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Budget Analysis: March 21, 2012

Government Sticks to the Plan: Only One More Year of Deficits

by Marie-Christine Bernard and Kristelle Audet | Version française

Despite a weaker economic environment, the Quebec government remains committed to balancing its budget by 2013–14. A $1.5 billion deficit is forecast for 2012–13. Budget 2012 does not introduce any new tax or fee measures. The government remains committed to raising post-secondary tuition fees and to the same fiscal framework laid out in the previous two budgets.

Quebec’s government has kept tight control on program spending over the last two fiscal years, managing to record an average increase of just 2.5 per cent per year. This latest budget contains very few new spending measures, but it does present plans to address the gap in retirement savings, promote senior home care, and address the challenges of climate change.

Even if the government does manage to balance its books by the 2013–14 fiscal year, the gross debt will remain a challenge, as it now equals over 54 per cent of GDP. As such, debt-servicing costs will continue to eat up a significant share of the budget in future years. Nationally, this is the highest debt-to-GDP ratio of any province—nearly 15 percentage points higher than fiscally challenged Ontario’s ratio. (See chart.) In response, Quebec has announced aggressive plans to refinance—and even “pre-finance”—its debt and manage its debt-servicing costs. Nevertheless, while the Quebec government is prudent in its fiscal and economic projections, global economic uncertainty and any prolonged weakness in the Quebec labour market could delay the return to fiscal balance.

Quebec the Most Indebted Province by Far chart

Fiscal Outlook

For the fiscal year ending March 31, the deficit is expected to come in at $3.3 billion. Even though this is lower than previously expected, the province’s gross debt will still increase by more than $10 billion, reaching $173 billion—or 54 per cent of GDP. Almost 60 per cent of that increase will be due to net capital expenditures totalling close to $6 billion. These expenditures refer to government investments in fixed assets, such as road infrastructure, that require borrowing. The deficit will be reduced by more than half in 2012–13, with a shortfall of $1.5 billion now expected.

The government is on track to achieve fiscal balance by 2013–14. And once that is accomplished, gross debt as a percentage of GDP is expected to gradually decline, falling to 52 per cent by 2017. Still, the government will have to keep borrowing to finance investments in road infrastructure over the coming years. This could put further pressure on the debt-to-GDP ratio.

In order to reach fiscal equilibrium, the Quebec government will have to close a revenue gap of more than $11 billion that began to open during the 2008–09 economic downturn. More than half of this adjustment will be achieved through spending cuts in government programs and in the budgets of various government departments and organizations. As a result, program spending is expected to post an increase of just 2 per cent in the fiscal year just ending—well below the 5.1 per cent average increase recorded between 2006 and 2010. For the next two fiscal years, growth in total program spending will remain muted at around 2 per cent.

On the revenue side, increased revenue from individuals and businesses will help close nearly 40 per cent of the revenue shortfall. Most of the revenue gains will come mainly from increases in the Quebec sales tax (QST), the health care contribution (which reached its maximum of $200 per tax filer this year), and the 1 cent per litre annual increase in the fuel tax until 2013. However, all these measures had already been introduced in the last two provincial budgets, and no new taxes have been imposed on Quebec taxpayers in this year’s budget.

The Quebec government has also made substantial efforts to increase revenues by fighting tax evasion, particularly in the construction sector and in restaurants. In the residential construction sector alone, an estimated $1 billion is lost every year due to tax evasion. And since November 1, 2011, all restaurants have been required to produce receipts using a computer system that ensures all taxes due to the federal and provincial government are collected. That measure is expected to bring in an extra $300 million per year. In 2011–12, Revenu Québec managed to collect an additional $3 billion, almost a third of which came from taxpayers who were obliged by the more thorough tax process to meet all their tax obligations.

New Initiatives

Even though the government has little room to implement new programs, Budget 2012 still outlines some new initiatives to address key social issues. In Budget 2011, the Quebec government announced fiscal measures to encourage older workers to remain in the labour force longer. This year, the focus of the government will be on implementing the new voluntary retirement savings plans (VRSPs). These new plans will offer a savings option for the estimated 2 million workers who are not currently covered by a group pension plan.

The government has been engaged in climate change initiatives and greenhouse gas (GHG) emission reduction targets for many years. This year’s budget includes a new 2013–20 Climate Change Action Plan under which some $2.7 billion (self-financed through the carbon market) will be invested between now and 2020 to address the challenges related to climate change. A significant portion of the eventual investment will occur in the transportation sector.

Economic Outlook

Similar to 2011, Quebec is forecast to experience modest economic growth in 2012. Significant job losses at the end of 2011, combined with a heavier tax burden for households, will weigh on economic growth this year. For a second consecutive year, real disposable income will decline in Quebec in 2012. The economic forecast underpinning the Quebec 2011 budget is generally in line with the Conference Board’s forecast for the next two years. The Quebec Ministry of Finance projects that the economy will grow by 1.5 per cent in 2012 and by 1.9 per cent in 2013. The Conference Board’s real GDP forecast is slightly more positive for 2013. We expect a 2.2 per cent increase in real GDP, thanks to firmer business investment and stronger consumer demand. Business investment will be boosted by more upbeat capital expenditures in the manufacturing and mining sector. Furthermore, the job market is forecast to recover, fuelling stronger consumer expenditures.

In terms of nominal GDP, the Quebec Ministry of Finance’s forecast of 3.8 per cent and 4.1 per cent growth over the next two years reflects the weakening price pressures in the near term. After 2013, the Quebec government expects the economy to advance at a moderate pace. Annual real GDP gains of 2 per cent are forecast for 2014–16, 0.5 percentage points lower than the national average.

Economic Impact of the 2012 Budget

The budget will have a positive impact on GDP growth this year and a negligible effect thereafter. Program spending in 2012–13 will be higher than what was planned in Budget 2011, mainly due to costs related to wage adjustments, an upward adjustment in education spending, and other new but minor initiatives. This will add roughly $529 million to program spending in 2012–13 and slightly less than that in 2013–14. In addition, while the provincial government plans to gradually reduce infrastructure spending over the next five years, public investment (including the contribution of government enterprises) will peak in 2012–13 at a higher level than what was initially proposed. An extra $700 million in 2012–13 and $800 million in 2013–14 will be injected in the Quebec Infrastructure Plan. This higher public spending would raise the Conference Board’s real GDP forecast for Quebec by roughly 0.2 percentage points in 2012.

Marie-Christine Bernard Marie-Christine Bernard
Associate Director
Provincial Economic Trends
Kristelle Audet
Economist

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