The Truth About Balancing Quebec’s Budget: Without Unprecedented Efficiency Gains, Services Will Be Impacted

We’ve just released our latest Economic and Financial Outlook [in French only] External link., reflecting an economic and geopolitical landscape that was—and still is—in flux. Our projections are mixed: while the situation is less dire than our winter scenarios suggested, it still remains less favourable than it was before the US election.

New developments are unfolding on a near-daily basis. In a rare twist for forecasters, it now seems easier to predict growth over the medium term than the short term. But stripping away the noise of the ongoing trade disruptions, we can see that Quebec’s economic gains are set to be more modest than the rest of the country’s. Two key factors explain this divergence: a sharper demographic slowdown and reduced budgetary flexibility.

Demographics: More than Just a Numbers Game

While it can’t be denied that immigration levels over the last few years have outpaced Quebec’s physical and administrative capacities, it’s also true that the province has reached a symbolic turning point. Last year, natural population growth turned negative for the first time, with deaths outnumbering births. In this respect, Quebec has joined a growing group of provinces and countries, which includes British Columbia and the Atlantic provinces, as well as several countries in Europe and Asia, that have crossed this demographic threshold.

There’s no need to sound the alarm just yet, but it does raise a point that will need to be addressed: without sufficient, well-integrated immigration, the burden of our public sector—from healthcare to education to public services—will fall on an increasingly smaller pool of workers. And as more countries face this demographic dilemma, global competition for talent will intensify.

The recent population surge has begun to strain the long-standing consensus on immigration that has existed across Canada, including in Quebec to an extent. For several quarters, population growth has outstripped that of the economy, leading to a drop in real gross domestic product (GDP) per capita. This is a basic mathematical ratio, and when it declines, it’s often interpreted as a sign that our standard of living is eroding. This perspective is founded on the assumption that GDP reliably reflects a society’s economic well-being—a view that has been debated, though there is a strong correlation External link. between GDP and human development indexes.

In the short term, one way to raise real GDP per capita may be to simply limit the number of workers with low-paying jobs—by lowering the number of temporary work permits in sectors where those jobs are concentrated, or letting in fewer immigrants who are willing to take those jobs. This approach may feel intuitive, but it risks oversimplifying a complex issue. It’s not necessarily true that a low-paying job negatively affects the well-being of someone already employed in the economy. This reflects the composition effect: the presence of lower-wage employment doesn't automatically drag down individual outcomes.

Over the longer term, flat population growth may lead us into a vicious circle: innovation slows, then private investment dwindles, public services deteriorate, skilled workers leave and innovation slows some more. A review by the Economic Innovation Group External link. highlights these dynamics in several US metropolitan areas grappling with demographic decline. When we focus on the numbers and reduce the economy to a per capita GDP figure, we risk overlooking the deeper consequences of prolonged demographic stagnation.

From a public finance perspective, fewer workers also means fewer taxpayers to shoulder the province’s debt and spending obligations. This brings us to the second factor that could rein in Quebec’s economic growth through the next decade compared to the rest of Canada.

A Limited Contribution from the Public Sector

Much of Quebec’s current economic strength stems from steady employment in publicly funded sectors such as healthcare, education and public administration. But with public finances under strain, it’s fair to question how long this can last.

The next quarterly report on Quebec’s financial situation is planned for late June. It will give us more details on the situation as at March 31, 2025. In the meantime, let’s review the key takeaways of the budget External link. presented by the government of Quebec:

• For 2025–2026, the deficit projected in the public accounts is $11.4B (1.8% of GDP).
• In that same fiscal year, the deficit under the Balanced Budget Act External link., which includes deposits in the Generations Fund, will be $13.6B (2.2% of GDP).
• The Act requires a return to a balanced budget by 2029−2030, with a maximum deficit of $1.5B allowed in 2028−2029.

As we noted in our March analysis External link., the budget generally outlines where fiscal consolidation efforts will be focused over the next few years. But many measures remain undefined, leaving a gap to be closed by the end of the decade.

Revenue remains closely tied to economic conditions. Government forecasts, while slightly more optimistic than our own, remain broadly aligned with those of the private sector. That said, the growth outlook is constrained. Demographic dynamics will not be a driving force, and a tax increase appears improbable in the near term. Quebecers already face some of the highest tax burdens in North America, and with elections just over a year away, the political appetite for new taxes is likely to remain limited.

With few improvements expected from the revenue side, more will be needed from the spending half of the equation. The 2025−2026 budget includes a breakdown of how the $165.7B in projected consolidated expenditures will be allocated:

• 40% for healthcare and social assistance
• 21% for education and higher education (roughly 2/3 going to education)
• 34% to cover other ministry portfolios (family, transportation and sustainable mobility, employment, social security, etc.)
• Just under 6% for debt servicing

Given that most additional consolidation will have to come from spending, it seems reasonable to wonder what that might entail. Expenditure growth is estimated to be just 1.7% per year from 2024−2025 to 2029−2030, and two observations must be made: First, this figure is likely an upper bound, as it excludes further cost-cutting measures. Second, with average inflation running slightly above 2%, this would imply a real decline in government spending and a negative contribution to economic growth.¹ This would, in fact, be the weakest sustained growth in public spending in recent decades.

There are limits to how much spending can be restrained before it begins to affect the quality of public services. While the budget does not provide a complete breakdown of expenses through 2029–2030, it does call for annual expenditure growth of 2.5% in healthcare and social assistance until 2026–2027. While this pace is above inflation, it may not be enough to maintain quality of care, especially in a sector where wages, governed by collective agreements, make up a large share of costs and are set to exceed that threshold. (See Section B of Budget 2024–2025 External link..)

This means there will have to be freezes—or cuts—elsewhere in the system. And this is coming when studies External link. suggest that, accounting for technological advancements and rising needs, annual spending growth of 5% would be ideal, or perhaps necessary, to ensure “continued growth in access and [healthcare] system improvement.”

In education and higher education, expenditures are expected to grow annually by 2.1% and 0.9% respectively. Here as well, faster wage growth often governed by collective agreements will put pressure on other budget line items. In the last week, school service centres and private schools were asked to identify an additional $570M in spending cuts. One potential source of relief is the projected decline in the number of primary and secondary school students based on demographic forecasts External link. from the Institut de la statistique du Québec. This may ease some pressure as the province returns to fiscal balance. That said, educators and advocates in Quebec are already raising concerns over the widening gap between classroom needs and the resources being provided.

Debt servicing is expected to grow and is non-discretionary. That means any shortfall will have to be absorbed by the remaining portfolios, which account for only a third of consolidated expenditures—and many of them are already projected to grow more slowly than inflation. There are still a few exceptions, including the budgets for family affairs, transportation and sustainable mobility, and the environment and climate action. But with the challenges we’re facing (climate change, electrification, etc.), that additional boost is needed, as keeping pace with inflation won’t be enough to reach Quebec’s societal ambitions.

What conclusions can we logically draw from this? Over the next five years, we cannot expect Quebec’s planned public expenditures to make a positive contribution to economic growth. The fiscal framework is already tight, and it could tighten further. There will remain limited leeway, and increasing the burden on taxpayers seems unlikely. Efficiency gains within the public sector are clearly desirable, and even necessary, but they won’t be enough. Given the effort that will be needed to balance the budget, some cuts seem inevitable. And we’ll have to hope that the next few years are uneventful, as any severe economic shock would further complicate the task.

In short, the path to balancing the budget will require some hard decisions. And those decisions will have to reflect social priorities. What will we protect? What can we do without? And at what cost to society? In a Quebec that hopes to age better, educate better, care better and transform its economy, these questions deserve more than quiet deliberation. They deserve a frank and open public debate.

¹ Unless there are major efficiency gains, which several ongoing initiatives aim to achieve.