60 years ago, Quebec elected a government whose vision was to modernize and develop society by using the public sector as a lever for its economic, cultural and social development.
It was possible to realize this vision thanks to the available fiscal capacity, federal transfer payments and the level of debt which was relatively low. From 1962-1963 to 1970-1971, spending on public services rose from 6.3% to 16.5% as a percentage of GDP. Growth subsequently slowed to 17.7% of GDP in 1975-76.
This budgetary development has exhausted the available room for manoeuvre, in part due to negligent management in three areas in particular: a tax burden on individual taxpayers 20% higher than in other provinces, a level of compensation for employees of the State which was 16% ahead of that of the private sector and an actuarial deficit of the pension plans. Corrective measures had to be taken from 1976-1977. But they were not sufficient, and from 1975-1976 to 1981-1982, the deficit increased from 951 million to 2.6 billion. Suddenly, the economy fell into recession in August 1982 and we had to face the harsh reality of financial constraints in unfavorable economic conditions. It was in a bit of a panic that the government raised taxes (on gasoline in 1981 and then on retail sales) and lowered spending, in particular by recovering in 1983 part of the wage increases granted previously.
The following years were a difficult period, because it was necessary to continue the budgetary restrictions. Unable to eliminate specific activities, the Treasury Board used the technique of freezing budgets at the beginning of the fiscal year, which left the departments responsible for reducing their expenditures. The deficit was stabilized, but it was still at 3 billion in 1990-1991 when a new recession hit causing a budgetary crisis similar to that of 1982-1983. The deficit soared to $5.8 billion in 1994-95, and in March 1996 the government held a socio-economic summit to discuss the difficult budgetary situation and the means that could be used to return to it as quickly as possible. budget balance. It was following this summit that the zero deficit policy was decided, which resulted between 1997 and 2000 in a reduction in services following a voluntary retirement program which 37,000 employees took advantage of.
It was in this confusion that a new budgetary accounting system was set up in 1997, inspired by that of companies. Instead of having a traditional budget integrating both current and capital expenditures, the budget would henceforth relate only to current expenditures, which is contrary to the international practice of having a consolidated budget. It was a serious mistake, because a government is not run like a business.
In the public sector, the notion of investment is totally different, because certain current expenditures – such as those in education – are as much an important investment as those in infrastructure and fixed assets.
Be that as it may, this method had the effect of changing the nature of the deficit since he no longer understood the financial impact of fixed assets. A zero deficit was therefore easier to achieve and already, in 1998-1999, there was a surplus of 126 million instead of a deficit of 1 billion, according to the old accounts. It is likely that the government would not have chosen to make the voluntary retirement program if it had known that the zero deficit could be achieved so easily.
Added to this is another problematic aspect of the new accounting system, stemming from the fact that it makes it possible to distinguish the part of the debt that would theoretically have been used to finance investments from that which would be due to past deficits. In order not to pass on this second part of the debt to future generations, the government created the Generations Fund (FG) in 2006. This new policy had two important financial consequences. First of all, the FG is financed by specifically earmarked revenues, increasing the tax burden of individuals and companies accordingly. In 2022-2023, the amount of this revenue is estimated at $3.4 billion. The second consequence is related to the fact that only the revenues dedicated to the FG are included in the budget. By not including payments to the FG in expenditure, the budget balance is unbalanced and does not fully reflect the financial situation.
In summary, we currently have a public financial management model that pursues a set of inconsistent objectives:
- The budgetary accounting system adopted in 1997 is not adapted to the mode of management of a government and does not make it possible to correctly calculate the budgetary balance because it does not include fixed assets and payments to the FG;
- Following the creation of the FG, the official zero deficit fiscal policy objective shifted towards debt repayment to the detriment of funding regular public services;
- The calculation of the budget balance was also manipulated according to cyclical objectives that the government considered more appropriate, as is the case with the stabilization reserve which is only a game of accounting camouflage between years of surplus and deficit years.
The obvious conclusion: it is necessary to change our budgetary policy if we want to be able over the next few years to properly refinance deficient public services, to choose the right priorities and to meet the enormous social and ecological challenges that await us. . Will the Minister of Finance’s next budget live up to these expectations?