The budget speech of March 12 revealed that the deficit should reach the unexpected level of $11 billion in 2024-2025. This was a surprise, because it is 8 billion more than what was announced in the fall 2023 economic update document, which maintained the return to budget balance in 2027-2028 as planned.
Not only has this return now been postponed until after 2028-2029, but there is no indication as to the year in which it can take place, except that the question will be re-examined in the next budget. We finally see, upon analysis, that the five-year financial framework published in the budget is already heading towards an impasse.
Unless there is a strong economic recovery, which is unlikely given current uncertainties, it appears difficult to maintain the current level of public services over the coming years. This pessimistic conclusion follows from the following observations.
The attached table presents the same data as the five-year budget plan for the period 2024-2025 to 2028-2029. However, these data are arranged in a different way to highlight the persistent budgetary imbalance in the coming years. To mitigate this problematic development, the five-year plan provides for two items – a gap to be absorbed and a provision for contingencies – which total 13.6 billion, without however explicitly saying whether they will apply to expenses or revenues.
But it is generally expected that a contingency reserve would apply to expenses, and this is what has been done in the table. Furthermore, a gap to be compressed can theoretically mean two possibilities: eliminating expenses or increasing income. It was placed at the end of the table without making a choice between the two possibilities, knowing that the government will probably avoid increasing taxes.
The structure of the table therefore allows a correct comparison of the three important indicators of the evolution of the financial situation: the surplus (or deficit) linked to total activities, the surplus (or deficit) according to the Balanced Budget Act before correction and the surplus (or deficit) according to the Balanced Budget Act after correction.
We see that the deficit linked to total government activities remains after 2025-2026 at more than $3 billion. If we then take into account payments to the Generations Fund, which will increase from 2.2 to 2.7 billion during this period, the total deficit according to the Balanced Budget Act before correction will be at the very high level of 6 billion dollars in 2028-2029.
If the government succeeds in compressing its budget by achieving what is planned in the “gap to absorb” field, the deficit according to the Balanced Budget Act will only be $3.9 billion. In the latter case, if we apply the correction entirely to expenditures, this would mean that annual growth in program expenditures would be on average 2.2% after 2024-2025, barely higher than the 2% inflation forecast. .
In summary, what we call the structural deficit could be between $4 and $6 billion after 2025-2026, depending on the amount of cuts that departments can absorb after 2024-2025.
Gray areas
But that’s not all, because the five-year scenario does not foresee any additions to the investment plan, which is unrealistic given the maintenance needs and project additions in several sectors. According to the current Quebec Infrastructure Development Plan (PDI), the planned amount of annual gross investments in fixed assets will decrease, from 8.2 billion in 2024-2025 to 5 billion in 2028-2029. However, there will certainly be new needs to be met between now and then, and significant additions will have to be made to the IDP.
If we adjust the forecast for the next four years by increasing it by only 2% to take into account inflation, we will have to add at least investments of $3.7 billion at the end of the period. These investments will be financed by borrowing, which will result in an increase of several hundred million in amortization expenses in the operating budgets of ministries and public networks.
There is also one final obscure aspect to the budget speech.
In the section on economic priorities, many interesting measures, totaling $1.9 billion, are announced, which aim to support sectoral and regional development. These measures are in addition to the sum of 1.3 billion already announced in the fall of 2023. There is no explanation on the financing of these additional expenses. But the biggest mystery concerns the billions of dollars in subsidies that have been promised for the construction of the Northvolt battery factory: where will these billions come from?
And, finally, the Prime Minister recently repeated that he wanted to continue to reduce the tax burden on Quebec taxpayers, even if there is an impasse in the evolution of the budgetary situation. The government seems to have lost touch with the reality of public finances.