Fiscal Resilience Supports Unchanged Quebec Provincial Deficit Outlook Amid Economic Softness, Says Desjardins

12:07 PM EDT, 10/01/2025 (MT Newswires) -- Quebec's provincial government released its public accounts for the 2024-25 fiscal year (FY25) on Friday, with the deficit for FY25 improving from $8.1 billion to $5.2 billion, representing 0.8% of gross domestic product, said Desjardins.

The fiscal improvement for FY25, first hinted at in a late June release, is driven by both stronger own-source revenues and lower-than-expected spending.

Quebec also released its Q1 fiscal update for FY26, with the projected deficit remaining unchanged at $11.4 billion, or 1.8% of GDP. The steady headline deficit number reflects relatively modest revisions within its components: higher revenue projections are being offset by increased spending in the education sector and higher debt servicing costs, noted the bank.

This fiscal stability stands in contrast to the economic softness observed in Q2, when Quebec's GDP contracted at an annualized rate of 2.4%. Despite this slowdown, government revenues have held up well, underpinned by a resilient labor market, pointed out Desjardins.

In the April-June quarter, personal income tax revenues rose 8.9% year-over-year, while QST collections increased by 7.0%, reflecting strong domestic demand. Corporate tax revenues also posted a solid gain, up 21% compared with the same period last year. Altogether, revenue for FY26 has been revised up by $480 million, including $350 million from own-source revenues and $130 million from federal transfers in Canada.

Portfolio expenditures rose 5.5% year over year in the April-June quarter. However, the overall spending forecast for FY26 remains unchanged, as a $250 million increase in education was offset by an equivalent, but unspecified, reduction in "Other Portfolios."

Meanwhile, debt service charges have been revised upward by $480 million, mirroring the increase in total revenue. This adjustment reflects higher-than-expected long-term interest rates since the budget was tabled in March.

Looking ahead to the rest of FY26, risks appear skewed towards smaller deficits, added Desjardins. Revenue has remained stable despite the economy contracting in Q2. With economic activity set to recover in the second half of 2025, revenue may well show continued resilience.

The unchanged $2 billion contingency reserve appears prudent and should be sufficient to absorb remaining downside risks. Beyond FY26, substantial revenue and expenditure adjustments will still be needed to meet the balanced budget target by 2029-30 (FY30), as required under the Balanced Budget Act.

The bank expects the upcoming fall update to provide greater clarity on the provincial government's strategy to achieve this objective.

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