Provincial Budgets

March 12, 2024 | 19:15

Quebec (FY24/25) — Losing Sight of Balance

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Shelly Kaushik

Economist
Economics

Shelly joined BMO Economics in 2020 and conducts research on the Canadian and regional economies. She also provi... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Shelly Kaushik

Economist
Economics

Shelly joined BMO Economics in 2020 and conducts research on the Canadian and regional economies. She also provi... (Read more)

The Province of Quebec is projecting a much deeper $8.8 billion deficit in FY24/25 (1.5% of GDP), before transfers to the Generations Fund. That compares to the small $678 million shortfall last expected in the fall fiscal update, and would mark the deepest deficit on record for Quebec in dollar terms (the deepest since the mid-1990s as a share of GDP).

Looking ahead, Quebec will run deficits right through the subsequent four-year forecast horizon, a notable shift from prior plans to balance the books by FY25/26. While the Province builds in a $1.5 billion per year contingency through the forecast, it also will need to find $2 billion in savings by the end of the horizon.

Over the five-year period from FY23/24 through FY27/28, the combined deficit is running a hefty $25 billion larger, while the net debt-to-GDP ratio pushes up to 41.0% versus steady declines assumed in the fall update. Suffice it to say that a softer economic outlook and substantial spending pressure have recast Quebec's previously positive fiscal situation in a much tougher light.

This budget includes a net $1.9 billion in new policy announcements for FY24/25, largely on the spending side.

Summary of Major Policy Measures:

A number of business tax measures including: tweaks to tax credits in the IT sector; boosting support for film and TV production; and, eliminating the tax credit for retention of experienced workers. The measures are expected to cost businesses roughly $1 billion in the next five years.
Full review of tax and budget expenditures to commence in the spring. Budget 2025 will aim for a fiscal plan that projects a return to balance.
Almost $1.9 billion over five years for economic development, including measures to raise productivity and improve competitiveness in key sectors such as construction and aerospace.
$4.9 billion over six years for health and social services, education, and higher education.
The forecasts incorporate the recently-agreed-upon public sector wage settlement, which includes a 6.0% wage bump in FY23/24. The increase totals 17.4% over five years.

The Province will draw $4.4 billion from the Generations Fund to reduce borrowing this coming year, and expects to reduce that amount to $2.5 billion in FY25/26.
Borrowing program of $36.5 billion for FY24/25.

Total revenue is projected to rise 2.4% to $150.3 billion in FY24/25. Growth is slowing alongside softer economic growth and smaller increases in federal transfers. Indeed, federal transfers are expected to fall by $1.9 billion this coming fiscal year. Over the following four years, revenue is projected to rise around 4% per year, consistent with slower but sturdy nominal growth.

The budget is built on expectations of still-weak real GDP growth, estimated at 0.6% this year before accelerating to 1.6% in 2025. That is in line with our current outlook of 0.6% in 2024 and 1.7% in 2025. Despite the expected sluggishness this year, we continue to anticipate a rebound in Central Canada as rates begin to fall in the second half. Still, Quebec is expected to lag the rest of the country with the slowest growth rate this year, as below-average population growth provides less of a boost in the province.

Total spending is projected to jump 4.4% to $157.6 billion in FY24/25. Program spending growth picks up to 4.6% after a 3.0% rise last fiscal year. Debt service costs also step modestly higher to $9.8 billion. Significant pressure comes from the negotiated wage settlement with various areas of the public service. The agreement came in at 17.4% over five years, and some front-loading with a 6.0% increase in FY23/24. Beyond this coming fiscal year, program spending growth will ebb to 2.5% per year through FY28/29.

As is the norm, the fiscal outlook builds in transfers to the Generations Fund for debt reduction. This fiscal year's transfer will total $2.2 billion, and transfers will grow gradually through the forecast horizon.

Meantime, Quebec will draw a substantial $4.4 billion from the fund this year, and $2.5 billion in FY25/26, to pay down debt (or, in practice, reduce borrowing requirements). The balance of the Generations Fund currently sits at $18.5 billion.

Total borrowing requirements are pegged at $36.5 billion for FY24/25, including $16.9 billion in maturities. That's up sharply from $21.5 billion in FY23/24, and will remain near $33 billion in FY25/26 before gradually falling. Note that the FY23/24 tally came in lower than initially expected in the budget plan by $8 billion, but the more robust borrowing outlook still leaves per-year funding between FY23/24 and FY26/27 running about $2 billion higher. Net debt will total $238 billion by fiscal year-end, or 40.3% of GDP. That's up from 39.0% in the prior fiscal year, and would mark a third consecutive year of increase after bottoming at 38.2% in FY21/22. At this time last year, the net debt-to-GDP ratio was pegged at 37.5% of GDP for FY24/25, and falling.

The Bottom Line: A slower economy and mounting spending pressure have pushed Quebec's fiscal outlook onto a weaker track. Quebec has spent a number of years boasting a strong relative fiscal story, but the province looks to be in a tougher spot for now. While this document foregoes much attempt at restraint, the 2025 edition might look tougher.