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2010 Quebec Budget: Honesty is the Best Policy

By Marie-Christine Bernard and Sabrina Browarski | Version française

Introduction

In its 2010 budget, the Quebec government presents a clear and honest view of the dire fiscal situation that the province currently faces. For fiscal year 2009–10, the province is slated to post its largest deficit—$4.3 billion—since the recession of the early 1990s, and that number will rise to $4.5 billion in 2010–11. More troubling, Quebec expects its gross debt to rise to more than half of provincial GDP through the near term, peaking at 55 per cent in 2012. By 2011–12, debt-servicing costs will eat up nearly $8 billion of Quebec’s provincial budget.

In the face of a rapidly aging population (and the resulting shrinking tax base), the 2010 budget squarely addresses the challenge of fiscal sustainability. Health care—easily the largest spending component—will see growth capped at 5 per cent going forward. Furthermore, new health-care funds will be generated through the introduction of a “health contribution” that will raise $1 billion a year by 2012. A second consecutive 1 percentage point increase in the Quebec Sales Tax (QST), valued at $1.6 billion, will be effective January 1, 2012. Additionally, minor tax increases on mining royalties and compensatory taxes for financial institutions will also add to revenues. At the same time, the Quebec government has set itself the daunting task of restraining total program spending to 2.2 per cent annually after 2011–12. If these measures can be implemented as described, Quebec could return to fiscal balance as early as 2013–14. Regardless, delaying a return to fiscal equilibrium any further is simply not an option for Quebec.

Fiscal Outlook

Among the Canadian provinces, Quebec is arguably in the most precarious fiscal situation. The provincial net debt now stands at $129 billion—equal to 43 per cent of provincial GDP. (Two decades ago, Quebec’s net debt-to-GDP ratio was only 22 per cent.) According to figures released by the Organisation for Economic Co-operation and Development, Quebec is in the fifth-worst position in terms of fiscal debt burden in the western industrialized world. Only Italy, Japan, Belgium, and Greece have higher debt-to-GDP ratios. Between 2009–10 and 2011–12 alone, debt-servicing costs will rise 29 per cent, providing a strong incentive for Quebec to curb its spending growth.

Compounding the problem of the province’s mountain of debt is the fact that, beginning in 2014, Quebec’s working-age population (consisting of those aged 15 to 64) will begin to dwindle. As the eldest members of the baby-boom generation retire, considerable pressure will be placed on younger generations to finance rising health-care and social-service costs. Between 2010 and 2030, Quebec’s working-age population is projected to decline by 3.3 per cent—a stark contrast to the projected increases of 10 per cent in the United States1 and 12 per cent in Ontario.

In addition to the adverse demographic factors, households in Quebec already face the highest tax burden among the provinces, as measured by provincial personal income and retail sales tax remittances. In 2008, Quebecers paid over $3,700 per capita in taxes—15 per cent more than Ontarians, who face the second-highest tax burden nationally, and 56 per cent more than Albertans (who do not pay a provincial sales tax). (See chart.)

Quebecers Face the Heaviest Provincial Tax Burden in Canada

The 2010 budget acknowledges these issues openly. Despite the resurgence of economic activity following the recession, Quebec will remain mired in deficits comparable to those predicted in the provincial government’s Fall 2009 Economic Update. For fiscal year 2009–10, the province will post a deficit of $4.3 billion—equal to 1.3 per cent of nominal GDP—a level not reached since 1996–97. Only by 2013–14, and only by relying upon a highly aggressive expenditure management plan that includes public service pay freezes and rising Hydro-Québec rates, does the Quebec government expect to return to fiscal balance.

In line with spending restraints laid out last year, the budget calls for total nominal program spending growth to be capped at 2.9 per cent in 2010–11. The bulk of savings, however, will be achieved after 2011–12 when annual program spending caps will be lowered to 2.2 per cent, where they will remain until 2013–14. Achieving these targets would be a tremendous coup given that program spending growth has averaged 4.8 per cent over the last decade, well over twice what is projected in this budget. However, assuming that this restraint does materialize, the Quebec government intends to return to nearly 4 per cent annual spending growth by 2014–15.

Health-care spending, which will consume 43 per cent of total revenues this year, will be the toughest dragon to slay. A new “health contribution,” effective July 1, 2010, will generate nearly $1 billion in new annual revenues by 2013–14. Unlike the Health Premium imposed in Ontario, which feeds gross program expenditures, funds collected from this tax will be earmarked for health spending. Quebec is also considering the institution of a health-care deductible requirement in future years, with the cost for low-income Quebecers possibly being offset via tax credits.

Economic Outlook

The economic forecast underpinning the Quebec 2010 budget is generally in line with the Conference Board’s forecast for the next two years. However, the Quebec government anticipates a more modest 2.3 per cent recovery in real GDP in 2010, and expects that to rise to 2.6 per cent in 2011. The Conference Board is forecasting stronger economic growth up front, with a more moderate outlook for the following year. Our outlook anticipates a firmer and more rapid comeback in private investment in 2010, led by a major development in the mining industry. As well, the announced hike in the QST will accelerate consumer purchases of big-ticket items in the final quarter of 2010. That will provide stimulus just as the economy is gaining traction, an effect that may be echoed toward the end of 2011 as Quebecers prepare for the second rate increase. Ironically, the timing of the first tax increase may serve as a subtle form of stimulus in 2010, and could help the province recover more quickly from the recession.

Quebec was at the forefront in initiating an infrastructure plan in 2007, even before the recession hit. And as the recession ravaged the construction sector nationally, public spending helped the sector hold up relatively well in Quebec in 2009. Infrastructure spending—including the creation of 27,000 new social housing units—will continue to support the Quebec economy in 2010, providing some upside potential to the Conference Board’s economic forecast. The Quebec government is injecting an extra $600 million in infrastructure spending this fiscal year, bringing total planned capital expenditures to $9.1 billion (including Hydro-Québec investment).

In terms of nominal GDP, there is some upside potential that could allow the government to collect an extra $3.4 billion by 2011. Stronger commodity prices could well lead to higher nominal GDP and overall prices—thus boosting revenues. Beyond 2011, Quebec is facing very moderate growth—just slightly above 2 per cent. While balancing the books is the main goal for all provinces in the foreseeable future, it is an even more pressing issue in Quebec, where aging demographic pressures are most immediate.

Economic Impact of the 2010 Budget

The budget will have a small positive impact on GDP growth this year and a modest negative effect thereafter. Most of the new tax measures to shore up government revenues will intensify next fiscal year. By 2012, Quebecers will face nearly $2 billion in new taxes. This added tax burden will shave 1 percentage point from disposable incomes, creating downward pressure on nominal GDP growth.

1   For the United States, the working-age population is defined as the population aged 16 to 64.

Marie-Christine Bernard Marie-Christine Bernard
Associate Director

Sabrina Browarski Sabrina Browarski
Economist

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