Budget 2015: Quebec’s twin fiscal challenges require bold action

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Appeared in the Montreal Gazette

Premier Philippe Couillard recently declared that government finances and the economy are his top priorities, stating that “the goal is clear: consolidation of public finances and economic re-launch.” This is laudable.

Whether it’s economic growth, job creation, the unemployment rate, or investment growth, Quebec over the years has generally lagged behind other Canadian provinces and U.S. states. When the economy underperforms, Quebec families lose out on prosperity and economic opportunities.

Quebec’s economic malaise stems partly from shaky government finances—high debt levels and uncompetitive taxes. But it doesn’t have to be this way. The upcoming provincial budget is an opportunity to take bold action and tackle deep-rooted fiscal problems.

Premier Couillard has already taken some initial steps to balance the budget next year (in 2015/16), and if things go as planned, Quebec would end a streak of seven consecutive deficits. But given the magnitude of Quebec’s fiscal challenges, small changes won’t cut it.

Consider the numbers. In the span of a decade, provincial government debt grew to $181.3 billion in 2013/14, up from $99 billion in 2004/05. This 83 per cent increase in debt dramatically outpaced provincial GDP growth (33.6 per cent), inflation (16.5 per cent), and population growth (8.2 per cent).

Quebec is now, by various measures, the most indebted government in the country. In 2013/14, government debt stood at 50 per cent of GDP—much higher than levels in Ontario, the second most indebted province, where debt totalled 38.4 per cent of GDP.

Quebec’s debt translates into $22,230 for every man, woman and child in the province. That’s $2,512 more per person than in Ontario and more than five times the amount in Saskatchewan, the province with the lowest net debt per person.

There are real economic consequences to all of this. Research from prestigious international organizations—including the IMF, OECD, and European Central Bank—has found that high levels of government debt adversely affect long-term economic performance.

There are short-term consequences, too. Governments, like families, must pay interest on the money they borrow. In 2013/14, the provincial government spent $10.6 billion on debt interest payments. In other words, more than 11 cents of every dollar collected by the government went to debt interest—not the programs Quebecers value (health care, education, daycare, etc.).

Debt interest also leaves less room for tax changes.

In recent years, Quebecers have been hit by an onslaught of tax increases including income taxes, sales tax, payroll taxes (higher QPP rates), health taxes, mining taxes and corporate income taxes. The average Quebec family bears one the heaviest tax burdens in Canada with a total tax bill from the federal, provincial, and local governments consuming 44.7 per cent of income.

The personal income tax system is most in need of reform. A Quebecer earning $50,000 faces the highest provincial income tax rate in the country at over 16.37 per cent—more than twice the provincial rate in British Columbia. For people earning $150,000, the marginal income tax rate (20.97 per cent) is the second highest in the country, only slightly behind Nova Scotia (21 per cent).

Such uncompetitive tax rates make it harder to attract and retain skilled workers and investment. More broadly, they discourage entrepreneurship, economic dynamism and general prosperity.

These are big problems.

But the government’s latest fiscal plan does not include the fiscal room for bold action. Reducing and reforming government spending would free up resources, to reduce government debt and enact tax changes while avoiding further budget deficits.

Premier Couillard is right, in principle, to focus on fixing government finances and reviving economic growth. Hopefully, the upcoming budget takes the right action in practice.

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