Quebec’s Fiscal Update: Comme ci, comme ça—Some Critics Say Too Much, Some Say Too Little

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Picture rosier but riskier too

Yesterday, the Quebec government unveiled its mid-year Economic and Financial Update, revealing better-than-anticipated finances for the province relative to Budget 2024. The improvement is largely due to stronger corporate tax revenues, as the provincial economy has outperformed expectations this year. (See Chart 1.)

However, Quebec’s fiscal situation remains among the most concerning of any province. The government is still forecasting a deficit of $11 billion for the 2024–25 fiscal year. While stronger revenue will allow the deficit to narrow over the next five years compared to earlier projections, the government’s financial outlook assumes 1.5 per cent economic growth in 2025, above our own forecast. This outlook also comes with several risks, including labour market pressure and U.S. trade policy uncertainty.

Boom and bust

The Quebec government expects real GDP growth of 1.2 per cent in 2024, significantly higher than the 0.6 per cent originally projected in Budget 2024. This upward revision is attributed to a stronger-than-expected performance in the first half of the year, driven primarily by robust household spending. In our latest provincial forecast, we estimate Quebec’s real GDP growth will be 1.0 per cent in 2024.

Looking ahead, the government projects economic growth of 1.5 per cent in 2025, somewhat stronger than our 1.0 per cent forecast. According to the fiscal update, growth in 2025 will continue to be driven by household spending as interest rates decline further. Non-residential investment is also expected to strengthen, with construction on several projects in the battery and mining sectors gaining momentum. Additionally, exports are projected to recover in tandem with improvements in the global economy

These factors are key drivers in our own outlook, though we are less optimistic than the province when it comes to business investment and have a different view on demographics and labour markets. While the Quebec government anticipates continued slackening in the labour market in 2025, with the unemployment rate rising to 5.8 per cent, we project a lower rate of 5.2 per cent.

Although we agree on a similar increase in employment, we expect that a sharp slowdown in population growth will limit labour force growth to just 0.2 per cent. Coupled with a declining participation rate, this will leave employers with little choice but to recruit from the pool of unemployed workers, ultimately driving the unemployment rate lower. This trend is expected to persist over the medium term, particularly as retirements intensify closer to 2030.

Our more conservative outlook for Quebec’s economy translates into a more modest view on the province’s finances than outlined in yesterday’s release. Considering that their own fiscal outlook was already painting a dark picture, the Quebec government is likely to find itself in a difficult spot for the next several years.

If I had 2 billion dollars

With the province’s finances looking slightly less gloomy than six months ago, the government announced an additional $2.1 billion in new spending. New spending focused on a few areas of the economy, with the largest initiative being $880 million for the public transit system to maintain its current service levels. Beyond this, additional spending initiatives are modest in scale.

Cutting tax credits for key working cohort misses the mark

The government announced a few changes to its tax system, including a key decision to raise the eligible age for the career extension tax credit from 60 to 65. We are concerned this change comes at an inopportune time, as the province has among the tightest labour markets in the country. With a median age two years older than the national average and the lowest immigration rates among all provinces, removing the tax credit for ages 60–64 will make the situation worse by discouraging workers in this age group. The change is particularly concerning given the seniority of workers in occupations experiencing severe labour shortages, such as construction-related trades, where retaining experienced employees is critical.

Eliminating tax credits for near-senior workers is also coming at a time when the province’s labour force is on the brink of contraction. After record population gains over the past two years, the population in Quebec is expected to stagnate given the federal government’s abrupt reduction in Canada’s migration targets beginning in 2025 and the Quebec government’s pause on many programs which admit both permanent and non-permanent residents into the province.

Slower population growth will place additional downward pressure on the economy and the province’s tax base, just as many baby boomers are exiting the labour force. This demographic shift is set to heighten demand for healthcare spending, compounding the fiscal challenges faced by the province.

Risks abound for bright investment outlook

Much like other provinces, Quebec’s economic and fiscal outlook depends significantly on U.S. trade policy. President-Elect Donald Trump has repeatedly mentioned slapping a minimum tariff of 10 per cent on all imports to the United States, a rhetoric we see as a bargaining tactic rather than a sincere plan. Still, there is potential for new tariffs across several important sectors in Quebec— such as forestry and aluminum. Policy around zero-emissions vehicles (ZEVs) and parts is also up in the air, which could derail the province’s plans to grow the ZEV battery industry.

Better finances for the province are based on assumptions of a substantial increase in non-residential investment, something we broadly agree with. However, it is important to mention the risks associated with the province’s investment landscape. The Northvolt battery plant is among the largest investment projects in the province, valued at $7-billion. Earlier this week, however, the company filed for bankruptcy protection in the United States, casting doubt over whether the project will proceed. The company has stated that its Canadian subsidiary is financed separately, and the battery plant will not be impacted, but rising concerns over the ZEV market are casting a cloud over current plans.

If the Northvolt plant were to be cancelled, it would significantly reduce the province’s investment outlook and have long term implications for Quebec’s economy. In addition, concerns over the ZEV market have the potential to hurt demand for the province’s minerals, such as aluminum, creating another wrinkle in our forecast.

Raising the roof on housing

The Quebec government anticipates robust housing starts next year and in the medium term, fueled by declining borrowing costs and the momentum from strong population growth in 2023–24. In its fiscal update, the government announced a new $208 million investment to improve housing accessibility. However, with the gap between housing supply and demand having significantly widened in recent years, the impact of this program is expected to be limited in addressing the shortfall. Significant investments will be necessary to reverse the current trend. Moreover, recent non-financial policies aimed at reducing red tape, coupled with lower near-term immigration, are likely to yield more substantial results in tackling the housing crisis.

Treading water

In summary, the Quebec government’s mid-year Economic and Financial update showed a modest improvement in the province’s finances, thanks to better economic growth than projected in the spring. The government responded by announcing an additional $2.1 billion in spending, though new initiatives were minor on their own. Looking ahead, Quebec’s financial situation will continue to be hampered by the province’s low migration rates and relatively senior population. Healthy gains in business investment will hopefully soften some of these challenges, but the environment is surrounded by risks.