Quebec's return to zero deficit could be delayed until 2030

Quebec Finance Minister Eric Girard will present his first budget on Tuesday since the adoption of a new law that allows him to postpone the moment when the government will stop running the deficit for a maximum of three years.

The Finance Minister's office confirmed this week duty The new version of the balanced budget law will lead to presenting a new plan to return to balanced budgets. The response was: “This law abolished the old law.” “Under the new law, due to the deficit shown in the public accounts for the period 2022-2023 presented on December 11, the government has until the 2025-2026 budget to present this plan.”

Since the law sets the duration of plans to return to the budget balance to a maximum of five years, it is possible that the government will decide to extend the deadline until the fiscal year 2030-2031, depending on when it is submitted and the number of years it takes.

At the end of January, at the end of a gathering of his deputies in Sherbrooke, Prime Minister François Legault did not rule out postponing the current goal of restoring budget balance during the 2027-2028 fiscal year. He answered in a press conference: “It is too early to answer this question.” “We are in the process of carrying out all the analyses. I have had meetings with Eric Girard, and I have plans for other meetings in the coming weeks. I ask you to be patient for a few months, and we will tell you everything in the budget. »

Three hours ago, Mr. Girard revealed the financial impact of the larger-than-expected salary increases granted to state employees. He explained: “The matter is mathematical at this stage. The deficit will be larger.” Mr. Girard had refrained from repeating his government's commitment to restoring budget balance in 2027-2028, at the end of his plan that already requires the suspension of the law in order to add two years to the five years scheduled to reach this goal.

In addition to additional raises for state employees, the minister highlighted the downward revision of the Bank of Canada's economic growth forecast for 2024. “The economy is practically at a standstill in the recession,” he explained.

In its update last November, the Legault government expected a deficit of four billion dollars, after payment to the Generations Fund, for the period 2022-2023. Then it decreased by one billion annually until the balance returned in 2027-2028.

Possible postponement

At the end of November 2023, the government adopted a new balanced budget law that completely replaces the previous law. The text still imposes a five-year deadline to eliminate the deficit, but it includes relaxations.

In the previous version, it was possible to declare a larger deficit during the implementation of the plan without exceeding the initially planned five years. The only way to delay a return to balanced budgets was to suspend enforcement of the law. The text adopted in December provides a new reason to postpone this moment when “a less robust than expected economic recovery occurs at the end of a period of economic slowdown or recession.”

In the parliamentary committee, while studying these amendments included in the comprehensive draft law, Mr. Girard called for more flexibility. “The application of the current law, in the context of a major economic slowdown, has proven to be too stringent,” he said. “Some of the concepts recommended by this law must be modified to make its application more flexible and simple, while maintaining the restriction associated with respecting a balanced budget. »

During consultations on the draft law, economist Luc Godbout insisted on the importance of setting criteria that define a “less strong than expected economic recovery.” The professor from the University of Sherbrooke had suggested that a fall of more than 25% in expected GDP growth was part of this. Then he told Minister Girard: “I think we are starting to see a big change.”

The new version of the law was adopted as proposed last December, without specifying criteria.

Plan or not

Even if he chooses not to invoke a lower GDP than his forecast, Mr Girard could still present a new plan, Professor Godbout believes. “We give ourselves the right to present a new plan to return to balanced budgets because the old law no longer exists,” the economist explains in an interview.

However, it is possible that the minister will continue on track as planned, he said. “This does not mean that the minister is abandoning the plan, but it means that he has the opportunity to present a new plan,” explains Mr Godbout. Under the new law, Legault's government can wait until next year to develop a new plan to return to the budget balance.

Director of Mr. Girard's government until 2022, Philippe Gougeon also believes that the plan to return to balance has been negated by the adoption of the new law. The person who is now director of consulting firm AppEco laments that these changes were adopted carelessly. “It really went under the radar,” he adds. But the flexibility he's given himself may mean he doesn't have to immediately come up with a plan to return to a balanced budget. It will depend on how he interprets his law. »

The head of the public policy committee of the Association of Economists of Quebec (AEQ), André Levesque, believes the government will not have to cite difficult economic conditions to present a new plan to return to budget balance. “The existing plan, in a way, disappears because they abolished the old law,” he said.

Mr. Levesque, who participated in the consultations on the draft law, confirms that this element went unnoticed. “It's one thing to give yourself more flexibility. It's another thing to completely restart the counters from scratch. We'll really see what they do. Basically, it'll be about seeing what horizon they'll give themselves to get back to budget balance.”

Austerity or strictness?

By asserting that state employee salaries would increase the deficit, Mr. Legault defended himself from the desire to resort to austerity. Mr. Girard stressed that the health and education budgets will increase in particular due to these salary increases.

For Philippe Gougeon, there can be no talk of austerity if the two main tasks of the state are preserved. We learned this lesson from the fiscal measures taken by Philippe Couillard's Liberal government, which left their mark. “The Cuellar government has written the book or the chapter on what not to do: what is written in it is not to cut health and education. »

Once this is confirmed, Mr. Gougeon expects spending growth to be lower in other departments, between 0% and 1%. But he believes that programs linked to the Ministries of Family, Immigration and the French Language should be preserved. According to him, cuts will be easier in the Ministry of Economy, where budgets have increased in recent years. “The tax measures have been very generous. So, at the political level, the consequences of impacting business aid envelopes are really less.

For his part, Luc Godbout believes that Minister Girard is in a complicated situation due to the restrictions imposed on him. “The mandate he got from the prime minister is a bit like squaring the circle. It's: “You don't get to raise taxes, you don't get to do austerity, but you have to make this deficit go away.” » The professor believes that a return to balanced budgets can only be achieved by reducing spending. He explains: “The Minister of Finance is in a strange chair, because revenues need to increase.”

In its pre-budget report, the AEQ noted that in 2022-23, departmental and agency expenditures were still above the pre-pandemic level, even if COVID-19-related costs ($2.3 billion) were marginal. In Quebec, per capita spending was 14% higher than the Canadian average in 2022-2023, while this gap was 6% in 2017-2018, the document notes.

“Unless there is a stunning improvement in productivity, there will be no growth that will save the day in terms of income,” says Andre Levesque. “Over the next five years, the rate of growth in spending must slow.”

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