economists see quebec pushing goal for balanced budget past 2027-28
finance minister eric girard is grappling with arguably the worst set of economic conditions since the early days of the covid-19 pandemic.
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quebec finance minister eric girard has his work cut out if he hopes to make good on a pledge to start balancing the books in four years.
as he prepares to table his fiscal 2024-25 budget tuesday, girard is grappling with arguably the worst set of economic conditions since the early days of the covid-19 pandemic.
not only has the economy slowed in the past year, but inflation — which swells government revenue — is down compared with the past two years and interest rates remain high, boosting the cost of future borrowings. last month, hydro-québec slashed the annual dividend it pays the government by $1 billion after experiencing one of its worst years for power outages.
and if that wasn’t enough, recent wage increases granted to public-sector workers will put extra strain on a government already facing increased health-care spending. premier françois legault warned quebecers last month about the “financial consequences” of the new labour deals, opening the door to a delay in reaching the 2027-28 balanced-budget goal while stressing there would be no service cuts or tax hikes.
“it’s a challenging time,” robert kavcic, senior economist at bmo capital markets in toronto, said in an interview. “a lot of the factors that helped provincial finances coming out of the pandemic are starting to turn against them. on the revenue side, the economy is starting to underperform. on the cost side, public-sector wages are getting bumped up and debt service costs, which were extremely low during the pandemic, are going to rise over time. so you’ve got two big spending lines that are heading higher.”
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girard’s mandate “is extremely difficult,” added luc godbout, head of the université de sherbrooke’s research chair in taxation and public finance. “he’s working for a premier who doesn’t want to raise taxes or embark on an austerity drive. at the same time, he has a budget deficit that he needs to eliminate. it’s a thankless task.”
both kavcic and godbout say they wouldn’t be surprised if girard is forced to upsize his year-old prediction of a $3-billion deficit in 2024-2025. girard’s call that quebec would cut the shortfall by $1 billion annually before wiping it out in 2027-28 is also looking shaky, they say.
“i suspect the deficit this coming year probably is going to look bigger, and even the path back to balance might not be there,” kavcic said. “you could conceivably see quebec run deficits for a couple of years out through the forecast horizon. the timeline could be pushed out.”
quebec last avoided a deficit in 2019-20. its fiscal year runs from april 1 to march 31.
canada’s second-most populous province is hardly unique in coping with a slowdown. last month, british columbia projected a $7.9-billion deficit for fiscal 2024-25 and revised its current shortfall to $5.9 billion — a 40-per-cent jump.
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“every province to report so far has forecasted a weaker fiscal path for the coming fiscal year and thereafter, and it’s borrowing more than last year,” kavcic said. “quebec won’t be alone.”
girard’s november fiscal update assumed economic growth of 0.6 per cent in 2023 and 0.7 per cent — revised from 1.4 per cent — this year. in fact, conference board of canada economists calculate, 2023 growth probably came in at 0.3 per cent, a level it could stay at in 2024.
“the outlook is quite weak, and we’re going to see that having an impact on the revenue side,” said pedro antunes, the conference board’s chief economist. “they’re working from a tougher starting point, with lower economic activity and more expenses. structurally, there’s an additional notch of pressure on finances that’s going to have to be relieved somewhere else.”
after taxes, the recent public-sector wage increases could cost quebec $620 million this year and up to $2.9 billion annually by 2027-28, according to a february document written by godbout and his team.
“were these sums budgeted by the government? no,” godbout said. “this means there will be less money for the other key state missions.”
despite the recent deficits, quebec is in better shape than it was a decade ago. net debt to gross domestic product, a closely watched ratio, is projected to hit 37.7 per cent by march 31, down from 50.2 per cent in march 2016, finance ministry data show.
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“until the pandemic, quebec had done fairly well in terms of getting its deficits in order and building up some reserves,” antunes said. “since the pandemic, the situation is quite different. all provinces have been strained and quebec is no exception.”
still, a return to endless deficits could eventually spook financial markets and trigger a deterioration in the province’s credit rating, making future borrowings costlier, godbout said. such concerns are probably overdone for now, he added.
quebec’s debt is rated aa2 by moody’s, aa- by s&p global ratings and aa2 by fitch ratings. all three ratings are investment grade.
“in the long run, the worry is that the credit rating will be downgraded, but for now it would be exaggerated to raise a red flag over this scenario,” godbout said. “if we don’t go back to balance and we push out the goal by a couple of years, it would mean that quebec will have run deficits for 10 straight years. with an aging population, balancing the budget will always be difficult. the longer we run deficits, the harder it will be to pay down debt.”
to show it’s serious about plugging the budget gap, quebec will eventually need to find ways of generating new revenue, godbout said. with income-tax increases off the table, one of the few possible avenues could be to raise gasoline taxes, which the government could justify on environmental grounds, he said.
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“they don’t have too many options available, and the advantage with raising gasoline taxes is that they are lower here than in many oecd countries,” he said. “obviously, there would be a political cost involved. it could be a hard sell.”
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