As promised during the last election campaign, Finance Minister Eric Girard is expected to announce a tax cut in his March 21 budget. Having not lowered taxes during its first mandate and being on the way to achieving the objectives of reducing the public debt, the government seems to consider that it now has the leeway necessary to proceed with a reduction in substantial tax.
However, in our opinion, a permanent reduction in government revenue risks harming the sustainability of Québec’s public finances.
We recently compared different studies on Quebec’s long-term fiscal sustainability. Based on demographic, economic and financial projections, various organizations predict the evolution of the primary balance (deficit or surplus) of governments over a period of several decades.
The Parliamentary Budget Officer (PBO) in Ottawa projects that Quebec is one of the only provinces whose public finances are viable over a 75-year horizon. According to him, the government can reduce its revenues or increase its expenditure structurally while maintaining a balanced budget.
However, the projections are much less optimistic for the next 30 to 40 years, since Quebec will bear the full brunt of the impacts of the aging of the population. In addition, PBO’s projections are based on three assumptions that deserve attention.
First, payments to the Generations Fund (FdG) are maintained, while the government promised during the election campaign to finance its tax reduction by reducing these payments. Second, the expected growth in health care spending is much weaker than comparable projections. Third, no additional spending is planned for energetic transition or adaptation to climate change.
If we take all these factors into account, it seems to us that Quebec’s public finances are not sustainable over a 30 to 40-year horizon. Recent projections made by university researchers (Chair in Taxation and Public Finance and Finances of the Nation) are based on assumptions that appear to us to be more cautious than those of the PBO and which rather suggest that Québec’s financial sustainability remains fragile.
Thus, a tax cut financed from payments to the FdG will contribute to the deterioration of the sustainability of Québec’s public finances, which raises important questions of intergenerational equity. Indeed, the government will necessarily have to raise taxes or cut public spending in the future to avoid structural deficits.
What to do ?
The fact remains that the government should achieve the public debt reduction targets set by law. One can question the relevance of wanting to reduce the public debt even further by continuing to increase payments to the FdG, which would increase from 3.4 billion in 2022-2023 to 5 billion in 2026-2027 if they were maintained.
However, the current architecture of the FdG creates too much uncertainty. Payments of several billion dollars a year represent significant sums. It is tempting for governments to redirect part of these payments towards an increase in current expenditure or towards a reduction in State revenue.
We are proposing that the government continue to deposit sums directly into the Generations Fund to stabilize its public debt in order to generate fiscal leeway to deal with economic shocks. However, the government could reallocate part of the payments to the Generations Fund towards a “health insurance sinking fund”. This fund would aim to pre-finance, at least partially, the growth in health expenditure attributable to the demographic evolution of the population and would aim to distribute over time the growth in health expenditure linked to the evolution of the risk profile of a ageing population.
Of all the variables, the growth in health care costs is likely to have the greatest impact on Quebec’s fiscal sustainability. Health spending will grow from 2.7% of GDP according to PBO’s optimistic estimate to 4% of GDP by 2050 according to the other projections. This is substantial growth as health spending accounted for around 9% of GDP in 2019.
To finance our health insurance sinking fund, the part of the revenues currently dedicated to the FdG that the government plans to redirect to lower taxes would be saved now and each year in order to be disbursed in about a decade, when the impacts of the demographic transition on health care costs will peak. Funds already accumulated in the FdG are not affected by our proposal.
Rising health care costs may lead to an increase in the tax burden for future generations or a reduction in other public expenditures. It therefore seems fair to us from the point of view of intergenerational equity to save now to finance expenses that will be incurred in the future.