The Quebec government is promising to help businesses affected by tariffs. Can it afford to?
Tariffs could push Quebec economy into a recession, experts say
The Quebec government has posted a historic budget deficit, is currently trying to scale back spending and is facing the threat of U.S. President Donald Trump imposing tariffs that would decimate the province's economy.
If the tariffs come, Premier François Legault has signalled that the province would step in with short-term loans to mitigate the impact of layoffs.
But economists and experts say Quebec is in an unfavourable financial position at an inopportune moment. As the province weighs potentially costly measures to counteract tariff impacts, they warn that any relief measures would have to be extremely targeted or they would risk putting the province's books into an even more dire state.
Preetika Joshi, an assistant professor of accounting at McGill University's Desautels Faculty of Management, said in an interview that the Quebec government has funds set aside for emergencies — exactly like the kind posed by Trump's tariffs. But she said the province's deficit spending might mean the government needs to be more surgical with its response.
"Just because they're running a deficit doesn't mean they don't have the physical capacity or ability to help companies. It's a little bit constrained," she said. "What it means is that whatever funds they have, they're going to have to deploy them in a more efficient manner."
Joshi said the government may have to take on more debt to respond to tariffs. That may seem like a distasteful prospect — Quebec's debt burden stands at roughly 38 per cent of its GDP — but she said that amount is in line with most other provinces and OECD countries.
Economists say the tariffs would likely plunge the Canadian economy into a recession. When the economy is in recession, government incomes drop. Combined with the cost of whatever tariff relief measures Quebec would implement, that poses a unique fiscal challenge.
Moshe Lander, an economics professor at Concordia University, said the Quebec government has been mismanaging its finances — spending too much, running deficits — when the economy was doing well.
"What are they going to do when the economy starts shrinking? They're going to have to run an even bigger deficit," he said. "But the problem is that the accumulated deficits over time add up to larger and larger debts, and those debts have to be financed."
In March of last year, Quebec Finance Minister Eric Girard announced that the province was projecting a deficit of $11 billion. However, in November, Girard said the economy was doing a bit better than expected. He announced more than $2 billion in new spending, despite the historic deficit projected.
Unemployment rate could rise, report says
A recent Desjardins Group report titled "Tariff Turmoil Foreshadows an Eventful Budget Season," projected that Canada's provinces collectively have up to $100 billion to provide relief to industries and individuals affected by tariffs.
However, the report noted Quebec's position was more vulnerable to tariffs than other provinces, in part because nearly eight per cent of the province's output is directly linked to U.S. exports. It said a blanket 25 per cent tariff on Canadian exports could see Quebec's unemployment rate rise — both through direct and indirect job losses — to 7.5 per cent.
Jimmy Jean, the chief economist at Desjardins Group, said provincial governments like Quebec have some "automated stabilizers" in place to soften the blow of job losses, which include employment insurance.
Quebec also has the ability to invest in "reskilling" workers — teaching them new professions and transitioning them to sectors less intertwined with the U.S. economy, Jean said. Legault has suggested workers could be retrained to work on hydroelectric projects. Jean said it's not clear how feasible that is, but it is an example of a way the provincial government could counter tariffs.
But those programs would be expensive and government revenue loss from a tariff-induced recession would also likely be substantial, he said, leading to more government debt. Jean said that's not necessarily a bad thing, as long as it leads to more economic growth in the future.
"The question is more 'what kind of measures do you roll out in order to boost productivity and economic growth over the long term?'" he said. "That's where decision making will be very important. It's certainly not the same kind of environment that we have during the pandemic, especially when you look at interest rates being much higher now."
Joshi and Lander, the accounting professor and the economist, both noted how burdensome it is for companies to do business in Quebec and how reducing that burden could be one way the government responds to tariffs.
Corporate tax rates are high in the province and things like language laws add barriers and costs.
"This government has created some of the most extreme interprovincial barriers," Lander said.
"Would they be willing to sacrifice some of those right now, relax some of those rules right now to try and give flexibility to the economy, to try and give Quebec export markets within Canada that otherwise wouldn't exist? I don't know that they're willing to do that. So they very much are part of this problem."
In a post on X Wednesday afternoon following more tariff talk at the White House, Legault said the province is ready to "speed things up" regarding interprovincial trade.
"Faced with a market of 340 million people about to impose tariffs on us, it makes perfect sense to increase our trade with the 32 million Canadians outside Quebec," he wrote.
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