QST should be increased to achieve a balanced budget: Institut du Québec

Quebec will struggle to achieve a balanced budget within the prescribed timeframe without curbing spending and raising taxes, according to the Institut du Québec (IDQ).

If the Legault government follows the same trajectory, the budget laws, which he himself updated, will not be enforceable, according to an analyst at the think tank. The analysis does not take into account the trade war with the United States, which could further cloud the public finances picture.

“Despite a significant slowdown in spending presented in the November 2024 update, we are ultimately failing to meet the government’s two legal obligations: to return to a balanced budget by 2029-2030 and reduce the debt-to-GDP ratio to 35.5 per cent by 2032,” noted Emna Braham, President and CEO of the IDQ, in an interview.

Quebec must address a deficit of nearly $11 billion, according to the latest economic update from the Ministry of Finance. Approximately $3.2 billion of this deficit is structural, meaning it is not related to the economic slowdown.

Finance Minister Eric Girard is scheduled to table his budget on March 25. Quebec’s top financial official has already warned that the trade war could cause the deficit to be larger than anticipated.

At the same time as the budget, the minister is also expected to present his plan to return to a balanced budget within five years. It remains to be seen what impact economic uncertainty will have on this objective.

Without taking the trade war into account, Quebec would already not achieve its objectives without additional measures, according to the IDQ analysis. “Without any change in direction,” the government would still be in deficit until 2037-2038 before the Generations Fund is paid out. Taking into account payments to the Generations Fund, the deficit would not be eliminated by 2045.

This situation is explained by the “starting point” of public finances and the aging of the population, which is putting pressure on health spending.

Sacrifices

Returning to a balanced budget will be a difficult undertaking. The IDQ has attempted to develop a scenario that would achieve the targets of the budget legislation while respecting the Legault government’s broad guidelines.

To achieve this, the growth rate of health and education spending will have to be maintained at 2.4 per cent and 1.8 per cent, respectively, until 2026-2027, as the government plans. However, the increase in other spending should be limited to a rate of 0.5 per cent, well below inflation.

Despite this “drastic” slowdown, a balanced budget would not be achieved, and Quebec would have no choice but to find a way to increase its revenues. Since the Legault government, which lowered the personal income tax rate, has committed not to raising taxes, the IDQ is not considering such an increase.

“If we don’t increase personal income tax, if we don’t increase business taxes, we’ll still have consumption taxes,” summarizes Braham.

To make up for the shortfall, we would need to add 0.5 percentage points to the sales tax, which would generate $1.6 billion in additional revenue in 2029-2030.

What would be the consequences of not complying with the budget laws? Debt service, or the portion of the budget devoted to paying interest on the debt, would still be lower, despite recurring deficits. It would drop from 6.5 per cent in 2024-2025 to 5.1 per cent in 20 years.

Braham points out that previous government debt reduction objectives have “greatly improved Quebec’s financial situation. This has created room to maneuver to deal with more significant crises.”

“Even if the situation isn’t catastrophic today, we are much more vulnerable to crises because we no longer have the necessary room to maneuver to deal with them,” she adds.

–This report by La Presse Canadienne was translated by CityNews