In Québec, the Act respecting the Ministère des Finances has required since 2015 that a pre-election report on the state of public finances be presented in the weeks preceding a general election call. This Monday, August 15, the Minister of Finance, Éric Girard, presented this important document, which will be used by the various politicians to quantify the various commitments contained in their respective election platforms. The Minister described this report as rigorous and prudent. It should be noted that, as provided for in the Act, this report was previously audited by the Auditor General of Québec, Ms. Guylaine Leclerc.
Highlights
Inflation related revenue increase
The economic recovery, but especially inflation, has had a significant impact on the Québec government's projected autonomous revenues, which are up by $4.7 billion. Of this, an additional $2.3 billion comes from individuals, an additional $1 billion from businesses and an additional $639 million from taxes.
Crown corporations are expected to bring in $579 million more than originally forecast.
This significant increase virtually wipes out the $6.45 billion deficit forecast for the current fiscal year in the last Girard budget.
The new projected deficit, after payment to the Generations Fund, is now only $729 million. A return to a balanced budget, in this context, would be possible quickly.
Maybe no recession, but probably a tax cut
During the presentation of his report, Québec's Finance Minister reiterated that he does not foresee a recession in the province at this time. However, $10 billion in provisions for economic risks and other support and stimulus measures are planned, given the current economic uncertainty. The Finance Minister also confirmed that his government will soon propose an "orderly and responsible" tax cut for individuals.
Auditor General calls report and forecast "plausible”
The assumptions made and the forecasts for the fiscal framework and the debt were deemed plausible for the years 2022-2023 to 2024-2025. The Auditor General notes, however, that the uncertainty surrounding these forecasts is very high due to the surge in inflation, which is causing a domestic and global tightening of monetary policies, the war in Ukraine and the pandemic.
In addition, the Auditor General notes that there is a serious possibility that some of the planned expenditures may not be fully realized due to the scarcity of manpower, suggesting potential additional flexibility.
Analysis
The pre-election report on the state of Québec's public finances is, on the whole, good news for both individuals and businesses. The Finance Minister's last budget, presented last March, already suggested a significant improvement in Québec's financial situation. The document unveiled today shows a significant acceleration of this trend, which will allow Québec to come close to balancing its budget at the end of this fiscal year, whereas the deficit initially forecast was over $6 billion.
This major financial improvement, on the eve of the next Québec general election, will certainly encourage the political parties to be more generous than initially anticipated in their electoral commitments, to the detriment of voices advocating greater budgetary rigour. Similarly, different groups will probably be more ambitious in their electoral demands.
The relevance of a reduction or suspension of payments to the Generations Fund is greatly diminished, regardless of which political party wins on October 3. The government, whatever its color, has enough leeway to lower taxes without encroaching on the Generations Fund.
This increase also confirms the trend of various promises, announced or to come, to lower personal income taxes. At present, several parties have already made commitments in this sense. It also makes it possible to send new assistance to Quebecers to fight inflation, as the current government had hinted a few weeks ago.
It will be interesting to see to what extent the various political parties will have the audacity to promise a similar reduction in the tax burden for businesses, particularly for SMEs. In any case, the scope of the leeway presented today will give the future Québec government, after the election, additional leverage to support businesses, many of which are struggling to recover from the COVID-19 pandemic.
As the Auditor General points out, the increase in government revenues is caused almost exclusively by inflation, a variable that is likely to slow down household consumption, and not by the increased productivity of Québec businesses.
Finally, and despite the safety margins provided, it would have been relevant to include in this report an alternative scenario that takes into account the effects of a potential recession. Despite the reassuring words of the Minister of Finance, Québec cannot be considered completely recession-proof, particularly given the unstable geopolitical context and its dependence on the American economy.