Quebec budget shows progress but bolder fiscal reforms still needed

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Appeared in the Winnipeg Free Press

The day before delivering his budget speech, Quebec Minister of Finance Carlos Leitão called the budget a “good news budget.” Indeed, Quebec’s 2015 budget continues to make progress on tackling deep-rooted fiscal problems.

But given the extent of the problems, the province needs bolder reforms to improve its tax competiveness and reduce the burden of government debt.

Let’s start with the good news. The government is projecting a balanced budget for the upcoming fiscal year (2015/16)—this is after six consecutive years of deficits. Assuming revenues grow robustly next year, as the government hopes, this would put Quebec in a select club of Canadian governments expecting a balanced operating budget.
 
To reach and maintain a balanced budget, the government is planning to slow the growth rate of spending (relative to past years), while revenue growth closes the gap.

On the one hand, more restrained spending growth will result in a smaller provincial government (measured by government spending’s share of GDP), reversing the upward trend to bigger government that started in the early 2000s. On the other hand, actual reductions in spending—as opposed to simply slowing the growth rate—are needed to truly solve the province’s debt and tax problems. 

Another nugget of good news: the government is taking some small positive steps to reduce the overall tax burden (total revenues relative to GDP). Specifically, it plans to eliminate the health contribution, decrease the corporate income tax rate slightly (from 11.9 per cent to 11.5 per cent), and reduce payroll taxes for small and medium businesses.

But given that Quebecers are among of the most heavily taxed in Canada with 44.7 per cent of the average family’s income consumed by federal, provincial, and local taxes, the tax changes (which won’t be fully implemented until either 2019 or 2020) are tepid.

Critically, the budget does nothing to address Quebec’s most important tax challenge: high and uncompetitive personal income tax rates.

At multiple income levels, Quebec has some of the highest marginal tax rates in Canada. For instance, a Quebec taxpayer earning $50,000 faces a provincial marginal tax rate of 16.37 per cent. That’s not only the highest rate in the country, but it’s more than twice the rate in British Columbia (7.70 per cent). For Quebecers earning $150,000, the marginal income tax rate (20.97 per cent) is the second highest among provinces, only a hair 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.

On government debt, encouragingly the budget plans to reduce its share of GDP to 42.6 per cent by 2019/20.

As of 2014/15, net debt is estimated at $190.4 billion, which equals 50.7 per cent of GDP or $23,107 for every man, woman and child in the province. This makes Quebec the most indebted province by a wide margin. Ontario, the second most indebted, expects net debt to equal 39.9 per cent of GDP and $21,003 per person.

But despite projections of balanced budgets, net debt will increase in absolute terms until 2016/17 and decline slightly thereafter to $189.4 billion in 2019/20—still higher than the 2013/14 level ($181.3 billion).

The level of debt is important because governments, like families, must pay interest on money they borrow. Higher levels of debt, all things equal, translate into higher interest payments and leave less money available for programs that Quebecers value (health care, education, daycare, etc.). According to the budget, interest payments will consume more than 10 cents of every revenue dollar over the next few years.

Minister Leitão and his government have begun to chart a new fiscal course. This is laudable, but to truly tackle the province’s fiscal challenges, they’ve got much more work to do.