Balanced budget: can we still achieve it?

Nothing is clearer than Article 6 of the Balanced Budget Act: The government may not incur any budgetary deficit. But why does it happen with every budget? It’s quite a difficult accounting exercise to wrap your head around. I make no claim to being a public finance expert, but we can certainly go back to the basics.

Let’s start from the beginning. The budgetary balance is calculated as the difference between government revenues and expenditures. It does not take into account the Generations Fund (we’ll come back to that). 

Art. 6.2 : The government achieves a balanced budget when the budgetary balance is zero or shows a surplus.

A balanced budget and a zero deficit are one and the same thing. The goal is to bring the government’s finances to a neutral position in order to reduce Quebec’s debt. 

Even though the law stipulates that deficits are not allowed, the government may still post a deficit balance when it tables its budget. That is when the famous return to a balanced budget comes into play. 

A bit of history. It was the duo of Lucien Bouchard and Bernard Landry (Deputy Premier and Minister of Finance) who enacted this law in 1996. It’s no secret that the PQ Premier of the day had made cleaning up the government’s finances his number-one priority. It was such a priority that in his first throne speech he was already floating the idea of creating this law. Some would attribute the disorder in public finances to the referendum year Quebec had just been through. For Lucien Bouchard, Quebec could not afford to lose a minute looking for someone to blame and had to rise from that turbulent period for public finances. He organized a summit bringing together stakeholders who would normally never sit at the same table: the community sector and private enterprise, employers and unions, the government and the opposition parties. In short, everyone was going to be part of the effort to turn the economy around. A bill quickly followed and was also supported by Daniel Johnson, then leader of the Official Opposition. The return to a balanced budget was going to be everyone’s business, at least for a while. 

Applying this law: no easy feat

The law requires that the minister present a five-year plan for returning to a balanced budget when tabling a deficit budget. What level of deficit is significant enough to be considered a deficit situation? The one-billion-dollar threshold is what places the government in a deficit context and forces it to present a recovery plan. Below one billion dollars, the government must restore its finances the following year, as provided for in Article 8.

Art. 8. If a shortfall of less than $1,000,000,000 is recorded for a fiscal year, the government must achieve a surplus equal to that shortfall during the following fiscal year.

There are exceptions to the requirement to table a return-to-balance plan, such as the occurrence of a disaster causing damage to the economy, deteriorating economic conditions, or unplanned transfers to the federal government. Since then, the law has also been amended to adapt to the realities of our times. The Quebec Liberal Party added provisions regarding the Generations Fund. The budgetary balance is now calculated by subtracting certain revenues, such as Hydro-Quebec royalties, in order to reduce Quebec’s debt.

The Legault government also amended the law to give itself more room to maneuver given the budgetary uncertainty of recent years, particularly during the pandemic and now with the tariff war with the United States, recognizing that returning to a balanced budget during a recession would be too difficult.

Within the five-year window to return to zero deficit, the Minister of Finance can still run certain deficits. However, he must adjust his return-to-balance plan, present it, and justify it before members of the legislature.

The Generations Fund: a tool for the public debt

This fund, managed by the Caisse de dépôt et de placement du Québec (CDPQ), has one sole purpose: to reduce the weight of Quebec’s debt and reassure the credit rating agencies that determine the government’s borrowing rate. The minister can independently decide to allocate amounts directly to the fund, but the majority of contributions come from revenues generated by Quebec hydroelectricity. 

In summary, the Generations Fund aims to guarantee a more stable economic future for Quebec by reducing the long-term public debt through the wise investment of current budgetary surpluses. The Caisse de dépôt’s returns have historically been higher than the government’s cost of funds.

How does it affect us?

One might think that the debt doesn’t affect us as citizens or organizations, that it’s far removed from everyday life. However, since the government is forced to make budget adjustments to achieve zero deficit, it is our services that can suffer. Some ministries may receive less money than anticipated, and others may have their funding cut for certain programs. It then becomes a balancing act for the government in power to ensure that citizens are not too heavily impacted. 

The answer to the question in the title is therefore: yes, we can still achieve a balanced budget. But nothing guarantees that a recession isn’t just around the corner, that tariffs won’t appear overnight with our allies, or that another virus won’t put the planet on pause. The government must make choices to get there, but those choices will also form the basis of voters’ judgment at the next election. Quite the political puzzle!