All these promises of tax cuts and softeners of the effects of the rise in the cost of living furnishing this beginning of the electoral campaign are based on public finances inflated by inflation. Wanting to redistribute part of it can be defended. Back to the pre-election report.
From the outset, the Pre-Election Report on Public Finances tabled in August states that it is not adopting a recession scenario. The simulated impact of a medium-scale recession on the five-year financial framework would result, on the other hand, in a drop in income of around 8.3 billion, which would however be offset by the provision for economic risk and other support and recovery of $2 billion per year, for a total provision of $11.8 billion over five years, if the provision for the contingency fund is added.
In the absence of a recession, the growth forecasts show a tax revenue surplus of nearly $14 billion over this horizon, more than $25 billion if provisions are added to it, before payments to the Generations Fund. But OK.
That said, over a shorter horizon, the report contains a revision of the economic and budgetary situation for fiscal years 2022-2023 to 2024-2025, increasing own-source revenue by $16 billion over this three-year period, mainly due to the recurrence more favorable than expected results in 2021-2022.
According to the preliminary results as of March 31, 2022 published by the Ministère des Finances, Québec would have recorded a budget deficit of only $294 million for the entire 2021-2022 fiscal year, compared to a deficit of $10.8 billion. accounted for a year earlier and the $7.4 billion forecast in the Québec Budget Plan. The effects of the pandemic gave way to a fairly vigorous economic recovery resulting in a particularly strong increase in own-source revenue, of around 20%, between the two comparative years.
Tax receipts were there, inflated by inflation, as evidenced by GDP growth in 2021, now at 5.6% in real terms, but at 12.5% in nominal terms (compared to 11.3 % in the March 2022 fiscal projections). For 2022, the forecasts relate to a 3.4% increase in real GDP, but 9.6% in nominal (compared to 6.4% in March 2022).
Recurrence effect
Coming back to the recurrence effect mentioned in the pre-election report, the revision of own-source revenue of $16 billion over three years includes $9.9 billion from personal income tax and contributions for health services and reflecting new projections on the increase in wages and salaries.
Of the total, 3 billion comes from corporation tax, 2.1 billion from consumption tax — due in particular to the upward revision of household consumption — and 2.2 billion from government enterprises (essentially a upward adjustment of the expected contribution from Hydro-Québec).
On the expenditure side, those of the ministerial portfolios are revised upwards by 6.2 billion, and debt service, by 2.7 billion under the effect of the rise in interest rates.
Indexation of the tax system
In short, the room for maneuver is very real. Not to mention the indexing of the Quebec tax system, which is based on a lagged inflation measure. The indexation rate is calculated by the change in the CPI excluding alcohol, tobacco and recreational cannabis between the twelve-month period ending September 30 of the previous year and that ending September 30 of the previous year. For the 2022 tax year, the indexation is 2.64% while the annual growth of the CPI in Canada fell from 5.1% in January to a peak of 8.1% in June. It was 1.26% in 2021, while inflation accelerated beyond 2% in March to reach 4.8% in December.
Luc Godbout, holder of the Chair in Taxation and Public Finance at the University of Sherbrooke, had made the correlation in March between this flagship measure of the Legault government’s 2022-2023 budget relating to the distribution of a one-time amount of $500 adults with an annual income of $100,000 or less and the indexation of the Quebec tax system, seeing it as a compensation measure.
Generations Fund
There remains the temptation to dip into the Generations Fund. Still according to the pre-election report, the payments projected over five years total $21.3 billion, with annual increases of 15% and 13% in the first two years, the main sources coming from hydropower royalties from Hydro-Québec and producers private, and the indexation of the price of heritage pool electricity.
Born of a law passed in 2006, the Generations Fund is dedicated exclusively to repaying Québec’s gross debt. During a conference held in January 2020, the Minister of Finance, Eric Girard, launched consultations on the use of the Generations Fund once the debt targets have been reached, which he then planned as of 2024, a target somewhat displaced by the pandemic. The Act provides that for fiscal year 2025-2026, the gross debt may not exceed 45% of GDP, while the debt representing accumulated deficits may not exceed 17% of GDP. In the report, it is expected that as of March 31, 2026, the first ratio will stand at 37.7% and the second at 15.4%.