Public Employees Retirement Plan (RREGOP) 545 932 262 897

Pension Plan of Management Personnel (PPMP) and Retirement Plan for Senior Officials (RPSO) 27 747 30 152

Other plans:

– Teachers Pension Plan (TPP)(1) and Pension Plan of Certain Teachers (PPCT)(1) 38 42 685

– Civil Service Superannuation Plan (CSSP)(1) 8 18 473

– Superannuation Plan for the Members of the Sûreté du Québec (SPMSQ) 5 625 5 274

– Pension Plan of Peace Officers in Correctional Services (PPPOCS) 4 048 1 910

– Pension Plan of the Judges of the Court of Québec and of Certain Municipal Courts (PPJCQM) 294 368

– Pension Plan for Federal Employees Transferred to Employment with the Gouvernement du Québec (PPFEQ)(2) 142 195

– Pension Plan of the Members of the National Assembly (PPMNA) 122 427

– Pension Plan of the Université du Québec (PPUQ) 8 841 4 338

Total for other plans 19 118 73 670

TOTAL 592 797 366 719 (1) These plans have not accepted any new participants since July 1, 1973. (2) This plan has not accepted any new participants since it came into effect on January 1, 1992. Source: Public Accounts 2015-2016.


Summary description of the retirement plans

The retirement plans of public and parapublic sector employees are defined benefit retirement plans. Benefits are calculated on the basis of participants’ average income for the best paid years (generally five) and their number of years of service. The pension usually represents 2% of an employee’s average income per year of service. Benefits are partially indexed to inflation.

RREGOP and the PPMP, which account for nearly 97% of active participants, are cost-sharing plans: the government is responsible for paying 50% of the benefits, and the participants are responsible for paying the other 50%.5

Most of the other retirement plans are cost-balance plans. The government covers the cost of these plans, net of contributions paid by participants.

Retraite Québec is responsible for administering the retirement plans.6

TABLE E.14

Change in the employee contribution rate of certain retirement plans (per cent)

RREGOP(1) PPMP(2) SPMSQ(3) PPPOCS(4)

2004 5.35 4.50 8 / 6.2 / 8 4.00

2005 to 2007 7.06 7.78 8 / 6.2 / 8 4.00

2008 to 2010 8.19 10.54 8 / 6.2 / 8 4.00

2011 8.69 11.54 8 / 6.2 / 8 4.00

2012 8.94 12.30 8 / 6.2 / 8 4.00

2013 9.18 12.30 8 / 6.2 / 8 6.50

2014 9.84 14.38 8 / 6.2 / 8 8.30

2015 10.50 14.38 8 / 6.2 / 8 9.30

2016 11.12 14.38 8 / 6.2 / 8 9.63 (1) For 2004 to 2012, rate applicable to the excess of 35% of maximum pensionable earnings (MPE), which is

determined in accordance with the Act respecting the Québec Pension Plan. Between 2012 and 2015, the contribution formula changed, gradually reducing the exemption from 35% to 25% of the MPE. For 2016, the rate applies to the excess of 25% of the MPE. In 2016, the MPE is $54 900.

(2) Rate applicable to the excess of 35% of the MPE. (3) Rate applicable up to the annual basic exemption under the Québec Pension Plan (QPP) ($3 500) / rate

applicable to the excess up to the amount of the MPE / rate applicable to the excess of the MPE. (4) Rate applicable to the excess of 25% of the employee’s salary or of 25% of the MPE if it is lower.

5 This cost-sharing formula has been in effect since July 1, 1982. Previously, the government was

responsible for payment of 7/12 of the benefits (58.3%). 6 Except for the PPUQ.


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Changes to the plans

In 2010, the government modified RREGOP and the PPMP to enable participants to accumulate up to 38 years of service. This change, which was agreed upon during the renewal of the collective agreements with government employees, was aimed at ensuring that employees nearing the end of their career stay longer in the labour market, thus facilitating the transfer of expertise.

The PPMP was also modified with the adoption of Bill 58 by the National Assembly in 2012. The changes included in the bill were the product of consultations with participant representatives and included several amendments fostering the financial health of the PPMP. In particular, the pension eligibility criteria were tightened. Accordingly, since January 1, 2013, new participants must complete an additional five-year period of membership in the plan for their retirement benefit to be calculated in accordance with the provisions of the PPMP. In addition, the reduction of the benefit for early retirement has been increased.

New changes were agreed upon for RREGOP in the agreement in principle reached on December 17, 2015. The age of eligibility for a pension without reduction will be raised to 61 years. In addition, the reduction applicable in the case of early retirement for RREGOP participants will be increased (from 4.0% to 6.0% per year). These changes will take effect in 2019 and 2020, respectively.

Retirement plans liability 3.1.1

In its financial statements, the government discloses the present value of the retirement benefits it will pay to its employees, taking into account the conditions governing their plans as well as their years of service. This value is called the retirement plans liability. It does not take into account the sums accumulated to pay retirement benefits, particularly the Retirement Plans Sinking Fund (RPSF), which will be discussed later on.

The actuarial valuations of the liability of the various retirement plans are carried out by Retraite Québec,7 following the rules of the Canadian Institute of Actuaries (CIA) and the Chartered Professional Accountants of Canada (CPA Canada) for the public sector.

As at March 31, 2016, the liability for the retirement plans of public and parapublic sector employees stood at $86 436 million (net of the plans’ assets). This amount is recognized in the government’s gross debt.

7 Except in the case of the PPUQ, whose liability valuation is performed by a private-sector

actuarial firm.


TABLE E.15

Retirement plans liability as at March 31, 2016 (millions of dollars)

Government and Public Employees Retirement Plan (RREGOP) 54 903

Pension Plan of Management Personnel (PPMP) and Retirement Plan for Senior Officials (RPSO) 12 962

Other plans:

– Teachers Pension Plan (TPP) and Pension Plan of Certain Teachers (PPCT) 10 762

– Civil Service Superannuation Plan (CSSP) 3 412

– Superannuation Plan for the Members of the Sûreté du Québec (SPMSQ) 4 016

– Pension Plan of the Université du Québec (PPUQ) 3 657

– Pension Plan of Peace Officers in Correctional Services (PPPOCS) 555

– Pension Plan of the Judges of the Court of Québec and of Certain Municipal Courts (PPJCQM) 620

– Pension Plan of the Members of the National Assembly (PPMNA) 205

– Pension Plan for Federal Employees Transferred to Employment with the Gouvernement du Québec (PPFEQ) 156

– Assets of the plans(1) −4 812

Total for other plans 18 571

RETIREMENT PLANS LIABILITY 86 436 (1) Plans’ assets, particularly those of the PPFEQ, SPMSQ and PPUQ.


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Annual retirement plans expenditure

Every year, the government also records its expenditure as an employer with regard to the retirement plans. This expenditure comprises two components:

— the net cost of vested benefits, namely, the present value of retirement benefits that employees have accumulated for work performed during the year, net of contributions paid, that is, $2 268 million in 2015-2016;

— the amortization of revisions to the government’s actuarial obligations arising from previous updates of actuarial valuations, for a cost of $869 million in 2015-2016.

In 2015-2016, government spending in respect of the retirement plans thus stood at $3 137 million.

TABLE E.16

Spending in respect of the retirement plans (millions of dollars)

2015-2016

Net cost of vested benefits 2 268

Amortization of revisions stemming from actuarial valuations 869

SPENDING IN RESPECT OF THE RETIREMENT PLANS 3 137


Retirement Plans Sinking Fund 3.1.2

The Retirement Plans Sinking Fund (RPSF) is an asset that was created in 1993 for the purpose of paying the retirement benefits of public and parapublic sector employees.

As at March 31, 2016, the RPSF’s book value stood at $59 738 million.

TABLE E.17

Change in the Retirement Plans Sinking Fund (RPSF) (millions of dollars)

Book value,

beginning of year Deposits Imputed

investment income Book value, end of year

1993-1994 — 850 4 854

1994-1995 854 — −5 849

1995-1996 849 — 74 923

1996-1997 923 — 91 1 014

1997-1998 1 095(1) — 84 1 179

1998-1999 1 179 944 86 2 209

1999-2000 2 209 2 612 219 5 040

2000-2001 5 040 1 607 412 7 059

2001-2002 7 059 2 535 605 10 199

2002-2003 10 199 900 741 11 840

2003-2004 11 840 1 502 862 14 204

2004-2005 14 204 3 202 927 18 333

2005-2006 18 333 3 000 1 230 22 563

2006-2007 22 437(1) 3 000 1 440 26 877

2007-2008 26 877 3 000 1 887 31 764

2008-2009 31 749(2) 2 100 2 176 36 025

2009-2010 36 025 — 2 175 38 200

2010-2011 38 200 2 000 2 065 42 265

2011-2012 42 265 1 000 2 087 45 352

2012-2013 45 352 1 000 1 992 48 344

2013-2014 48 344 1 000 1 989 51 333

2014-2015 51 333 1 500 2 430 55 263

2015-2016 55 263 1 500 2 975 59 738 (1) These amounts take into account restatements arising from the government accounting reforms of 1997-1998

and 2006-2007. (2) This amount takes into account an adjustment arising from consideration of the expected average remaining

service life (EARSL) of participants in the PPMP.


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As at March 31, 2016, the market value of the RPSF was higher than its book value.

TABLE E.18

Book value and market value of the Retirement Plans Sinking Fund (RPSF) as at March 31 (millions of dollars)

Book value Market value Difference

1994-1995 849 831 18

1995-1996 923 954 −31

1996-1997 1 014 1 095 −81

1997-1998 1 179 1 321 −142

1998-1999 2 209 2 356 −147

1999-2000 5 040 5 703 −663

2000-2001 7 059 7 052 7

2001-2002 10 199 9 522 677

2002-2003 11 840 9 240 2 600

2003-2004 14 204 12 886 1 318

2004-2005 18 333 17 362 971

2005-2006 22 563 23 042 −479

2006-2007 26 877 28 859 −1 982

2007-2008 31 764 32 024 −260

2008-2009 36 025 25 535 10 490

2009-2010 38 200 29 559 8 641

2010-2011 42 265 35 427 6 838

2011-2012 45 352 38 222 7 130

2012-2013 48 344 42 562 5 782

2013-2014 51 333 49 034 2 299

2014-2015 55 263 57 432 −2 169

2015-2016 59 738 60 084 −346


Amounts deposited in the RPSF have no impact on the gross debt

The government issues bonds on financial markets in order to make deposits in the RPSF. Nevertheless, the amounts deposited in the RPSF do not affect the government’s gross debt.

Even though the borrowings contracted to make deposits increase the direct debt, these deposits reduce the net retirement plans liability by the same amount. Therefore, the net impact on the gross debt is nil.

TABLE E.19

Illustration of the impact on the government’s gross debt of borrowing $1 billion on financial markets in order to deposit it in the RPSF(1)


Before

deposit After

deposit Change

(A) Consolidated direct debt 185 124 186 124 1 000

Retirement plans liability 86 436 86 436 —

Less: Book value of the RPSF −59 738 −60 738 −1 000

(B) Net retirement plans liability 26 698 25 698 −1 000

(C) Net employee future benefits liability 47 47 —

(D) Less: Generations Fund −8 522 −8 522 —

(E) GROSS DEBT (E = A + B + C + D) 203 347 203 347 — (1) This illustration is based on results as at March 31, 2016.


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A decline in debt service

Deposits in the RPSF entail a reduction in the government’s debt service. Indeed, the rates of return on funds managed by the Caisse de dépôt et placement du Québec are generally higher than interest rates on Québec government bonds issued to finance deposits in the RPSF. Therefore, the income of the RPSF, which is applied against the government’s debt service, is usually higher than the additional interest charge that arises from new borrowings. This leads to a net decrease in the government’s debt service.

Since the RPSF was created, the return obtained by the Caisse has been higher than the cost of new borrowings by the government 17 years out of 22.

TABLE E.20

Comparison of the RPSF’s annual return and the Québec government’s borrowing costs (per cent, on a calendar year basis)

Return of the RPSF Cost of new borrowings(1) Difference

(percentage points)

1994 −3.3(2) 9.2 −12.5

1995 17.0 8.9 8.1

1996 16.1 7.7 8.4

1997 13.4 6.5 6.9

1998 10.4 5.8 4.6

1999 15.3 6.0 9.3

2000 7.2 6.5 0.7

2001 −4.7 6.1 −10.8

2002 −8.5 5.8 −14.3

2003 14.9 5.2 9.7

2004 11.4 5.0 6.4

2005 13.5 4.5 9.0

2006 13.5 4.6 8.9

2007 5.2 4.7 0.5

2008 −25.6 4.5 −30.1

2009 10.7 4.4 6.3

2010 13.4 4.1 9.3

2011 3.5 3.7 −0.2

2012 9.4 3.0 6.4

2013 12.6 3.3 9.3

2014 11.9 3.2 8.7

2015 8.3 2.4 5.9 (1) The government’s borrowing costs correspond to the yield on 10-year maturity Québec bonds. (2) From February to December 1994. Source: PC-Bond for the yield on 10-year maturity Québec bonds.


A flexible deposit policy

In December 1999, as part of the agreement concluded for the renewal of its employees’ collective agreements, the government set the objective that the book value of the amounts accumulated in the RPSF would be equal, in 2020, to 70% of its actuarial obligations in regard to the retirement plans of public and parapublic sector employees.

However, the government has all the necessary flexibility in applying this policy. Deposits in the RPSF are made only when market conditions are favourable, particularly with respect to interest rates and market receptiveness to bond issues.

As at March 31, 2016, the RPSF’s book value represented 65% of the government’s actuarial obligations in regard to the retirement plans of public and parapublic sector employees.

CHART E.15

Book value of the RPSF in proportion to the government’s actuarial obligations regarding the retirement plans of public and parapublic sector employees (per cent)

6570

0

10

20

30

40

50

60

70

80

90

100

1999-2000 2003-2004 2007-2008 2011-2012 2015-2016 2019-2020

Objective


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Generations Fund 3.2The following table shows the book and market values of the Generations Fund since its creation. As at March 31, 2016, the market value of the Generations Fund was higher than its book value.

TABLE E.21

Book value and market value of the Generations Fund as at March 31 (millions of dollars)

Book value Market value Difference

2006-2007(1) 584 576 8

2007-2008 1 233 1 147 86

2008-2009 1 952 1 598 354

2009-2010 2 677 2 556 121

2010-2011 3 437 3 524 −87

2011-2012 4 277 4 375 −98

2012-2013 5 238 5 550 −312

2013-2014 5 659 6 299 −640

2014-2015 6 938 8 182 −1 244

2015-2016 8 522 9 562 −1 040

(1) The first deposit in the Generations Fund was made on January 31, 2007.

Since the first deposit was made in the Generations Fund in January 2007, the return has been higher than the cost of new borrowings by the government eight years out of nine.

TABLE E.22

Comparison of the Generations Fund’s annual return and the Québec government’s borrowing costs (per cent, on a calendar year basis)

Return of the

Generations Fund Cost of new borrowings(1)

Difference (percentage points)

2007 5.6(2) 4.7 0.9

2008 −22.4 4.5 −26.9

2009 11.3 4.4 6.9

2010 12.3 4.1 8.2

2011 4.0 3.7 0.3

2012 8.4 3.0 5.4

2013 12.0 3.3 8.7

2014 11.7 3.2 8.5

2015 8.1 2.4 5.7 (1) The government’s borrowing costs correspond to the yield on 10-year maturity Québec bonds. (2) Return realized from February to December 2007, given that the first deposit was made in the Generations Fund

on January 31, 2007. Source: PC-Bond for the yield on 10-year maturity Québec bonds.


Returns of the Caisse de dépôt et placement du Québec 3.3on funds deposited by the Ministère des Finances

In 2015, the return on funds deposited by the Ministère des Finances with the Caisse de dépôt et placement du Québec was 8.30% for the RPSF, 8.13% for the Generations Fund and 8.31% for the Accumulated Sick Leave Fund. The investment policy of these funds is presented in the box on page E.47.

TABLE E.23

Market value and return in 2015 on funds deposited with the Caisse de dépôt et placement du Québec by the Ministère des Finances

Return Market value as at

December 31, 2015

(%) ($ million)

Retirement Plans Sinking Fund (RPSF) 8.30 59 307

Generations Fund 8.13 9 036

Accumulated Sick Leave Fund (ASLF) 8.31 1 018

Retirement Plans Sinking Fund 3.3.1

The RPSF posted a return of 8.30% in 2015. Its market value was $59 307 million as at December 31, 2015.

The assets of the RPSF are managed by the Caisse in accordance with an investment policy established by the Ministère des Finances in cooperation with the Caisse. This investment policy is established taking several factors into account, including 10-year return, standard deviation and correlation forecasts for various categories of assets, opportunities for investing in these assets and recommendations of the Caisse.

The investment policy of the RPSF consists of 33.5% fixed-income securities (bonds, real estate debt, etc.), 18.0% inflation-sensitive investments (real estate and infrastructure) and 48.5% equities. These weightings are similar to those used on average by the Caisse’s depositors as a whole.


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TABLE E.24

Investment policy of the RPSF as at July 1, 2016 (per cent)

Benchmark portfolio

of the RPSF Average benchmark portfolio

of depositors as a whole(1) Fixed-income securities 33.5 34.2

Inflation-sensitive investments 18.0 17.5

Equities 48.5 48.3

TOTAL 100.0 100.0 (1) Data as at December 31, 2015 drawn from Annual Report 2015 of the Caisse de dépôt et placement du Québec.

With its investment policy, the RPSF is expected to generate an annual return of 6.35%. It is important to note that the RPSF’s investment policy is based on a long-term horizon and constitutes the benchmark portfolio for the Caisse. However, through active management, the Caisse adjusts the allocation of the RPSF’s assets, particularly to take fluctuations in the economic and financial situation into account.


Generations Fund 3.3.2

The Generations Fund posted a return of 8.13% in 2015. Its market value was $9 036 million as at December 31, 2015.

The assets of the Generations Fund are managed by the Caisse in accordance with an investment policy established by the Ministère des Finances in cooperation with the Caisse. This investment policy is established taking several factors into account, including 10-year return, standard deviation and correlation forecasts for various categories of assets, opportunities for investing in these assets and recommendations of the Caisse.

The investment policy of the Generations Fund consists of 38.5% fixed-income securities (bonds, real estate debt, etc.), 16.0% inflation-sensitive investments (real estate and infrastructure) and 45.5% equities.

TABLE E.25

Investment policy of the Generations Fund as at July 1, 2016 (per cent)

Benchmark portfolio of the

Generations Fund Average benchmark portfolio

of depositors as a whole(1) Fixed-income securities 38.5 34.2

Inflation-sensitive investments 16.0 17.5

Equities 45.5 48.3

TOTAL 100.0 100.0 (1) Data as at December 31, 2015 drawn from Annual Report 2015 of the Caisse de dépôt et placement du Québec.

Accumulated Sick Leave Fund 3.3.3

The Accumulated Sick Leave Fund (ASLF) posted a return of 8.31% in 2015. Its market value was $1 018 million as at December 31, 2015.

The assets of the ASLF are managed by the Caisse in accordance with an investment policy established by the Ministère des Finances in cooperation with the Caisse. The ASLF’s investment policy is identical to that of the RPSF.8

8 The difference in relation to the return of the RPSF in 2015 (8.30% for the RPSF compared

with 8.31% for the ASLF) is due to asset allocation adjustments made by the Caisse.


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Comparison of investment policies

Investment policies as at July 1, 2016 (per cent)

Specialized portfolios RPSF and

ASLF Generations

Fund

Average benchmark portfolio of depositors

as a whole(1)

Short-Term Investments 1.0 1.0 1.1

Bonds 28.5 33.5 26.7

Long-Term Bonds 0.0 0.0 1.0

Real Estate Debt 4.0 4.0 5.4

Total – Fixed Income 33.5 38.5 34.2

Real Return Bonds 0.0 0.0 0.4

Infrastructure 6.5 6.0 5.4

Real Estate 11.5 10.0 11.7

Total – Inflation-Sensitive Investments 18.0 16.0 17.5

Public Equity(2) 35.5 34.5 36.9

Private Equity 13.0 11.0 11.4

Total – Equity 48.5 45.5 48.3

TOTAL 100.0 100.0 100.0

RPSF: Retirement Plans Sinking Fund. ASLF: Accumulated Sick Leave Fund. (1) Data as at December 31, 2015, drawn from Annual Report 2015 of the Caisse de dépôt et placement du

Québec. (2) Since January 1, 2016, the Caisse has grouped its Public Equity portfolios into a global portfolio including

several mandates (35% Global Quality Equity, 25% Canada, 20% Alternative weightings, 15% Growth Markets and 5% Relationship investing).


Interest on the retirement plans liability 3.4The government records an interest charge on the retirement plans liability. This stems from the fact that, historically, it decided to manage its contributions to the retirement plans of its employees internally rather than have an external fund manage them. This reduced borrowings on financial markets and growth in the direct debt. On the other hand, the commitments in respect of the retirement plans of government employees are shown as a liability and the government must record an interest charge calculated on the value of the actuarial obligations in respect of these plans. However, the investment income of the RPSF must be subtracted from this amount. The interest charge on the retirement plans liability is included in the government’s debt service.

TABLE E.26

Interest on the retirement plans liability (millions of dollars)

2015-2016

Interest on the actuarial obligations relating to the retirement plans(1) 5 709

Less: Investment income of the RPSF −2 975

INTEREST ON THE RETIREMENT PLANS LIABILITY 2 734 (1) Net of the income of specific funds of the plans.

Accounting of the investment income of the RPSF

The returns realized by the Caisse de dépôt et placement du Québec on the RPSF are taken into account in the government’s balance sheet and results.

In accordance with generally accepted accounting principles (GAAP), the RPSF is valued at a market-related value, namely, the adjusted market value. The adjusted market value of the RPSF is adjusted every year based on realized returns.

If, for a given year, the realized return differs from the anticipated long-term return, the difference between the two is spread over five years. All other things being equal, this means that the adjusted market value and the market value will converge over a five-year period. It is important to note that this method is applied when returns are higher than expected as well as when they are lower.

The investment income imputed to the RPSF corresponds to the anticipated return on the adjusted market value as at March 31 of the preceding fiscal year plus the amortization of differences in return for previous fiscal years. These differences in return are amortized over a period of about 14 years, that is, the expected average remaining service life (EARSL) of retirement plan participants.

Owing to the method used, differences in return are fully incorporated into the book value of the RPSF after 19 years. This amortization mechanism and the period used are prescribed by GAAP.


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4. CREDIT RATINGS

The Québec government’s credit ratings 4.1A borrower’s credit rating measures its capacity to pay the interest on its debt and repay the principal at maturity. To establish the credit rating of a borrower like the Québec government, credit rating agencies analyze a series of factors. Among the main factors are the size, structure and vitality of the economy, the situation on the labour market, fiscal competitiveness and the budgetary situation, as well as debt and liquidity levels.

To express the quality of a borrower’s credit, credit rating agencies use rating scales, namely, a scale for long-term debt and a scale for short-term debt.


The following table shows the rating scales used by agencies for long-term debt. The current credit ratings for Québec are indicated in bold.

TABLE E.27

Credit rating scales for long-term debt

Definition Moody’s Standard &

Poor’s DBRS Fitch Japan Credit

Rating Agency

Extremely strong capacity to pay interest and repay principal.

Aaa AAA AAA AAA AAA

Very strong capacity to pay interest and repay principal.

Aa1 Aa2 Aa3

AA+ AA AA−

AA (high) AA AA (low)

AA+ AA AA−

AA+ AA AA−

Strong capacity to pay interest and repay principal, despite greater sensitivity to economic conditions than levels AAA and AA.

A1 A2 A3

A+ A A−

A (high) A A (low)

A+ A A−

A+ A A−

Adequate capacity to pay interest and repay principal. Difficult economic conditions may reduce this capacity.

Baa1 Baa2 Baa3

BBB+ BBB BBB−

BBB (high) BBB BBB (low)

BBB+ BBB BBB−

BBB+ BBB BBB−

Uncertain capacity to pay interest and repay principal, particularly under difficult economic conditions.

Ba1 Ba2 Ba3

BB+ BB BB−

BB (high) BB BB (low)

BB+ BB BB−

BB+ BB BB−

Very uncertain capacity to pay interest and repay principal, particularly under difficult economic conditions.

B1 B2 B3

B+ B B−

B (high) B B (low)

B+ B B−

B+ B B−


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Credit rating agencies add an "outlook" to the rating that indicates the trend the credit rating may follow in the future. The outlook may be positive, stable or negative. In the case of Québec, two changes occurred in this regard in June 2016.

First, the Standard & Poor’s (S&P) credit rating agency improved the outlook related to Québec’s credit rating, by raising it from “stable” to “positive.” In its report, S&P explained that this improvement stemmed from the fact that Québec had returned to a balanced budget through responsible management of spending. S&P also underscored the strength of the Québec economy, which includes large sectors such as aerospace, transport, telecommunications and aluminium production.

Second, the Fitch credit rating agency also improved the outlook related to Québec’s credit rating, by raising it from “negative” to “stable” due to the return to a balanced budget. Fitch had lowered this outlook in December 2013, following the postponement of the return to a balanced budget to 2015-2016, announced in November 2013.

Moody’s, DBRS and Japan Credit Rating Agency (JCR) assign a stable outlook to Québec’s credit rating.

TABLE E.28

The Québec government’s credit ratings

Credit rating agency Credit rating Outlook in 2015

Outlook in 2016

Moody’s Aa2 Stable Stable

Standard & Poor’s (S&P) A+ Stable Positive

DBRS A (high) Stable Stable

Fitch AA− Negative Stable

Japan Credit Rating Agency (JCR) AA+ Stable Stable


The following table shows the rating scales used by agencies for short-term debt. The current credit ratings for Québec are indicated in bold.

TABLE E.29

Credit rating scales for short-term debt(1)

Definition Moody’s Standard &

Poor’s DBRS Fitch

Very strong capacity to pay interest and repay principal over the short term.

P−1 A−1+ A−1

R−1 (high) R−1 (middle) R−1 (low)

F1+ F1

Very adequate capacity to pay interest and repay principal over the short term, despite greater sensitivity to economic conditions than the upper level.

P−2 A−2 R−2 (high) F2

Adequate capacity to pay interest and repay principal over the short term. Difficult economic conditions may reduce this capacity.

P−3 A−3 R−2 (middle) R−2 (low) R−3

F3

Uncertain capacity to pay interest and repay principal over the short term. Securities in this category are considered speculative securities.

Not Prime(2)

B−1 B−2 B−3 C

R−4 R−5

B C

Incapacity to pay interest and repay principal over the short term. Securities in this category are considered default securities.

Not Prime(2) D D D

(1) JCR does not assign a short-term credit rating to Québec. (2) Moody’s uses the “Not Prime” category for all securities not included in the upper categories.


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Change in Québec’s credit ratings

The following charts show the change in the Québec government’s credit ratings. The credit ratings for 2016 are those in effect as at October 19, 2016.

CHART E.16

Credit rating assigned to Québec by Moody’s

CHART E.17

Credit rating assigned to Québec by Standard & Poor’s

30

40

50

60

70

80

90

100

2000 2002 2004 2006 2008 2010 2012 2014 2016

Aaa

Aa1

Aa2

Aa3

A1

A2

A3

Baa1

30

40

50

60

70

80

90

100

2000 2002 2004 2006 2008 2010 2012 2014 2016

AAA

AA+

AA

AA−

A+

A

A−

BBB+


CHART E.18

Credit rating assigned to Québec by DBRS

(1) The credit rating was raised from A (low) to A on June 14, 2000.

CHART E.19

Credit rating assigned to Québec by Fitch

Note: Fitch’s credit rating agency has assigned Québec a credit rating since 2002.

30

40

50

60

70

80

90

100

2000 2002 2004 2006 2008 2010 2012 2014 2016

AAA

AA (high)

AA

AA (low)

A (high)

A

A (low)

BBB (high)2000(1)

30

40

50

60

70

80

90

100

2002 2004 2006 2008 2010 2012 2014 2016

AAA

AA+

AA

AA−

A+

A

A−

BBB+


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CHART E.20

Credit rating assigned to Québec by JCR

30

40

50

60

70

80

90

100

2000 2002 2004 2006 2008 2010 2012 2014 2016

AAA

AA+

AA

AA−

A+

A

A−

BBB+


Comparison of the credit ratings of the Canadian 4.2provinces

The following charts show the credit ratings of the Canadian provinces as at October 19, 2016. No chart is given for JCR since Québec is the only province that receives a credit rating from that agency.

CHART E.21

Credit rating of the Canadian provinces – Moody’s

(1) Negative outlook.

CHART E.22

Credit rating of the Canadian provinces – Standard & Poor’s

(1) Negative outlook. (2) Positive outlook.

Aaa AaaAa1

Aa2 Aa2 Aa2 Aa2 Aa2 Aa2Aa3

B.C. Sask. Alta. Qué. Man. Ont. N.B. N.S. P.E.I. N.L.(1)(1)

AAAAA+

AAAA-

A+ A+ A+ A+A A

B.C. Sask. Alta. Man. Qué. Ont. N.B. N.S. P.E.I. N.L.(1) (1)(1) (1) (2)


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CHART E.23

Credit rating of the Canadian provinces – DBRS

CHART E.24

Credit rating of the Canadian provinces – Fitch

Note: British Columbia, Saskatchewan, Québec and Ontario are the only provinces that receive credit ratings from this agency.

AA (high) AA (high)

AA

AA (low)

A (high) A (high) A (high) A (high)

A (low) A (low)

B.C. Alta. Sask. Ont. Qué. Man. N.B. N.S. P.E.I. N.L.

AAA

AAAA− AA−

B.C. Sask. Qué. Ont.

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OCTOBER 2016 UPDATE

THE QUÉBECECONOMICPLAN

the québec economic plan – october 2016 update€¦ · october 2016 update of the québec...

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