(Adds details on budget, bond reaction, quotes from economist)
By Allison Lampert
QUEBEC CITY, March 28 (Reuters) - Quebec's government on Tuesday said it would cut taxes and extend a prior debt-fighting commitment, while balancing the Canadian province's books in 2017-18 for the third straight year.
Finance Minister Carlos Leitao pledged C$1 billion in Quebec's C$106 billion budget to lower taxes and said his government would invest C$2.5 billion into a fund aimed at reducing the debt.
The budget, while "prudent," will increase program spending by about 4 percent at a time of comparatively low unemployment and strong growth in Canada's second-largest province, he said.
Elected in 2014, Quebec's Liberals promised balanced budgets from 2015 through 2020 after six years of deficits. On Tuesday, Leitao pledged balanced budgets for the next five years.
"Public service on credit is not a sustainable policy," he told reporters.
Quebec has one of the highest public debt loads of any province, and nearly C$10 billion was dedicated to a fund for debt servicing in the C$102.5 billion budget in 2016-17.
"It's the second year that the debt burden is declining," said Sebastien Lavoie, chief economist at Laurentian Bank Securities. "It's not every jurisdiction where that's happening."
Quebec expects its debt-fighting Generations fund, with an expected book value of C$13 billion in 2017-18, to grow to almost C$27 billion in 2021.
Infrastructure spending will grow from C$8.9 billion in 2016-17 to C$9.6 billion in 2017-18, enabling the extension of the Montreal metro.
Quebec also announced a C$1.3 billion equity investment in a C$6 billion Montreal light rail project planned by the province's largest pension fund for 2020.
Quebec said it would lower taxes by almost C$6 billion over six years, including C$1 billion in 2017-18, both by eliminating a health charge and modifying the income tax structure.
The cuts would help "maintain the faster-than-usual growth of the Quebec economy," Lavoie said.
In 2016, Quebec's economy grew at 1.7 percent, compared with growth of 1.4 percent for Canada as a whole and 1.6 percent for the United States. GDP growth for Quebec is projected to be 1.7 percent in 2017 and 1.6 percent in 2018, Leitao said.
The Liberal government aims to reduce the province's debt from 52.7 percent of gross domestic product in 2017 to a previously announced goal of 45 percent of GDP by 2026.
Following the budget announcement, the difference in yield between Quebec and Canada's 10-year bonds was little changed at 76.5 basis points.
Canada's 2017-2018 fiscal year begins on April 1.
(Reporting by Allison Lampert; Editing by Bill Trott and Jonathan Oatis)