Right Idea, Wrong Timing? Our Analysis of Quebec’s Budget 2023

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The Quebec Government issued Budget 2023 on Tuesday, putting forward tax cuts and additional spending at a time when inflation remains a concern. The Government had already twice delivered generous cash payments to help offset the impact of high inflation on households—with the last pre-budget measure, implemented in December last year, putting $3.5 billion back in the hands of taxpayers immediately. These payments, along with other measures under the “Anti-Inflation Shield”, will total $13 billion over six years. Now, just a few months later, Budget 2023 adds tax cuts that will cost an additional $9.2 billion (from 2022–23 to 2027–28), and while adding generously to household incomes, may in fact also add to inflationary pressures—or at least to the Bank of Canada’s challenge in beating back inflation.

While there’s no doubt that many lower-income Quebecers are feeling the pinch of high inflation, the province is the most constrained in terms of its labour market. The unemployment rate averaged 4.0 per cent in the first months of 2023, by far the lowest in the country, and this may be driving stronger wage inflation than in other provinces. Average wage gains in Quebec outpaced the national average in 2022 by nearly 1 percentage point, while this is good news for households, the concern is that strong wage inflation could make the fight to reduce inflation in the province more difficult.

Budget 2023 didn’t stop at tax cuts, with additional spending mostly on health but also on infrastructure, the environment and productivity, adding another $12.4 billion over the Budget’s six-year planning horizon.

Overall, Quebec’s latest budget takes a measured approach to its finances. Quebec’s economy was strong over the years prior to the pandemic, helping the provincial government run surpluses, pay down debt and even start building the Generations Fund. The plan was to eventually give the fiscal dividend back to Quebec households by cutting the province’s relatively high taxes. Budget 2023 has done that, despite the fact that the steep and lasting economic and fiscal cost of the pandemic puts into question whether the timing is right.

Kicking the Debt Down the Road

In its latest budget, Quebec has increased spending in the short-term, but continued to commit to long-term prudence. In just its latest update in the Fall of 2022, Quebec’s government expected to run a surplus (before its contributions to the Generations Fund) as early as fiscal year 23-24, and to remain in that position all the way through its fiscal planning period, ending in fiscal year 26–27. That plan is now out the window. The income tax cuts are set to knock out $9.2 billion in revenues through 2027–28, which, when coupled with a weaker economic outlook, keeps the province comfortably into a deficit position through fiscal year 2026–27, though this deficit includes over $1 billion in contingencies each year.

Often, governments use tax cuts to shrink government, but that’s not the story here. The province has been on a path to reducing its net debt through contributions to the Generations Fund, but the plan is for the tax breaks to mostly reduce the rate at which Quebec will pay down its substantial debt. This marks a significant shift in policy, with the province expected to meet its debt goals in 15 years, rather than the previously planned 10 years. In fact, the province is set to propose changes to its debt management strategy in order to enable the government to better deal with economic shocks.

The government also plans to increase spending over the next several years. In the Fall update, the province was projecting program spending of $134 billion in fiscal year 2023–24, a number that has climbed to over $138 billion in the latest budget. Spending growth is set to average 2.1 per cent annually between fiscal year 2023–24 and fiscal year 2027–28. Much of this spending is allocated to health care, but also includes the other initiatives announced in the budget.

While the province’s short-term finances will take a hit, the long-term plan remains rooted in fiscal responsibility. Revenue growth is expected to average 3.2 per cent between 2024–25 and 2027–28, outpacing spending growth of 2.5 per cent over the same period, meaning the province will be running structural surpluses for many of these budget years—even with contingencies of over $1 billion in every year. (See Chart 1).

Chart 1

Rising Expectations
(spending and revenue forecasts, $ billions)

*including allowance for risk
e = estimate
f = forecast
Source: Finances Québec.

Adding everything up, the province’s finances are set to be in solid shape by fiscal year 2025–26, when the province’s balance will return to surplus (including contingency reserves but excluding contributions to the Generations Fund). When adding in contributions to the Generations Fund, it won’t be until fiscal year 2027–28 that the province finally reaches surplus.

New Debt Plan Raises Fiscal Vulnerability

It’s worth noting that these financial forecasts are all dependent on the province’s expectation that its economy will grow by 0.6 per cent in 2023 and 1.4 per cent in 2024. Our own forecast projects Quebec’s economy will grow by 0.2 per cent in 2023 and 2.0 per cent in 2024, slightly faster in total. With our outlook, given the spending plans outlined in the budget, the province’s finances could come out rosier than what’s presented in the budget, especially in the short-term—although economic risks are plentiful.

The biggest concern in this budget is the province’s higher debt path, and the suggested proposal to amend the Balanced Budget Act, an amendment that would weaken the commitment to a fast-paced debt reduction. Compared to the fiscal update, deposits to the Generations Fund are lower than previously estimated, which will keep debt loads higher for longer, and makes the province’s debt reduction plan more susceptible to any worsening of its economic performance, and there are no shortages of economic risks today. (See Chart 2).

Chart 2

Crossing Paths: Québec and Ontario’s Debt Loads
(net debt/GDP, %)

e = estimate
f = forecast
Sources: Ontario Finance; Finances Québec.