On October 21, the Quebec Ministry of Finance released the report on financial operations for the first four months of the 2022-2023 budget year.
Posted at 4:00 p.m.
The report is very encouraging, because it shows that as of July 31, government operations recorded a budget surplus of $496 million. Moreover, the outlook for the full year is also excellent, as the monthly report confirms the revised August forecast: instead of having a deficit balance of 3.0 billion announced in the budget, the fiscal year will end with a surplus of 1.8 billion. That’s a 4.8 billion improvement.
On the other hand, the echoes that come from the operation of the main service sectors are less encouraging. The media regularly mention problems of underfunding, lack of human resources or excessively long waiting times for clients who need urgent or specialized services, whether in health, education, social services or for the care of the elderly. The pandemic has exposed operational problems that already existed, but which have become more evident and more widespread. These problems worry both the users and the personnel who are on the front line. For each of the sectors concerned, an analysis of their operation should be carried out and an adjustment plan prepared, such as the one which was made public in March 2022 for the health sector.
However, there is a sort of paradox between, on the one hand, the overall situation of public finances, which seems excellent, and, on the other, the difficult situation of the services themselves.
The public sector forms a whole and we must try to explain the reasons for this paradox. The reflection that follows leads to a questioning of a public finance management philosophy that has been introduced over the past few decades.
1- Let’s start first with overall budget management. Since 1997, the Government of Quebec has been using an accounting approach which, at first glance, is innocuous, but which is similar to that of an organization operating on a market where there is supply and demand for the goods or services that are produced. By adopting this system, the government’s budgetary expenditures include only current operating expenditures used for its operation. When the government posts a budget surplus of $1.8 billion, as will be the case in 2022-2023, we must be aware that this surplus is like the equivalent of a profit for a private company.
However, this surplus is not available for the financing of services, because it will be absorbed in the procedure for financing the Generations Fund, which will result in a loss of $1.7 billion at the end of the budget year.
2- The second point concerns the investments made by the government and which are planned under the ten-year infrastructure plan called PQI, the Quebec Infrastructure Plan. The current plan for the period 2022-2032 totals 142.5 billion, an average of 14 billion per year. The annual expenditures resulting from this plan are financed initially by borrowing, and they will become budgetary expenditures when the project is completed and the annual amortization is budgeted.
We can therefore proceed with the implementation of the elements of the QIP without there being any short-term impact on the budgetary situation.
The bill will come later. The delay between the decision to carry out a project and its budgetary impact can be relatively long, which leads to the kind of discussion disconnected from reality such as the one currently taking place concerning the construction of the tunnel between Quebec and Lévis, whose minimum cost is 6.5 billion. We will only know in four, five or six years. It is likely that those who decide to go ahead with the project will no longer be there when it comes to assuming the budgetary consequences, in a context that will be totally different since we will be in the midst of a global warming crisis.
3- The best way to manage investments is as follows. If Quebec were part of the European Union, it should have a consolidated budget according to international practice, that is to say a budget including both the cost of current operations and the investment expenses incurred during the year, whether the project is completed or not (a net amount of $5.0 billion in 2022-2023). The projected surplus of 1.8 billion would become a deficit of 3.2 billion. After the transfer of $3.4 billion of revenue allocated to the Generations Fund, the final deficit would be $6.6 billion. That is the reality of Quebec’s budget.
4- Note, in closing, that during the pandemic from 2020 to 2022, rather than suspending the application of the Balanced Budget Act, the government will have borrowed $10.2 billion in order to be able to pay the planned contributions to the Generations Fund, the assets of which will be used to reduce it. Since these assets are speculative, the government borrows to speculate when its mandate is to provide quality services to the population. It should focus on that mandate. If we want to reduce the debt burden as a percentage of GDP, the recipe is simple: it must simply grow less quickly than GDP.
In summary, Quebec’s public financial management model is obsolete because it pursues a set of inconsistent objectives. It is urgent to re-evaluate it in order to be able over the next few years to redress deficient public services, to choose the right priorities and to meet the enormous ecological challenges that await us.