Quebec Budget 2021
- Government projects $12.3 billion deficit in 2021-22
- Suspends balanced-budget legislation to return to balance in seven years
- $15 billion in new spending measures, including $5.2 billion in 2021-22
- Absent are any new taxes
- Net debt to peak 45.5% in 2021-22 and gradually fall thereafter
The pandemic was obviously still on the mind of Quebec Finance Minister Éric Girard when he delivered his 2021 budget. Addressing the health impact and hardship suffered by Quebecers and businesses continues to command tremendous resources from the province, contributing to a deep $12.3-billion deficit in the year ahead—down modestly from $15 billion in 2020-21. But Minister Girard also turned his attention to tackling healthcare system issues exposed by the pandemic, and laying the groundwork for a full, sustainable and inclusive recovery. Budget 2021 introduces $15 billion of new spending measures over six years to strengthen the healthcare system, support the next generation of Quebecers and foster economic growth. Of this spending, $5.2 billion will take place in 2021-22.
Suspending the balanced-budget act
This choice made it harder for the government to balance its books within the five years required by current legislation. So Minister Girard announced the province will suspend the legislation and achieve balance in seven years (2027-28) instead. He also pledged not to impose any fiscal restraint measures as long as provincial employment is below pre-pandemic levels. With employment projected to recover fully in 2022, fiscal restraint will make its appearance in 2022-23 (the government projects spending on programs other than health, education and post-secondary education will fall 0.2% that year).
A longer-term plan: deficit to be eliminated in seven years
Budget 2021 presented the first strokes of the seven-year plan to return to balance. Minister Girard laid out its four guiding principles as: no increase in the tax burden; tying spending growth to revenue growth; acceleration of economic growth; and an increase in federal contribution to health care spending. The plan still has significant holes in the out-years. Measures yet to be identified amount to $6.5 billion by 2027-28—what the government calls its structural deficit. Future budgets will flesh out a more fulsome plan. No doubt the province is hoping the federal government will chip in to fill the gap.
Government will miss its debt targets
Minister Girard had another reason to suspend its balanced-budget act: the province is set to miss debt targets stipulated in the legislation. Successive deep deficits put provincial gross debt on course to reach 47% of GDP in 2025-26 (exceeding the limit of 45%), and debt representing accumulated deficits to hit 24.6% of GDP (surpass the 17% limit). The adoption of an auditor general’s recommendation to change the accounting treatment of certain transfer payments to reporting entities makes the task harder in some respects. The change resulted in a $12.4-billion upward revision to the net debt and debt representing accumulated deficits in 2019-20. It had no impact on gross debt. Budget 2021 projects net debt to rise $15 billion in 2021-22 to $199 billion and a further $14 billion to $213 billion in 2022-23. As a share of GDP, net debt will reach a peak of 45.5% in 2021-22 and gradually decline to 40.7% by 2027-28.
Yet managing that heavier debt load will remain under control. Debt service costs, while rising, will take 7.0% of revenue in 2021-22—still well below the 10%+ levels that prevailed just five years ago. The debt service costs-to-revenue ratio is projected to drift lower over the medium term thanks in large part to low interest rates.
The government’s financing program will be $28.5 billion in 2021-22, down from $38.4 billion in 2020-21. It is then projected to rise to $32.2 billion in 2022-23, and average $31 billion in the following three years.
Budget plays both defense and offense
With the third wave of the pandemic raising concerns and mass vaccination campaigns giving hope, the outlook is promising and uncertain at the same time. Budget 2021 plays both defensive and offense. It allocates more than $10 billion in additional funding over six years to defend and strengthen the provincial healthcare system, including $7 billion specifically to overcome the public health crisis and $2 billion to improve services to seniors. It also prepares for the future—boosting investment in the school system, job training, accelerating the digital shift (including expanding high-speed internet service), and helping hard-hit tourism and cultural industries rebound.
Deficit-elimination mode will be for another budget
While firmly committed to balancing the books, the government wisely refrained from rushing into deficit-elimination mode. The economy remains too fragile at this early stage of the recovery to remove support. Spending restraints or tax increases—or both—will be for another budget. Small businesses, in fact, got a cut in their income tax rate from 4.0% to 3.2%. That said, it was necessary for the government to present a longer-term deficit and debt reduction plan. While still very rough, full of holes and requiring the cooperation of the federal government, it will serve as a useful baseline to gauge progress in the coming years.
Robert Hogue is a member of the Macroeconomic and Regional Analysis Group, with RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and for the provincial economies. His publications include Housing Trends and Affordability, Provincial Outlook and provincial budget commentaries.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.