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Will red-ink budgets be a thing of the past?

Challenges and Choices for Quebec

March 18, 2015

“Provided certain conditions are respected, Quebec could soon be able to invest in social or economic development projects, or even reduce its tax burden, without getting caught in a spiral of debt,” said Raymond Bachand, President of the Institut du Québec (IdQ). The IdQ’s second study on the state of public finances, entitled La fin des budgets écrits à l’encre rouge? Défis et choix du Québec, points to a brighter future for public spending in Quebec, thanks to a more favourable economic outlook and the ongoing improvement to Quebec’s fiscal position. “In Quebec, red-ink budgets could conceivably become a thing of the past,” said Bachand.

Simulations based on The Conference Board of Canada’s economic models suggest that Quebec is on the verge of a major upswing. With budgetary surpluses projected to begin in 2017, the province could, for one of the few times in its history, simultaneously maintain its current level of services while reducing its debt load and even opening up new opportunities.

“While we’re now seeing the light at the end of the tunnel, the Quebec government still has a ways to go in its recovery. It’s undeniable that in the short term, keeping program spending at 0.7 per cent in 2015–16 poses a sizable challenge. Businesses must also strive to take advantage of the strong U.S. economy. However, the current conditions appear to bode well for this to occur,” said IdQ research head Robert Gagné.

In the short and the long term, Quebec can achieve financial flexibility, provided the government permanently reduces growth in health care spending from 5.2 per cent (the average annual increase in health care spending in Quebec over the last 10 years) to 4.2 per cent. Doing so would constitute a historical turning point that would give the provincial economy fresh impetus. 

“To meet the challenges of the aging population, priority should be given to workforce training and education in terms of investing in new projects,” said Mia Homsy, the IdQ’s director. “The creation of a skilled labour pool whose training would meet market needs is proving a necessary prerequisite to long-term, sustained economic growth.”

The projected budget surpluses could be used in different ways. Three simulations were performed using The Conference Board of Canada’s economic model to illustrate the long-term impact on public finances:

In the first two scenarios, net debt would fall from over 50 per cent of GDP in 2015 to almost 30 per cent of GDP in 2025, the net debt value would be slightly reduced, the annual interest payments on the debt would remain essentially the same, and the tax burden on households and businesses would remain among the highest in North America.

In the third scenario, net debt would go from over 50 per cent of GDP in 2015 to close to 40 per cent in 2025. However, the net debt itself would continue to rise, as would annual interest payments on the debt. Nonetheless, with fewer dollars going toward taxes, households would enjoy a rise in disposable income while net production costs for businesses would decrease, a situation that would, overall, have a positive impact on economic activity.  

Each option has economic advantages and disadvantages, but all are achievable without compromising the ability of future generations to make their own decisions.