It is not a question of establishing balanced budgets as a dogma. It goes without saying that when the economy is below its economic potential, deficits can be made. There is consensus that it would have been more than foolish to campaign to balance the budget during the pandemic crisis. Conversely, we must not allow a level of collected income to persist that is poorly adapted to the level of expenditure; the last time this happened, without a mechanism to regulate government actions, Quebec experienced forty consecutive years of deficits.
Since 1996, a law requires that Quebec present a balanced budget. This law, combined with the Debt Reduction Act, made it possible to consolidate Quebec’s public finances.
However, history has shown its rigidity during economic upheavals (financial crisis of 2008, COVID-19), leading to the need to suspend its application. To prevent this from happening again, this law and that on the debt were modernized and sanctioned last December.
Clarification that, if we can affirm today that there is the presence of viability of Quebec public finances, it is precisely because the premise is respect for the plan to return to balance and the achievement of the target of debt.
Missed opportunity
When modernizing the laws, however, the government missed the opportunity to offer an open and transparent debate to ensure that stakeholders renew their wishes regarding the importance of balancing the budget and reducing debt.
In addition, the manner used to modernize the Balanced Budget Act, by replacing it with a new version, had the effect of canceling the plan to return to balance presented in March 2023; the minister will then have to present a new one. This aspect of modernization was not clearly communicated, whether during the budget, the tabling of Bill 35 or consultations in parliamentary committee. Reading the discussions in the National Assembly, it appears difficult to conclude that the legislator properly informed parliamentarians of this effect and, consequently, the entire population.
If this element had been communicated more clearly, suggestions could then have been made to ensure alignment with the return to balance plan, for example, the setting of transitional targets, as was the case in the pass.
The necessary plan to return to balance
Having said that, when will the minister have to present his new plan to return to balance? As the budget deficit observed is greater than the revenues recorded in the Generations Fund under the 2022-2023 public accounts, tabled after the sanction of the Law, the Minister must, on the occasion of the next budget (March 2024) or the following ( March 2025), present a plan to return to balance over five years. Depending on the scenario, this makes it possible to postpone the return to balance as late as 2029-2030. If this were to prove true, Quebec would experience its longest deficit period since the implementation of the Balance Act.
Now, how do we get the budget back into balance?
Certainly, regardless of its relevance, the government’s salary offer which was the subject of the agreement in principle creates additional pressure on the budgetary framework. The same goes for weaker than expected economic growth, which has the effect of reducing tax revenues and falling profits for Hydro-Québec. All this complicates the plan to return to balance.
Starting from a deficit situation, if the deficit does not resolve itself, taking into account a structural component (not linked to the economic situation), income must necessarily increase faster than expenditure to regain the ‘balance. From this perspective, the plan to return to balance will either have to increase the level of income, review the rate of growth of expenditure or a mixture of the two.
History has shown that it is never easy to eliminate a structural deficit. If the Couillard-Leitão tandem did this essentially by limiting the growth in expenditure, the Charest-Jérôme-Forget then Charest-Bachand tandems also played on increases in income (two QST points, introduction of the health contribution and four cents of fuel tax). Regardless of the path chosen, returning to balance remains an exercise strewn with pitfalls.
This is where we must understand the full complexity of the Minister of Finance’s task, because the Prime Minister is asking him, in a way, to square the circle: to reduce the deficit situation, a portion of which is structural resulting from certain government initiatives, and do so without increasing the burden of taxation or affecting the basket of public services. An impossible mission, which forces the Legault-Girard tandem to make choices, but let’s keep in mind that inaction cannot be an option.
Next election campaign
Considering that the plan to return to balance will still be in effect during the next general elections, even if they are still far away, it will be difficult to promise a reduction in the tax burden. It will not be easier to announce improvements to public services unless we find the necessary revenue to finance them.
Until then, an underlying risk is that the objective of balancing the budget may be scrapped on the horizon. Obviously, this would be a significant step backwards, because it is only in the presence of healthy public finances that it is possible to consider, for some, tax reductions or, for others, improvements to public services, all without financial consequences for future generations.
Let us hope that by presenting his new plan to return to balance, the minister will be able to convince the National Assembly, and the Quebec population, that with their modernization, our two laws for sound management of public finances constitute an asset for Quebec .