Finance Minister Eric Girard tables a 2022-2023 budget against the backdrop of the war in Ukraine. A budget that fits into a context of inflation that promises to be higher and of longer duration; a budget that must take into account a surge in oil prices which is increasing the cost of supplying Quebec.
In an interview at Homework, Eric Girard promises that the Legault government will stay the course for 2027-2028 to return to a balanced budget without curbing the funding of public services and without imposing austerity measures on Quebecers. “The goal is to achieve a balanced budget without the citizens realizing it,” he summarizes. In this budget, which coincides with the second anniversary of the suspension of complete sections of the economy, the Minister says he is betting on growth by increasing the income invested in the main missions of the State. We will see on Tuesday whether he speaks of a real or nominal increase in these “investments”.
Because we can only remember that this pandemic has brought out the aftermath of an approach to emerging from the crisis (from 2008) that borrowed from austerity, having prioritized accounting balances at the cost of cutbacks that led to an under- chronic financing of State missions and a continuous deterioration of infrastructures.
Returning to a return to balance, the tone was already set in the November economic update. In the exercise, which instead took the form of a mini-budget, the bulk of the approximately $11 billion in new investments was then devoted to “countering labor shortages” and “helping Quebecers to meet the cost of living”. In the projections presented, Quebec reminded us that its definition of a balanced budget included payments to the Generations Fund. In this update, the budget reached the surplus zone as early as 2023-2024 before the provision of 1 billion for economic risk. The balance turned into a deficit of some $4 billion for 2023-2024 and the following two fiscal years due to deposits in the Generations Fund.
Full of inflation
Quebec posted one of the strongest recoveries in Canada after restrictions were lifted. The real estate overheating, the return to full employment and the pressures it exerts on wages, the savings surplus generated during the pandemic, the net operating surplus of companies fueled by subsidy programs and the he impact of the sharp rise in prices on own-source revenue of 106 billion in 2021-2022 has swelled nominal GDP and inflated the tax base.
“Nominal consumption will increase by 7.5% in 2021 and 8.2% in 2022,” the Ministry of Finance predicted in November. Inflationary expectations supporting the GDP deflator had to double in the Ministry’s projections, under the weight of rising transportation costs and continuing distortions in supply chains bringing labor shortages back to the agenda.
And if we bet on a return of the Consumer Price Index (CPI) to the Bank of Canada’s 2% target somewhere in the second half of 2022, Vladimir Putin’s war on Ukraine comes shift everything. In his Monetary Policy Report published in January, the Canadian central bank saw inflation measured by the CPI remaining around 5% during the first half of the year to end the year at around 3%, as the distortions on the chains of supply will fade. Inflation is then expected to hover around 2.25% in the second half of 2023 to stay near the 2% target in 2024, it said.
However, the odds remained strong that this price surge would become entrenched. First, that the upward pressure on wages comes to shake the anchor of inflationary expectations. Second, that price pressures persist depending on the evolution of the pandemic and the repercussions on the supply shock. Then came the invasion, which propelled energy and commodity prices to new heights.
Quebec will also have to deal with a rise in interest rates which adds to the debt service bill, although it is expected that the resulting reduction in its room for maneuver will be mitigated by an increase in tax revenues sips of inflation.
Oil, this unknown
The other big unknown stems from the sharp surge in oil price fever. Also last November, the department based its calculations on a price of US$64 per barrel for West Texas Intermediate (WTI), compared to US$58 in its March 2021 budget. At the exchange rate of $1.25 to 1 US$, it is estimated that each variation of US$10 per barrel increases the cost of oil supply by C$1.6 billion, or the equivalent of a 0.3% drop in nominal GDP. We are talking about a supply cost of 9.8 billion at a price of 60 $US per barrel and 13.1 billion at a price of 80 $US per barrel, amount being retained as the equilibrium price before the attack on Ukraine does not start, equivalent to 2% of nominal GDP in the latter case. Today WTI is touching US$110 a barrel.