We often associate a penultimate episode with great excitement, or a buildup that keeps you on the edge of your seat waiting. The Quebec government’s penultimate budget of its four-year term would better be described as dry, conservative, stable, uninspiring or transitional. But it definitely makes us wonder what to expect next year when Quebec Premier François Legault asks Quebecers for a second majority mandate.
Budget Context
Last week, Quebec Finance Minister Eric Girard tabled his third budget, a far different one than the one he presented March 10, 2020 – days before the entire province was put on “pause” due to the Covid-19 pandemic. Record spending and record deficits ensued as the government scrambled to keep the economy afloat.
It’s important to remember that Quebec came into the pandemic in its best economic position in at least a generation, with successive balanced budgets going back to 2015-16. The Liberal government of Philippe Couillard paid a political price for the unpopular limited growth in spending, which critics referred to it as a period of austerity, and which ultimately played a part in its electoral defeat in 2018. François Legault’s Coalition Avenir Quebec (CAQ) however benefited from the work of putting Quebec’s public finances in order and tabled two more surplus budgets, including what was an anticipated $4.5 billion surplus in 2019-2020 (it turned out to be only $3 billion). The province’s net debt-to-GDP ratio was reduced from a high of 50.7% in 2012-2013 to 37.2% last fiscal year—below Ontario’s 39.9%.
A Year and a Pandemic Later…
Quebec projected a $15 billion deficit for 2020-21, and the anticipated deficit for this fiscal year is $12.3 billion. The deficit is expected drop further to $8.5 billion next year. Nevertheless, there will be no tax increases. New expenses will total $5.2 billion, predominantly in healthcare and education, with the restart focus on SMEs, culture and tourism. The ratio of debt to GDP rose to 49.5% and will increase until 2025-26 before starting to drop again.
What caught most analysts’ attention was the announcement that the return to balanced budget will be pushed back two years to 2027-2028 (for seven years instead of the five years promised last June).
What You Need to Know
The first thing to note when analysing this budget is that Quebec elections are scheduled for October 2022. This likely means that next year’s budget will be a classic electoral budget with good news for almost everyone. Minister Girard has done a good job to maintain plenty of room to maneuver going forward. After the pandemic drove GDP down by 5.2% last year, Girard predicts growth of 4.2%, far below Desjardins’ expected 6%. As such, the revenue estimates are likely underestimated.
Minister Girard made it clear no measures will be taken to reduce the budget deficit until Quebec returns to its pre-pandemic employment levels. But as of last month, 96.8% of jobs lost since the beginning of the pandemic have returned. Quebec has the lowest unemployment rate in Canada at 6.4% (it was at 5.5% before Covid hit).
Furthermore, the most repeated talking point from the government stated that the current crisis will leave Quebec with a structural deficit of approximately $6.5 billion per year. For months, Premier Legault has been demanding a massive increase in the healthcare transfer from the federal government. It is no coincidence that the share he is looking for Quebec just happens to be about $6 billion.
Premier Legault knows he won’t get the full $6 billion from Ottawa, but there’s a decent chance he’ll get an increase. If he doesn’t, this becomes a mobilizing campaign issue for his re-election campaign. With conservative growth estimates, employment not far from a return to where it was a year ago, and a “structural” hole of $6 billion that may shrink, Legault and Girard will enter 2022 with the flexibility to increase spending in popular sectors while planning to balance the budget much sooner than expected. An almost perfect recipe heading into an election.
For Context…
We may just be living in a bizarro world where everything is backwards. Ontario has not had a balanced budget since 2007-08, and is not projecting a return to balance until 2030. Quebec has been in surplus for five of the past six years, with a realistic hope for a return to surplus within five years. Ontario will desperately need to find additional revenue to pay for its additional spending while Quebec plans for election goodies.
At least in this bizarro world, the Canadiens are scrambling to make the playoffs while the Maple Leafs sit in first place.
For help navigating Quebec or to discuss this Perspective, contact Jonathan Kalles. To receive McMillan Vantage’s bi-weekly COVID-19 updates, please contact info@mcmillanvantage.com.
