The Coalition avenir Québec’s election promise of a tax cut is not unanimous. Some refer to the current inflationary context, others point in the direction of the budget deficit. Between the two unfolds the thesis of an increased injection aimed at adequate funding of public services, with more attention given to health and education. Public choices have to be made, but from a strictly accounting point of view, there is budgetary space. At least, to a large extent.
During the last election campaign, a CAQ government promised to reduce by one percentage point the rate of the first two tax brackets, which are currently 15% and 20%. The Research Chair in Taxation and Public Finance at the University of Sherbrooke (CFFP) estimates the cost of this promise at nearly $1.9 billion for the 2023-2024 financial year. In its estimate last November, it mentioned $7.4 billion over the next four years.
In order not to compromise the balanced budget, the return of which is planned for 2027-2028, the financing of this tax cut would come from a reduction in payments to the Generations Fund, planned at $3.9 billion in 2023-2024 , for a cumulative total of 21.8 billion by 2026-2027 according to Quebec projections.
In its brief submitted to the Ministère des Finances and made public on Wednesday, the Chair comes to the conclusion that such a scenario would postpone by five years the achievement of the objective of a net debt-to-GDP ratio equivalent to the current ratio of the all provinces excluding Quebec. “The objective would therefore be achieved in 15 years instead of 10, i.e. by March 31, 2038, with a ratio of 29.2%. This is in line with the 10-15 year horizon adopted by the government.
The Legault government has also promised to lower these same levels by 0.25% per year from 2027, for a total of 2.5% in 2032. According to CFFP estimates, all of the tax cuts would cost in 2032 just over 6.2 billion. In this case, the source of funding for this reduction was not specified. Assuming that it would also come from payments to the Generations Fund, the Chair calculates that it would then not be possible to reach the average ratio of net debt to GDP of the provinces (excluding Quebec) before March 31, 2060. In just under 40 years!
It is also calculated that, from 2032 to 2039, the total revenue allocated to the Generations Fund would no longer be sufficient to finance the tax reductions and that it would then be necessary to draw on the sums accumulated in the Fund, which the law does not allow. “Consequently, with the information available today, the government will have to assess the relevance of the tax cuts promised from 2027 or will have to find another source of financing than the reduction of payments to the Generations Fund”, continues the memorandum. .
All this should be put in the context that the current objective of reducing the gross debt to 45% of GDP has already been achieved. According to figures from the Ministry of Finance, it represented 41.8% of GDP as of March 31, 2022. That of the debt representing accumulated deficits, at 17% of GDP, will be in March 2026. There remains net debt (minus the government’s financial assets), to some 38% of GDP, compared to a ratio of 29.4% for all the provinces (excluding Quebec). “Quebec was the third province with the highest ratio,” emphasizes the specialists of the Chair.
Inflation-laden incomes
In its latest economic update, Quebec pointed out that inflation increases government revenues, all of which is inflated by a recurrence effect. The budget deficit forecast for 2022-2023 was then revised downwards, to $5.2 billion from the $6.5 billion outlined in the March 2022 budget forecasts. If we exclude payments to the Generations Fund, Ministry projections still show a deficit at the end of the current fiscal year, followed by four surplus years. As for the impact of rising interest rates, as of March 31, 2022, the average maturity of Quebec’s debt was 11 years. The ministry points out that 86% of the loans made in 2022-2023 had a maturity of ten years or more. The financing requirement fluctuates around 30 billion per year, on average, over the 2026-2027 horizon.
Quebec is not talking about a recession, but expects slower real GDP growth of 0.7% this year compared to 3.1% in 2022. This expected growth was 2% in the March 2022 Budget Plan. Pre-election report on public finances tabled last August, it was pointed out that the simulated impact of a medium-scale recession on the five-year financial framework would result in a drop in revenue of around 8.3 billion, which would however be offset by the provision for economic risk totaling $8 billion by 2026-2027.
After a series of recitals and recitals that, “if it is necessary to reduce a tax, it is indeed the income tax which must be privileged. It is not only the most used tax in Quebec […] but it is also a tax which is recognized as more damaging to economic growth,” adds the CFFP.