Premier Jean Charest had warned that Quebec’s 2008-09 budget, brought down Mar. 13, would not be flamboyant and Finance Minister Monique Jérôme-Forget called it one of “prudence and discipline.”

In keeping with the province’s balanced budget law, this is a zero-deficit budget. But it took a bit of creative accounting to balance the $63.9-billion spending plan for the new fiscal year.

Without the $1.8-billion reserve created by setting aside $1.3 billion from Quebec’s $1.9-billion surplus in 2006-07 and a $517-million net surplus in the fiscal year ended Mar. 31, Jérôme-Forget would have faced a $1.4-billion deficit in 2008-09.

She has stashed away the $447 million remaining from the reserve to offset an expected shortfall in 2009-10.

The reserve was created largely by Hydro-Québec, the government’s wholly-owned public utility, which raised about $900 million in 2006-07 through the sale of international assets in Latin America and China.

Higher than anticipated income tax revenue, thanks to record participation in the labour market, also contributed to the 2007-08 surplus.

Hydro-Québec, which makes huge windfall profits on its sales of electricity on the U.S. spot market, already pays the government a 50% dividend. In her budget, Jérôme-Forget announced that the province is raising its take to 75% of the utility’s profit stream.

Jérôme-Forget’s main worry for 2008-09 is the economic slowdown in the U.S. While domestic demand is holding, so far, she has revised her growth projection downward to 1.5%.

Consumption in 2008-09 is getting a boost from the $950-million tax cut in her first budget, effective in the 2008 tax year, plus the Harper government’s second, one-percentage-point reduction in the GST.

Adding to these tax cuts, Quebec’s $6 billion in infrastructure spending and the start of Hydro-Québec’s 10-year, $30-billion investment plan account for 1.2% of the 1.5% increase this year.

The Charest government was re-elected in the spring of 2007 on a promise to reduce income taxes by $250 million a year for five years. Thanks to new transfers from federal Finance Minister Jim Flaherty’s 2007-08 budget, Charest was able to top up his first tax cut by $700 million a week before the vote.

In her latest budget, Jérôme-Forget boasts that she has not raised taxes, adding that the gap between Quebec’s higher taxes and the Canadian average has been narrowed by 70% since 2003, when Charest was first elected. But the budget does not cut taxes, either, and the provincial government’s commitment to consecutive $250-million tax cuts has fallen by the wayside.

When Charest said days before his government’s budget was brought down that it was “not going to be exciting,” his message was for the other two parties in Quebec’s minority national assembly: “There is not going to be anything in this budget that will be so offensive to one of the Opposition parties that they would say: ‘I want to go into an election campaign’.”

Although the smaller Parti Québécois charged that the budget marked the return to deficit financing — denouncing Jérôme-Forget’s plan to boost the Hydro-Québec dividend — the official Opposition, the Action démocratique du Québec, signalled that it would vote for the budget.

In pre-budget consultations, the ADQ called for more spending on Quebec families. The government’s answer was a commitment to add 20,000 more $7 daycare spaces to the present 200,000 — plus more tax credits for families with children and seniors relying on homecare.

An innovation in this budget is the creation of two funds in partnership with the family of Vidéotron Ltée founder André Chagnon. The Chagnon Foundation will contribute $250 million toward a $400-million fund to help children under the age of five with development problems related to poverty, and also pay $50 million of a $200-million fund to assist unpaid relatives who stay at home to help seniors.

The ADQ said right away it would support the budget, saying it was impressed that the finance minister had adopted generally accepted accounting principles.

The effect of adopting GAAP is that previously excluded deficits relating to health and education, which had cost the government $853 million in 2007-08, were included in the 2007-08 balance sheet. But even with this hit, the province still ended the fiscal year with a surplus.

The price for PQ support was more spending on education, forestry and manufacturing. The government met the PQ partway, promising another $453 million a year for post-secondary education and more than planned for manufacturing.

@page_break@Jérôme-Forget says PQ demands that she immediately lift Quebec’s capital taxes would have cost the government $1 billion a year. But she did offer Quebec’s 14,300 manufacturing enterprises a $220-million break by abolishing the capital taxes they pay.

Pursuing her own productivity agenda, Jérôme-Forget announced a new investment tax credit for the purchase of manufacturing and processing equipment of 5%, rising to 20%, 30% and 40%, depending on how far the investment is from Montreal and other areas in which manufacturing is well established.

From the $717-million surplus this past year, $200 million was deposited in the Generations Fund, created two years ago to offset Quebec’s huge public debt.

Funded by the government’s surpluses, the royalties Hydro-Québec pays on the water it uses to generate electricity and investment income earned on the fund’s total deposits, the fund stands at about $1.2 billion and will grow to more than $2.7 billion by the end of 2010.

Quebec’s total debt as of Mar. 31 was $144.9 billion, after deducting total deposits in the Generations Fund. The province’s debt is 48.4% of its gross domestic product. Factoring in deposits to the Generations Fund, rather than paying down debt, will lower debt as a percentage of GDP.

Charest says he will not ramp up infrastructure spending beyond the planned $6 billion this year, even if the slowdown worsens. The infrastructure spending and Hydro-Québec’s development plan have been conceived to counter such a downturn, he explains. IE