The governments of Quebec and Canada are emerging from a particular period where their deficits and debts did not seem to have as much importance as before. This parenthesis has closed. This will make things more complicated.
The Quebec Finance Minister tabled a 2024-2025 budget on Tuesday marked by a deficit of $11 billion. “It could be the highest deficit in dollars” in history, admitted Eric Girard, before explaining that his government will not have a plan to return to budget balance before next year and that the The objective may well not be achieved before 2029-2030.
Everyone will have understood that, if the minister insists that this sad record is “in dollars”, it is because there are other ways of counting. If we remove from the calculation in particular the sums set aside as a provision in the event of an economic slowdown (1.5 billion) and as a payment to the Generations Fund (2.2 billion), we instead arrive at a deficit directly linked to government activities. of 7.3 billion. Relative to the size of the Quebec economy, this deficit is equivalent to approximately 1.2% of gross domestic product (GDP). This would be more than the 2020-2021 budget year, directly affected by the COVID-19 pandemic (0.9%), but two or three times less than in the aftermath of the recessions of the 1990s (3.3%) or of the 1980s (3.7%).
Minister Girard mainly attributed his shortfall to three major factors that we continue to talk about in Quebec. First, a drop in revenues attributable to the slowdown in economic activity, the impact of poor rains on electricity production and Hydro-Québec’s profits, as well as the reduction in personal taxes. Second, the salary increases granted to public sector workers. And third, new spending on essential sectors, including health, elder care and services, education and affordable housing.
And it’s not over
Unfortunately, Quebec is not close to returning to the solid growth rates that were flirting with 3% per year just before the pandemic struck. At a standstill since last year, after its post-pandemic rebound, economic activity should remain there for a good part of this year, the government predicts, before then resuming, at best around 1.7% in the coming years.
With climate upheavals, we have not finished talking about the economic and budgetary impacts of lack of rain, forest fires, floods and other environmental disasters of all kinds.
As for the increase in labor costs, it is the direct consequence of the scarcity of workers with which, not only the government, but Quebec as a whole will have to deal with the aging of its population for a long time to come.
Demographic trends obviously also play a central role in the growing pressure on the costs of the health system and care and services for seniors, as well as on the crucial importance of having the best possible education system. But health, education or even housing are not the only critical issues that will command greater attention (and more money) from the government in the coming years.
We can cite, among others, the fight against global warming and adaptation to it, the reception and Frenchification of immigrants or the control and reduction of another deficit, that of road maintenance. , bridges, dams, hospitals, schools, sewers and other infrastructure in Quebec. From nearly 18 billion in 2017, this deficit was already double last year, recalled the Public Policy Committee of the Association of Quebec Economists during the pre-budget consultations. However, before thinking about acquiring new infrastructures, we should not only worry about keeping those we already have in working order, but take the opportunity to modernize them and make them more resistant to climatic upheavals.
As the weight of taxation in Quebec is already one of the highest (39% of GDP in 2022), not only in Canada (34%) and compared to the United States (28%), but also among the economies advanced (36%) – with the exception of France (46%), Germany (39%) and the Scandinavian countries (41% to 44%) – the Legault government and a large number of economists dismiss the idea of an increase in taxes.
Instead, Minister Girard promised to set in motion a “state optimization” program and a major review of all of its spending. Experts are urging him in particular to adapt his numerous economic development programs and tax credits to reality so that they finally address labor scarcity and stop targeting creation of more jobs, instead seeking to improve their quality and increase business productivity.
Failing to increase taxes, the government could also improve the efficiency of its taxation, experts have also been repeating for several years without success. The experience of other countries has shown in particular that the reduction of personal income tax in exchange for an increase in consumption taxes, or even greater recourse to eco-taxation, could bring in as much money as possible. by promoting work or the green transition and without harming social justice.
The least dirty shirts
Quebec is not the only one grappling with such issues. This is the case for many governments, including that of Ottawa, which will present its budget next month. The urgency to act in the face of the health crisis, the feeling that we had been too timid during the previous financial crisis and the low interest rates even gave, for a certain time, the impression that deficits no longer mattered as much as we previously believed.
In fact, if it is true that the pandemic has led to a surge in deficits and debt, we must understand that we are facing a major trend that goes back a long time, observed the International Monetary Fund this fall. From the 1950s to last year, total public and private debt slowly and inexorably grew from the equivalent of the size of the global economy (100% of GDP) to almost two and a half times the value of all wealth produced (238%).
In this regard, Quebec and Canada are doing rather well. Equivalent to almost 54% of its GDP in 2013, the net debt of the Quebec government should stand at 39% at the end of the month, announced Eric Girard. It will then rise again a little in the middle of the decade (to 41%), but should fall immediately afterwards to 31% in 2038.
As for Canada, its government’s deficits and debt relative to the size of its economy remain among the lowest among developed countries. “Canada remains one of the cleanest dirty shirts in the fiscal laundry basket,” summarized Desjardins Group economists in a study last month.