Quebec Budget 2011: Budget Moves Quebec in Right Direction—But Commitment and More Specifics Needed

Overview

In its 2011 budget, the Quebec government restates measures announced last year and remains committed to balancing the books by fiscal 2013–14. Tough choices were made last year, and the government is sticking to its course in this budget. While the 2011 budget does not include any new or expanded tax measures, the government opted to tap into new sources of funding. For example, the budget boosts post-secondary education tuition fees by $325 per year for five consecutive years, starting with the 2012–13 school year. (In the past 43 years, tuition fees in Quebec have been raised only 10 times.) The province kept a tight leash on program expenditures in 2010–11. After growing by an average of 5 per cent per year over the last decade, program spending advanced by only 2.4 per cent in 2010–11, resulting in a deficit of $4.2 billion—slightly less than what was projected at the start of the fiscal year. But the government will need to keep a close eye on spending in 2011–12. A deficit of $3.8 billion is now anticipated for this year, worse than what was projected in Budget 2010. The government plans to rein in the deficit to $1.5 billion in 2012–13 by keeping even tighter control on program spending. More detailed targets will be needed in subsequent budgets, as a total of $1.7 billion in budget measures need to be more clearly identified if the books are to be balanced. Overall, however, the Quebec government is headed in the right strategic direction.

Fiscal Outlook

Quebec is firmly holding to its commitment to have a balanced budget by 2013–14 (four fiscal years before Ontario would do so under its current plan). The provincial net debt now stands at just over $150 billion. That is equal to 50.1 per cent of GDP—a level well above all other provinces. Looking ahead, Quebec, like all provinces, faces an aging population, and that will surely drive up health-care costs. Quebec’s problem is compounded by declining growth in the size of its working-age population, thereby reducing its capacity to generate additional revenues. By way of comparison, Ontario, which faces a similar fiscal situation, has strong growth in its working-age population. Average annual program spending increases of 5.9 per cent over the last four years are clearly unsustainable.

Last year’s budget acknowledged the pressing need to control spending and raise revenues. An additional increase to the sales tax rate, a new health-care contribution, and reduced spending growth were introduced in Budget 2010. While the 2011 budget holds the same vision, the focus is on limiting budgetary spending growth. The government is sensitive to the fact that Quebecers already pay the highest provincial taxes in the country.

With its older and aging population, Quebec’s greatest fiscal challenge is controlling its spending on health care. In 2010–11, health care made up 47.5 per cent of all program spending. The proportion of people over the age of 65 is expected to reach 19.9 per cent by 2020, up from 15.7  per cent in 2011. A new tax credit worth up to $1,500 per older worker is intended to encourage those over the age of 65 to keep working. The total cost of the measure is estimated at $120 million per year. In addition, the Quebec government plans to fund its health-care system by relying on the newly created FINESSS¹ fund, which is bankrolled by the health contributions that began on July 1, 2010, and that will progressively rise over the next two years. Health-care spending is now forecast to grow 5 per cent annually over the budget forecast, more in line with historic trends and better reflecting the demographic pressures.

With health-care spending continuing to rise rapidly, aggressive expenditure management in other departments will be needed. In an effort to control education spending, beginning in the fall of 2012, post-secondary students (or their parents) will have to open their wallets a little wider. The government will increase tuition by $325 per year over five years. Still, tuition fees will remain well below the Canadian average. (See chart.) The government is also calling on its major public bodies, including Hydro-Québec and Loto-Québec, to cut spending and find efficiency gains. Despite the need for additional revenues, the new budget announced only minor tax measures—a small increase in pension contributions and a change to the shale gas tax regime. To increase revenues without directly increasing taxes, the government plans to fight tax evasion, eventually hoping to recuperate $1.2 billion over the medium term.

Overall, planned program spending growth will be limited to 2.4 per cent in 2011–12 and 1.4 per cent in 2012–13, and revenues are expected to benefit from a recovering world economy. Achieving the goal of a balanced budget in 2013–14 will be challenging, however. This latest budget still includes $1.7  billion in undefined savings and new revenue measures, and the cuts to departmental budgets other than health care in 2012–13 and 2013–14 are likely to affect the level of services provided to the voting public.

Economic Outlook

The recovery is well entrenched in Quebec. The job market is dynamic, and households spent at a healthy pace right through 2010. But the Conference Board expects the economic recovery to lose momentum over the next two years. Taxpayers are now facing myriad tax increases, and the government is set to ease the stimulus measures put in place over the last two years. Real disposable income will lose ground this year—a first since the 1990–91 recession. 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, after rebounding by 3 per cent last year, real GDP will grow by a modest 2 per cent in 2011 and 2.2 per cent in 2012. The Conference Board’s real GDP forecast for 2012 is slightly less optimistic—just below 2 per cent, as we expect residential construction to suffer a deeper decline.

The Quebec government has stressed the risks to the trade outlook. Exports have yet to turn around, and prolonged weakness in that segment of the economy could jeopardize near-term economic performance. Quebec, like other provinces, will gradually ease infrastructure stimulus spending over the coming years. But the level of capital investment will not decline until the next fiscal year. For now, more funds will be injected into public infrastructure in 2011–12, bringing total planned capital expenditures (including Hydro-Québec investment) to $9.6 billion. The provincial government also announced new infrastructure investments and measures totalling $1.191 billion over the next five years. These investments are part of the Northern Plan to develop transportation and telecommunications links. The goal is to improve quality of life and facilitate natural resource development in the Northern part of the province.

In terms of nominal GDP, there is some upside potential that could allow the government to collect an extra $1 billion to $2 billion this year. Higher commodity prices, due mainly to rising prices for petroleum products and food, could well lead to higher nominal GDP than forecast in the budget—a situation that would boost revenues for the government. After 2012, the Quebec government expects the aging of the population to temper growth in the economy. Annual real GDP gains of 2 per cent are forecast for 2013–15.

Economic Impact of the 2011 Budget

The budget will have a small positive impact on GDP growth this year and a neutral effect thereafter. The stronger outlook for public investment will shore up construction activity, boosting employment and income gains further. As well, program spending in 2011–12 will be higher than what was planned in Budget 2010, due to costs related to pay equity, the agreement with child-care service providers, and some other minor adjustments. This higher government spending could add up to 0.3 per cent to the Conference Board forecast for real GDP in 2011.