(Quebec) We tend to think that the inflation boom harms the government. That it makes it more difficult to achieve a balanced budget and debt targets. However, it is quite the opposite.
Posted yesterday at 5:35 p.m.
Thanks to inflation, Minister Eric Girard has a lot of leeway this year, which allows him to incur major new expenses, a few months before the elections.
How? ‘Or’ What ? Well there you have it, the significant price growth comes on top of the strong post-lockdown economic recovery. In 2021, real GDP grew by 6.3%, but adding inflation, the increase is 11.3%. It’s unheard of since… the 1970s.
This jump in nominal GDP is caused by businesses selling more, entrepreneurs renovating more, wages rising faster, commodity prices jumping.
This increased activity has a direct impact on the taxes and duties collected by the State. And in the end, the government therefore saw its own-source revenue increase by $10.2 billion more than forecast this year (2021-2022), a largely recurring amount for the years to come. wow!
Meanwhile, his expenses have not increased at the same rate. Yes, there have been commitments related to COVID-19, but the government’s largest expenditure item – the salaries of its employees – has not followed suit. The new collective agreements provide increases of 2% per year for three years, essentially, and when we add the special offers (teachers, nurses, CPE), in addition to the increase in the salary scale, the payroll increases by about 3% per year.
In short, income is increasing much more than current expenditure.
Inflation has another advantage, in the short and medium term: it reduces our relative indebtedness. In fact, the debt expressed as a percentage of GDP is falling, since GDP has exploded by 11.3%.
So even though the gross debt has increased by 5.2 billion this year, reaching 215 billion as of March 31, 2022, the debt as a percentage of GDP is falling considerably, from 46.8% of GDP last year to 43, 1% this year.
But beware, this beautiful scenario will not last forever. In the long term, high inflation ends up having harmful economic consequences.
To break inflation, the Bank of Canada will significantly increase its key interest rate. This decision will cause the government’s interest expenditure to jump and slow the economy, and therefore the growth of government revenues. These increases could be made in parallel with the negative economic impacts resulting from the war in Ukraine.
Another element: in the government, collective agreements end on March 31, 2023 and one can think that union members will be demanding, especially if inflation has remained high. The opposite effect of this year will then occur: wage increases will be strong, but the growth of government revenues, based on current GDP, will become weaker.
The government also forecasts that nominal GDP growth, from 11.3% in 2021, will fall to 6.4% in 2022 and 3.5% in 2023. Once inflation is subtracted, real GDP will therefore grow. very slowly (1.5% per year from 2024), less than elsewhere in Canada and the United States. The government’s challenge will then be to curb the ardor of pressure groups and halve spending growth.
In the meantime, the Quebec budget offers us some nice surprises. As in other provincial governments, the strength of the recovery surprised us, causing deficits to shrink much more than expected.
In the year ending March 31, 2022, a few days from now, the deficit will be $6.1 billion, or half of what was projected in the March 2021 budget. And again, it would have been more like of about $3 billion if the minister had not decided to offer $500 to 6.4 million Quebecers, the measure being financed from the fiscal year that is ending and not from the one that is beginning.
That’s not all. If Quebec calculated its deficit like the other provinces – and therefore without payments to the Generations Fund and without a $500 check – our deficit would be practically nil this year (2021-2022), which is rarely the case elsewhere.
During the beginning of 2022-2023, the deficit is calculated by including, in addition to payments to the Generations Fund, a provision of $2.5 billion for economic risks. By subtracting these two elements, the deficit of 6.45 billion for 2022-2023 would melt to 500 million.
And over the following years, doing the same exercise, we would have a surplus of 1.5 billion in 2023-2024, 2.1 billion in 2024-2025 and 6.2 billion in 2025-2016. Who would’ve believed that ?
In short, even if the government speaks of a structural deficit, this budget does not suggest any other period of austerity…
Lots of money for universities
The budget grants a lot more money to CEGEPs and universities.
As of this year, funds for higher education will increase by 930 million – or 12% – if measures linked to the health crisis are excluded. By subtracting the 455 million dedicated to the Perspective scholarships, among others, the funds reserved for the current budgets increase by approximately 450 million – more than 6% – which is almost twice as much as is necessary to cover the costs of the system and the increase in clientele (3.2%), as indicated in the expenditure budget.
Government funding for higher education – excluding pandemic measures – is around $8.65 billion in 2022-23.