Bill 35 tabled in the National Assembly has gone somewhat unnoticed. However, it specifies the changes that the government intends to make to the Balanced Budget Act (Deficit Act) and the Act to reduce the debt and establish the Generations Fund (Debt Act).
The Deficit Law was passed unanimously in 1996. A historical look reveals that this law, with its noble objective and certainly positive legacy, was nevertheless unsuitable when the economy was faltering. Indeed, both during the Great Recession (2008) and the Great Confinement (2020), the government suspended it.
Let us first emphasize that the new version does not change the definition of budget balance nor the obligation to present a balanced budget each year, and the Minister of Finance continues to be accountable to the National Assembly. Furthermore, if the latter ever has to present a deficit budget, the same three circumstances as at the origin of the Deficit Law can justify it: natural disaster, significant deterioration of economic conditions or substantial drop in federal transfers.
So what’s changing?
First, the notion of a stabilization reserve is abandoned. Previously, past surpluses made it possible to run future deficits without the constraints of the Deficit Law applying. This was an element of flexibility facilitating the maintenance of a multi-year budget balance. A priori, its elimination goes in the opposite direction sought by its modernization, even if it makes it easier to understand.
From now on, to avoid its application being suspended in the future, the new Deficit Law offers three elements of flexibility.
In the event that a deficit not anticipated at the time of the budget is noted during the publication of the public accounts, it will have no consequences provided that it remains lower than the year’s payments to the Generations Fund ($2.4 billion this year, for illustration purposes). However, if it turns out to be higher than the payments to the Fund, the new Deficit Law will require two things: justification by one of the three circumstances and the submission of a plan to return to balance of at most five years.
Then, the minister will have more time to present his plan to return to balance. Previously, it was from the first budget speech where a deficit was noted. From now on, it can be, at the latest, in the second budget after the observation of a deficit exceeding the threshold.
Finally, it will be possible not to respect a plan to return to balance if we observe an economic recovery less strong than expected after an economic slowdown or a recession. Here, the Deficit Law does not specify any guidelines allowing us to know what a recovery that is weaker than expected is. In this regard, the minister seems to benefit from a discretionary power allowing him to justify, at the time he deems appropriate, the non-compliance with a plan to return to balance and the presentation of a new plan, always of at most five years.
The Debt Law is also changing
First, instead of setting two targets in relation to the gross debt and the debt representing cumulative deficits, the minister opts for a target linked to the net debt. This change favors, among other things, the comparison of debt with other provinces.
As indicated in the budget, the minister also reduced the sources of revenue intended for the Generations Fund.
Also in the budget, he announced that his net debt/GDP target was set at 30% in 2037-2038. It was also specified that this was a median value which could vary within a range of +/- 2.5%. However, the bill makes no mention of the median value and only indicates the top of the range, leaving the impression of an upwardly revised target. Perhaps this is not the case, but the budget wording should be retained: a target of 30% by 2037-2038, within a range of 27.5% to 32.5%. %.
Maintain their big goals
Knowing the benefits that these two laws have had on Quebec public finances, a group of experts invited by the Chair in Taxation and Public Finance and other organizations in 2021 came to the conclusion that it was necessary to retain their major goals. The elements raised by this group regarding the Deficit Law are covered by the bill, even if they are not all covered in the desired sense (for example, the abolition of the stabilization reserve). For the Debt Law, most of the points are also covered with the exception of an automatic debt repayment mechanism when the Fund exceeds a certain threshold.
The new Deficit Law will be more able to withstand economic upheavals. Obviously, if this were to lead to more deficits, an undesirable effect, these would nevertheless have repercussions on the debt. Ultimately, it is the debt target which constitutes the ultimate safeguard for the state of public finances. If Quebec finds itself in 2037-2038 with a net debt/GDP ratio of 30%, the minister will have succeeded in modernizing the two laws while keeping their fundamental objectives intact.
As the National Assembly must vote on the bill, parliamentarians/parties will have to position themselves on both the proposed modifications and the importance of these laws. Let us see this as a collective opportunity to renew our wishes for the sound management of Quebec public finances.