The Minister of Finance of Quebec, Eric Girard, will have to demonstrate the talents of a tightrope walker or illusionist, it depends. Its economic update takes place in a context of tense negotiations and a rather austere economic and social situation. But also with the presence of a comfortable margin of maneuver. We will have to see what decisions will be made.
The vast demonstration movement that occurred on Monday places this update from the Minister of Finance at the heart of a difficult negotiation with a view to renewing the collective agreement for some 650,000 public service employees. It comes the day after a 30% increase in MP salaries and on the eve of Quebec plunging into recession. With, in the meantime, an “enhanced” employer offer of 10.3% over five years for the salary part reduced to the level of an insult by the Union Common Front.
This offer should be seen in the perspective of an increase in the consumer price index (CPI) in Quebec of 6.7% on an average annual basis in 2022 after a surge of 3.8% in 2021. Added to this is the increase of 4.8% over one year measured last September. Or a recurrence effect rather heavily felt among employees.
For its part, with a jump of 11.8% in nominal GDP in 2021 and 10% in 2022, the government’s financial framework has largely benefited from inflation and its recurring effects. Already the pre-election report on the state of Quebec’s public finances, published in August 2022, contained a significant revision of the economic and budgetary situation for the fiscal years 2022-2023 to 2024-2025. Autonomous revenues were revised upwards by 16 billion over this three-year period mainly due to the recurrence of more favorable results than expected in 2021-2022, we could read.
And it’s not over in terms of inflation. At the Canadian level, the Bank of Canada forecasts that inflation as measured by the CPI will average 3.5% until mid-2024, before gradually falling and returning to 2% in 2025 But she insists that fundamental inflation is proving more tenacious than expected, with three-month rates remaining high, oscillating between 3.5% and 4% for a year. And it evokes an increase in inflationary risks, particularly in a scenario of war between Israel and Hamas degenerating into a larger-scale regional conflict.
Room for maneuver of 10 billion
In another report, that on the 2023 financial sustainability of governments written by the Parliamentary Budget Officer (PBO) and published in July, it is estimated that the current budgetary policy of Quebec, Saskatchewan, Nova Scotia, New Brunswick and Alberta is sustainable in the long term. “We consider that these provinces have financial room to maneuver allowing them to increase spending or reduce taxes. » Quebec has the highest margin among these five provinces, at 1.8% of provincial GDP. Alberta has the lowest at 0.1% of GDP.
For Quebec, “the current budgetary policy is viable in the long term. The province could reduce its taxes or increase its spending permanently by 1.8% of GDP ($10 billion, in current dollars, then increasing at the rate of GDP) while stabilizing the government’s net debt (as a percentage of the economy) in the long term,” specifies the PBO.
Another favorable point for Quebec, while the primary (budgetary) balance – before the payment of debt charges – in relation to the GDP of most provinces should deteriorate in the long term, under the weight of the aging of the population on health care spending, the drop in the primary balance ratio will only be marginal in Quebec over the time horizon retained by the PBO. However, this positioning must be linked to the fact that this relative stability is mainly explained by an increase in payments for equalization and the Canada Health Transfer.
Recession hits
However, the recession is now knocking on our doors. Last December, Quebec’s projections focused on real GDP growth of 0.7% in 2023 and an increase in the CPI of 3.7%. Cumulatively in July, after seven months, GDP is 0.5% higher than in the same months of 2022, which implies zero growth for each of the last two months. The production of goods industries has decreased for a fifth month in a row, tells us the Institute of Statistics of Quebec.
As for its impact, the pre-election report on public finances also included a simulation based on a moderate recession scenario. Analysis of historical data indicates that a recession of average magnitude would reduce nominal GDP growth by 2.8 percentage points in the first year of the shock, and by 0.7 percentage points the following year. Nominal GDP growth would return to its pre-recession level over a five-year cycle.
And the report adds that the impact in the form of loss of independent income is then estimated at 8 billion over five years to which must be added an increase in expenses linked in particular to support programs. That is to say a total impact of 10 billion over five years, which would be absorbed by the provision set up to counter the effects of the recession.
As for the increase in interest rates, as of March 31, 2022, i.e. before the sharp rise in interest rates, the average maturity of Quebec’s debt stood at 11 years with 86% of borrowings made in 2022-2023 with a maturity of ten years or more.
What to think?