(Quebec) Tell you how surprised I am.
I expected a dull, severe budget, under the sign of austerity, but that is not what Minister Eric Girard presented to us.
And I was expecting an certainly imposing deficit, of the order of 7 billion, but lo and behold, it is rather the figure of 11 billion that we find in the budget for the year 2024-2025! Ayoye!
The CAQ government is therefore postponing balancing the budget until much later, preferring to increase its spending to tackle certain issues.
Additional support for poor people, social housing, daycare services, seniors suffering from disabilities, home care, DYPs, the aluminum sector, among others… The amounts are not all muscular, but they are there.
Of course, there will always be groups who consider themselves neglected, given their very significant needs, such as community organizations, and they are probably right. But in the current deficit context, I expected worse.
Four months ago, in November, the CAQ government forecast a deficit of 3.0 billion for 2024-2025, once payments to the Generations Fund are subtracted. This deficit has just been increased to 11 billion, or 8 billion more. Ayoye, did I say it?
What explains the explosion?
First, despite the deficit situation, the government chose to add new spending (which I mentioned above) totaling $1.9 billion in 2024-2025, an amount which is part of the $8 billion gap.
Increased offers to state employees? For the year 2024-2025, they cost approximately 3 billion more than what was planned by the government in last fall’s update. 1
On this subject, an observation: these 3 billion, they represent approximately 0.5 percentage points of the government’s payroll of 60 billion. In other words, the Ministry of Finance had underestimated the offers ultimately negotiated between the parties by some 0.5 points for the years 2023-2024 and 2024-2025.
These salary offers, remember, are around 8.8% for these two years (6% for the first year and 2.8% for the second), or even 9% with the compound effect. We can therefore deduce that Quebec ultimately planned to offer 8.5% rather than the 9% obtained by the unions. It is therefore not a very big difference, whatever one may think, but the effect on the deficit is nonetheless impressive, at around 3 billion. 2
Another major impact on government finances: the low hydraulicity of Hydro-Québec basins attributable, in particular, to low precipitation. This factor, which forced Hydro to reduce its exports, explains most of the $1 billion shortfall since the fall.
This is the main difference.
Have the Caquistes lost control, as the Liberal Party says? Is the situation unmanageable?
Not really. First, the forecast deficit of 11 billion, which would become the largest ever recorded, includes a provision of 1.5 billion for unforeseen events.2 Then, the payment to the Generations Fund reaches 2.2 billion, so that the real deficit from current activities is closer to 7.3 billion.
This adjusted deficit of 7.3 billion – the definition of which becomes the same as in the other provinces – is equivalent to 1.5% of Quebec’s gross domestic product (GDP). Recently, British Columbia announced that its own deficit reached 1.8% for the same period and Nova Scotia, 0.8%.
In the 1980s and 1990s, Quebec’s deficit was already significantly higher, notably under Finance Minister Jacques Parizeau in 1980 (4.7% of GDP) and under Jean Campeau in 1994 (3.3% of GDP).
Another consideration: in periods of recession or strong slowdown, the government is not advised to compress spending, as John Maynard Keynes taught, even if increasing them, conversely, will harm the fight against inflation and therefore to lower interest rates, as Tiff Macklem of the Bank of Canada recently said.
The situation is no less serious. And it will require strong measures, which Eric Girard has essentially postponed until next year, when he will present his return to balanced budget, required in the law.
The minister has also announced that from the spring, he will scrutinize state spending. Cleaning up will be done both in budgetary expenditure (which totals 136 billion) and tax expenditure (74 billion).
For the moment, the minister has notably reactivated two classic measures to fight the deficit, by increasing the tax on cigarettes and tightening the fight against tax evasion.
In closing, a tip of the hat and a review.
I would like to tip my hat to the government’s decision to finally reform the tax credits offered to IT and multimedia companies. In IT, in particular, only 4 companies out of 702 pay taxes in Quebec.
These salary credits are less and less necessary, given the labor shortage. They benefit IT companies, such as CGI and IBM, which thus absorb human resources to the detriment of other unsubsidized organizations. Quebec will recover 364 million per year, in the long term (see the text by my colleague Julien Arsenault).
A false provision of 1.5 billion
My criticism? Eric Girard says he is being cautious by including a provision for contingencies of 1.5 billion in each of the next years. The problem is that at the same time, he specifies in his budget that there is a gap to be closed from 750 million to 2 billion in each of the same four years 2025-2026 to 2028-2029.
In other words, these gaps are possible major revenue reductions or increases that add to the deficit forecast for these years. And they come to cancel out the prudence of the provision…
1. The sum of 3 billion and the difference of 0.5 percentage points include employees still in negotiations, notably nurses.
2. For the following three years of collective agreements, the increases are much smaller (2.6%, 2.6% and 3.5%) and the government’s underestimation could be around 0.5 to 1 percentage point, for a total of 1 to 1.5 points over the entire 5 year period. In other words, rather than the 18.6% negotiated with the unions, Quebec had probably planned 17-17.5%.