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Published on June 25, 2025
Municipalities across Québec are starting to prepare their budget for 2026 and must deal with a particularly unstable environment.
Faced with government changes, trade tensions, an economic slowdown and structural challenges, local administrations must tackle a complicated budgetary situation. In this context, strategic planning, revenue diversification and financial discipline become essential components of sustainable municipal services.
Uncertainties in both the political and economic spheres
Politically, several factors drive uncertainty. The new federal government could decide to revise its budgetary priorities, thus affecting transfers to municipalities. The upcoming 2026 provincial elections could also have an impact on the government of Québec’s direction, especially in respect to municipal taxation and infrastructure investments And, to top it all off, persistent tariff threats loom over some economic sectors and could further slow down business activities.
Economically, the perspectives for 2026 are far from encouraging. According to the most recent Desjardins forecasts, Québec’s real GDP would increase by merely 0.6%, while the unemployment rate could reach 6.6%. Such an economic slowdown, combined with increased budgetary restrictions, higher construction costs and persistent inflation, creates a challenging environment for municipal finances. Although the prime rate should decrease, it will remain above what it was five years ago, which increases the cost of borrowing when refinancing. Furthermore, its decrease will also negatively impact municipalities’ interest revenue.
Significant budgetary constraints
Municipalities across Québec depend heavily on property taxes, which makes them vulnerable to fluctuations in the real estate market. In 2026, the slowdown in housing starts and fewer real estate transactions could result in a decrease in transfer duties. The economic slowdown could also reduce transfers subject to QST, which would directly impact municipal revenue.
On the expense side, around 41% of costs are practically non-compressible, especially those related to worker compensation and debt service The remaining 59% are somewhat more flexible, but include significant items (service contracts, supplies, equipment, professional fees, etc.). A decline in revenue would therefore force municipalities to make difficult choices that could affect the quality and quantity of services provided. All these factors could also lead to a tax increase, which would weigh more heavily on residents.
Investments under pressure
The three-year capital expenditure plan (PTI), which provides the framework for infrastructure investments, will also be put to the test. Infrastructure needs are substantial and, according to the Union des municipalités du Québec, the deficit in municipal water infrastructure maintenance alone has reached $45 billion. On the other hand, the amounts provided for municipalities in the Plan québécois des infrastructures have stagnated in the last ten years, while the overall funding for infrastructures across Québec has risen by 85%.
In a context where resources are limited, municipalities will need to prioritize the most urgent projects, often at the expense of improving existing infrastructures or developing new ones.
Aging infrastructures, compounded by population increase and urbanization, put additional strain on municipal networks. Safety risks, citizen dissatisfaction and rising repair costs further exacerbate the situation. In addition, the shortage of affordable housing and inadequate infrastructures to support new residential developments are detrimental to local economic development.
Solutions to overcome uncertainty
Confronted with such challenges, municipalities must adopt proactive strategies. First, they should maximize the available fiscal tools. For instance, user-pay pricing better reflects the actual costs of services. Variable taxation rates, based on property categories or value brackets, promote greater fiscal equity.
Municipalities can also create subcategories of non-residential properties to adjust tax rates according to ability to pay. The imposition of transfer duties and the use of general taxation powers to introduce regulatory fees can also be leveraged to diversify revenue sources.
Beyond taxation tools, long-term financial planning is key. This means setting clear strategic objectives that are aligned with local priorities and citizens’ expectations. Municipalities must also establish budgetary guidelines that are consistent with the desired level of service, while identifying the financial strategies needed to achieve their goals.
Another crucial element is asset management. A structured plan, which takes into account the infrastructure condition, useful life and associated risks, facilitates the management of its maintenance, renewal and development, while promoting more efficient use of resources and better anticipation of future needs.
The 2026 budget: a challenging balancing act
The 2026 budget for Quebec municipalities promises to be a balancing act between financial discipline, continuity of services and strategic investments. In a context of economic and political uncertainty, local governments will need to demonstrate creativity, transparency and resilience. By focusing on rigorous planning, revenue diversification and proactive asset management, they will be better equipped to face the challenges ahead and continue to play their crucial role in ensuring the development and quality of life of their communities.
The taxation and municipal budget planning experts are there to help you analyze and implement concrete solutions to meet these challenges.
Source
1Desjardins Economic Studies, April 2025