(Quebec) This big tax cut repelled many observers, fearful of its effects on our public services. It was disputed, even if Quebecers are the third most taxed in the world. Can we really afford it?
However, the Quebec government is achieving this while significantly increasing program spending. Its recipe: it postpones the achievement of the zero deficit by two years and, above all, it lets the relative debt increase for the first time in 10 years, by reducing its payments to the Generations Fund.
Finance Minister Eric Girard is also more optimistic about economic growth than the private sector.
Let’s see. Over the coming year (2023-2024), the amounts forecast for health, education and other sectors will grow by only 1.2% compared to the year that is ending (2022-2023), to 138.4 billion. It’s very little, you will say, but it is explained because the basis of comparison included expenses for COVID-19 and for the inflation shield – the checks for $400 and $600 – which do not come back This year.
Excluding these exceptional items, the increase in program spending will instead be 5.1%, which is significantly higher than the average inflation of 3.5% forecast for this year. No austerity in sight, in short.
Most have forgotten it, but Quebec was heading for a surplus of 1.7 billion as of this year (2023-2024), according to the update made by the Ministry of Finance at the beginning of December. This budgetary balance, whose methodology is comparable to that of the other provinces, excludes payments to the Generations Fund, which are used to reduce the debt.
With this budget by Eric Girard, this surplus of 1.7 billion turns into a deficit of 1.6 billion. This deficit will increase to 597 million next year before returning to a surplus of 544 million in two years, in 2025-2026. No austerity in sight, I told you.
If we include the payments to be made in the Generations Fund, we have to wait until 2027-2028 to return to a balanced budget, in 5 years. But even there, we can bet that it will be sooner, since the government has registered an annual reserve varying between 1 and 1.5 billion in case of unforeseen events.
It is the debt that will absorb the blow, albeit modestly. Each year, the government will reduce the payments provided for in the Generations Fund by an amount equivalent to the tax cut, i.e. $1.7 billion1. In doing so, it is postponing for 5 years the new objective it has set itself to reduce its net debt (37.4% of GDP) to the average of Canadian provinces (30% of GDP), explained Eric Girard during the budget lock-up.
Before the payment cuts, this target of 30% of GDP for net debt would have been reached in 10 years, in 2032-2033, and now it is 15 years, in 2037-2038. As of March 31, 2023, the net debt will amount to 206.8 billion.
Another impact: for the first time since 2013 – excluding the exceptional pandemic year – the relative net debt is increasing in Quebec, from 37.4% of GDP last year to 37.7% as of March 31, 2023.
Not only the tax cuts are responsible for this, but also the increase in the envelope to fix Quebec’s infrastructures, such as schools and roads. The envelope over 10 years goes from 142.5 billion to 150 billion, which has an impact of nearly 560 million on the debt this year.
Finally, Eric Girard is also more optimistic than the private sector in his economic forecasts. According to the budget, real GDP growth will be 0.6% this year, higher than the private sector forecast (0.3%). The Mouvement Desjardins, for example, sees the economy shrink by 0.2%, which the Liberals have clearly argued in their criticisms, like the Conservatives.
This gap with the private sector, Eric Girard justifies it by the economic stimulation that the tax cuts will have, among other things, not only by taxpayers’ expenses, but also by the incentive to work that this measure will have (16,000 more workers).
For a taxpayer earning $70,000, the tax bill is 36% higher in Quebec than in Ontario, argues Mr. Girard (who fails to mention the many additional services in Quebec, such as CPEs, low fees tuition or drug insurance).
In Quebec, the weight of income taxes is the highest of the Canadian provinces, at 14.7% of GDP, which is also far from the average of industrialized countries (9.5%). With the tax cut, the weight remains at the Canadian peak, but it will drop to 14.3% of GDP (Ontario is at 14.1%).
Some are of the opinion, like the Liberals, that by reducing payments to the Generations Fund, the government is depriving itself of the good returns offered by the investments made at the Caisse de dépôt et placement. Economists believe, however, that this return comes with risks – as we saw this year with the -7.9% return of the Generations Fund – and that the government is better advised to repay its debt directly.
The CAQ has also chosen to dip into the Generations Fund this year to repay 5 billion in debt within 2 years, in addition to reducing its annual payments to the Fund.
Surprisingly, despite lower personal income taxes, personal income tax revenues are up 1% this year. And when all revenues are added, the increase is 1.8%, before rising to 3.4% the following year.
We won’t experience austerity, I told you, unless the world economy falters, with the problems of certain banks and the war…
1. The decline will come from three sources, among others. Hydro-Québec’s contribution to the Fund will decrease by $310 million in 2023-2024, and this amount drawn from the government corporation’s dividends will instead go to the government’s general fund, such as mining revenues ($409 million) and the portion of taxes on alcoholic beverages (500 million) which was intended for the Fund.