Quebec’s deficit will not disappear by magic

2024-03-12 18:33:01

“There is no question of cutting any services whatsoever and there is no question of increasing taxes,” promised Prime Minister François Legault at the start of the year. With such instructions, the Minister of Finance, Eric Girard, faces quite a challenge: that of restoring budgetary balance without increasing the tax burden and without affecting spending. How will he achieve this?

“Luc Langevin will have to get on board,” quipped economist Luc Godbout, holder of the Research Chair in Taxation and Public Finance at the University of Sherbrooke. More seriously, “the government will have to make choices,” believes the researcher, who does not believe in magic tricks.

In its economic update last November, the Quebec government estimated its deficit at nearly $4 billion for the year 2023-2024. And according to its projections at the time, balance was expected to return in 2027-2028 with a slight surplus of $4 million.

However, since then, negotiations for the renewal of collective agreements with the public sector have changed the situation by weighing on government spending. Result: the next budget will be “largely in deficit”, warned Prime Minister Legault in February, evoking at the same time a possible postponement of achieving a balanced budget.

The deterioration of the economic context also complicates this return to balance. The lower-than-expected growth weighs on tax revenues and the profits of Hydro-Québec, which paid dividends of 2.5 billion in 2023, compared to 3.4 billion the previous year, recalls Luc Godbout.

A difficult spending slowdown

To resolve the structural component of the deficits, that is to say the portion which is not attributable to the economic situation, the plan to return to balance must “either increase the level of income, review the rate of growth of expenses or a mixture of the two,” argues the tax expert.

Before the Coalition Avenir Québec came to power, the liberal trio formed by former Prime Minister Philippe Couillard, Minister of Finance Carlos Leitão and President of the Treasury Board Martin Coiteux chose the path of “budgetary rigor » — or “austerity”, according to their detractors — by limiting the growth of public spending to reduce deficits.

Even before them, former Prime Minister Jean Charest and his Finance Ministers Monique Jérôme-Forget and Raymond Bachand “also played on increases in income,” recalls Luc Godbout, citing the increase in the QST, the introduction of the health contribution and the increase in the fuel tax.

In the current context, particularly because of the aging of the population, “it is a major challenge to reduce the growth in spending,” says the general director of the Institut du Québec, Emna Braham. The trained economist emphasizes that the slowdown announced in last year’s budget “of around 2.2% per year” already represented “a difficult trajectory” to respect.

However, in the November economic update – even before the result of negotiations with the public sector – the government was already “not quite” able to follow the trajectory planned for the spring, underlines M^me Braham. Now he’s moving further away from it, she adds.

“The government’s challenge is to maintain rigorous budgetary discipline while investing to increase the economic potential of the province,” explains the director of the Institut du Québec.

A balance by 2029-2030?

Returning to a balanced budget is not a choice. Under the Balanced Budget Act, introduced in 1996 and modernized last year, the government must provide a plan to achieve this over a five-year period. If Quebec does not present a plan this year, it will have to do so next year. And this would allow it to postpone the return to balance in 2029-2030, indicates Luc Godbout. “If this is the choice that the government makes, it would be the longest period of deficit since the implementation of the Balanced Budget Act,” he notes.

Quebec must also monitor the repayment of its debt, warn Mr. Godbout and M^me Braham.

The tax cut for taxpayers announced last year, financed by reductions in payments to the Generations Fund, pushed back its objective of reducing the net debt. This should be lowered by 7.5% in 15 years rather than 10 years, Minister Girard emphasized in the last budget. At the time, he had a plan to return to balanced budgets, which may not be the case this year.

To watch on video

1710281496
#Quebecs #deficit #disappear #magic