A Lack of Budgetary Discipline Is Undermining Quebec’s Public Finances

Economic Note showing that the deterioration of public finances could have been avoided if spending had been brought back as close as possible to its pre-pandemic level and trajectory in 2023-2024

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Québec aurait pu éliminer le déficit dès la fin de la pandémie, croit l’IEDM (L’actualité, April 24, 2025) Quebec could have eliminated the deficit as soon as pandemic ended, MEI believes (CityNews Montreal, April 24, 2025)		Interview (in French) with Gabriel Giguère (Radio Pirate, April 25, 2025)

This Economic Note was prepared by Gabriel Giguère, Senior Policy Analyst at the MEI. The MEI’s Taxation Series aims to shine a light on the fiscal policies of governments and to study their effect on economic growth and the standard of living of citizens.

In its 2025-2026 budget, the Quebec government is projecting a $13.6-billion deficit, the largest in its history.(1) After having increased its spending extraordinarily during the pandemic, the government never made the necessary effort, once the pandemic was over, to ensure the sound management of public finances by returning to the rate of spending growth inherited from the Couillard government that preceded it. Such management would have eliminated the gap between spending and revenues that had opened up.

This absence of budgetary discipline has now led us to a situation of chronic deficits. The Quebec government missed the opportunity to return to balance, and even record a surplus, as of 2023-2024. Faced with this deterioration of public finances, the government must commit to returning to a balanced budget quickly, not just in 2029-2030 as projected in the 2025 budget.(2)

Chronic Deficits

A massive increase in public spending led to a deficit of over $10.7 billion for the 2020-2021 fiscal year, the first year of the pandemic.(3) Among other things, the pressure to release funds to support the overburdened healthcare system contributed to this particularly high deficit.(4) Indeed, this deficit was a sharp departure from the budgetary balance of the previous year, as well as from the years of the Couillard government, when surpluses had become the norm.

After this heavy deficit, Quebec’s public finances improved thanks to a strong rebound in economic activity in 2021, which contributed to an increase in government revenues.(5) This resulted in a substantial reduction of the deficit, which shrank from $10.7 billion to $772 million (see Figure 1).(6)

However, this improvement in public finances was very short-lived, as Quebec’s deficit bounced back to $6.1 billion in 2022-2023.(7) This jump, coming after a year where the deficit was relatively small (less than a billion dollars), marked the beginning of a series of larger and larger deficits.(8)

Starting with the first post-pandemic budget, for 2023-2024, it would have made sense to see a substantial reduction in extraordinary pandemic-related spending. However, the government instead opted for a different trajectory: it chose to maintain spending at its pandemic level, growing the deficit even more, despite its initial projections. Indeed, it doubled the deficit it had projected in its 2023 budget, from four to eight billion dollars.(9) The government had established a financial framework aiming to return to budgetary balance in 2027-2028.(10) Barely a year later, though, it abandoned this commitment and announced that it was now aiming for balance in 2029-2030, but without presenting a detailed plan to achieve this.(11)

Indeed, instead of planning a return to a balanced budget within five years, the government had chosen to push this objective back beyond this timeframe.(12) It indicated that, on its deficits of some $10 billion to $11 billion, a reduction of just $7 billion over five years was feasible, thus leaving a projected deficit of $4 billion.

The Quebec government never made the necessary effort, once the pandemic was over, to ensure the sound management of public finances.

The recently tabled 2025-2026 budget confirms that the Quebec government has still not changed the projected trajectory of these deficits, and that the return to budgetary balance in 2029-2030 remains uncertain. This uncertainty is notably due to the lack of a clear plan to reduce $2.5 billion of deficit.(13)

Indeed, the projected deficit for the current fiscal year is expected to hit $13.6 billion. By adding the two post-pandemic budgets and the projection for this year, Quebec will record a cumulative deficit of $32 billion, or more than $3,525 per Quebecer, by April 2026.(14)

This deterioration of public finances could have been avoided if the government had reduced spending after the pandemic, instead of maintaining it at its extraordinary level.

The “Ratchet Effect” Trap

The Quebec government’s lack of willingness to reduce spending is a good example of the economic concept of the ratchet effect.(15) According to this concept, in times of crisis, the size of government—and so, its spending level—increases, without returning to its previous level once the crisis is over. This is exactly what happened after the pandemic, as the Legault government failed to bring spending back down to its pre-pandemic level once the crisis had passed.

Concretely, we can distinguish three stages. First, there is the period before the crisis, with a level of spending that can be considered the reference level. In this case, these are the years preceding the pandemic that was declared in March 2020, which corresponds to the 2019-2020 budget.

The second stage consists of the rapid increase in the size of government in order to deal with the emergency situation, in this case the pandemic, thus creating large public deficits. It is during this phase that spending reaches its peak.

Finally, the third stage corresponds to a normalization of spending at a higher level after the crisis, which persists over time, after a slight reduction such as the one observed in 2022-2023 (see Figure 2). This is exactly what the Quebec government’s post-pandemic budgets show.

The government could have avoided the ratchet effect trap, however, by making different choices—notably by bringing spending back as close as possible to its pre-pandemic level and trajectory, like under the previous government.

The Missed Opportunity to Return to Budgetary Balance

Imagine that the government had done a good job of managing public finances after the pandemic. This would have meant reducing spending and exhibiting budgetary discipline, as the government of Philippe Couillard did, to quickly balance the budget. What would the result have been in terms of public finances, compared to the current situation?

Even though the government could have managed the pandemic differently, this alternative scenario does not call into question the extraordinary level of spending during the health crisis. However, it supposes that after the pandemic, the government would have avoided the ratchet effect by bringing spending back to its pre-pandemic level, opting for a more disciplined approach to public finances.

We can thus estimate the level of spending that we could have expected during the post-pandemic years by following the average annual growth of government spending observed under the Couillard government before the pandemic, adjusted for inflation. The gap between the observed scenario and the alternative scenario in 2023-2024, the first post-pandemic year, corresponds to the budget cuts that would have been required to bring spending back to its pre-pandemic level (see Figure 2).

In times of crisis, the size of government—and so, its spending level—increases, without returning to its previous level once the crisis is over.

If the Legault government had reduced spending once the pandemic ended, starting in 2023-2024, it could have avoided the ratchet effect trap and changed the trajectory of public spending. This new trajectory would have led to a reduction in spending of some $10.3 billion(16) as of that year, leading not merely to a balanced budget, but in fact to a $2.2-billion surplus,(17) since revenues would have been more than sufficient to cover expenses. The budget surplus would have been $3.9 billion for the 2024-2025 fiscal year, and $912 million for 2025-2026.

The lesson is clear: while spending exploded because of the pandemic, it needed to be brought back down to a sustainable level in 2023-2024, once this reason had disappeared, to ensure the sustainability of public finances. It is among other things this lack of political will during the post-pandemic period that led to a situation of chronic deficits, with the government now projecting a record deficit of $13.6 billion for the current 2025-2026 budget year.(18)

Conclusion

The Quebec government is on a deficit trajectory that shows no sign of slowing, as can be seen in the most recent budget tabled in the National Assembly. Meanwhile, these deficits add up, and Quebec’s public debt keeps growing. Yet, the government could have gone down a different path after the end of the pandemic, thereby avoiding the ratchet effect trap. Indeed, by bringing spending back down to its pre-pandemic level as of 2023-2024, the government could have been in surplus starting that very year.(19)

The current amount of spending stems directly from political decisions made by the current government. It must act quickly to bring spending back to a reasonable level and return to budgetary balance. This is essential in order to avoid forcing future generations to bear the weight of the debt or further increasing Quebecers’ tax burden to cover deficits.