The Legault government’s 2022-2023 budget bears the stamp of inflation. It provides Québec with a fairly comfortable budgetary and financial leeway likely to enable it to bring the return to a balanced budget two years earlier (once the sums paid into the Generations Fund are excluded).
Billions separate what the government forecast in March 2021 and projections for the fiscal year ending March 2022. Revenue is $12.9 billion higher than forecast for 2022 a year earlier, while spending is higher by 4.8 billion, due in particular to the adoption, last autumn, of an exceptional benefit for the cost of living. For own-source revenue alone, growth will exceed 15% during the current fiscal year, compared to a forecast of 6.3%. Thus, the deficit for 2021-2022 is heading towards $6.1 billion, whereas $12.3 billion was forecast in March 2021.
As for a balanced budget, it would now be achieved in 2023-2024 (excluding payments to the Generations Fund). In March 2021, Quebec spoke rather of 2025-2026, recalls the evaluation agency Moody’s.
Borrowing needs will be 5.6 billion less than expected, and net financing needs are 9 billion lower than those projected in March 2021, add economists from the National Bank and the Mouvement Desjardins.
The strong growth in prices is inflating nominal GDP even more, the increase in which is estimated at 11.3% in 2021. To this will be added an expected growth of 6.4% in 2022, rather very high figures of one point from a historical perspective. The years 2021 and 2022 will thus be pivotal and swollen with inflation, with an expected jump of 8.8% in revenue collected from consumption tax in 2022-2023. Because this expected growth in nominal GDP is then reduced to around 3.5% annually for the years 2023 to 2026, with risks of a recession estimated at 25% by the Minister of Finance, Eric Girard. With, also, geopolitical uncertainty. Even if Quebec calculates that the economic impact of the invasion of Ukraine on GDP will only subtract 0.2 percentage points from the GDP growth rate, mainly due to the increase in oil prices, this estimate is surrounded of unknown.
$500 each and indexation of tax tables
Observers noted the day after the tabling of the budget that the government intends to reinject a large part of these additional sums into the Quebec economy, with a considerable increase in its spending. And we especially had a bad time for the one-time distribution of $500 to adults with an annual income of $100,000 or less, a $3.2 billion deal affecting 6.4 million taxpayers.
In his text accompanying a presentation on Wednesday, Luc Godbout, holder of the Chair in Taxation and Public Finance at the University of Sherbrooke, made the correlation between this single payment and the indexation of the Quebec tax system based on a lagged inflation measure, seeing it as a compensating measure.
The indexation rate is calculated by the change in the consumer price index (CPI) excluding alcohol, tobacco and recreational cannabis between the twelve-month period ending September 30 and that ending September 30 September of the previous year. For 2022, the indexation is 2.64% based on inflation between the 12 months ending in September 2021 and the corresponding period of 2020.
The overall CPI rose 3.8% in 2021, after accelerating at the end of the year that spilled over into 2022. Quebec expects the index to increase by 4.7% in 2022, and then forecasts a return to 2.3% in 2023. We arrive at a gap to be compensated for of just over 2%. Applied to the market basket measure of $21,500, let’s do the math.
And Luc Godbout added that the combined effect of the implementation, last year, of the exceptional benefit for the cost of living for people eligible for the refundable tax credit for solidarity and that of the he refundable tax allocating a one-time amount of $500 per individual benefits low-income households more in proportion to their income.
However, this should all be seen in the perspective of a study by the Boston Federal Reserve indicating that in the United States, the marginal propensity to consume falls from 97% in the so-called lower quintiles of disposable income, to 48% in the upper segment, a gap that would not be so different in Canada. And this lowest income bracket devotes proportionally more resources to food, housing and other current expenses meeting basic needs – where inflation hits harder – than to services and discretionary expenses.