Fraser Forum

How Quebec can reduce its reliance on equalization

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New Quebec Premier François Legault (pictured above) said on the campaign trail that he’d like to “aim for zero equalization.” This is an ambitious goal that would change the face of fiscal federalism in Canada. But is it achievable? Perhaps, but it would not be quick or easy.

The equalization program transfers federal revenue to provincial governments in lower-income provinces to help them fund “reasonably comparable” services at comparable levels of taxation. Last year the program transferred $11 billion to the Quebec. This is due to the fact that the province has relatively low “fiscal capacity”—20 per cent less than neighbouring Ontario.

To reduce the province’s reliance on equalization, Quebec would need strong economic growth over time. The province’s GDP growth would have to outpace growth in Ontario by more than one per cent annually for two decades, which is no small feat. But there are policy levers the government can pull that would help—and some that would hurt.

To its credit, the last government did some heavy lifting that provides the new government with a solid foundation. It was able to return to surpluses after the recession faster than Ontario, and stabilized the province’s large public debt while providing some tax relief. The current government should continue on that trajectory. But there’s more that can be done to boost economic growth.

The Legault should start by reducing the province’s high marginal tax rates. Quebec has one of the highest top personal income tax rates of any province or U.S. state, and the large corporate income tax rate advantage it once enjoyed over U.S. states has largely evaporated due to recent federal tax cuts in the United States. Reducing those rates would help boost productivity in the province, which would help grow the economy.

One way to help pay for rate reductions would be reducing or eliminating government subsidies to corporations in the province. As Alexandre Moreau of the Montreal Economic Institute recently noted, the Government of Quebec spent $3.1 billion on corporate subsidies in 2016/17. Rather than trying to pick winners and losers, the province should reduce rates to make it easier for winners to win and losers to restructure.

Lastly, the province should be cautious about exacerbating its current labour shortages, which will likely get worse as the population ages. Whether it’s through immigration from the rest of the world, or domestic migration from within Canada, Quebec must ensure it has an adequate number of employees with a variety of skill levels to power its workforce. Given that Quebec experienced negative interprovincial migration every year since 1971/72, there’s a clear problem with attracting people that must be addressed. It’s particularly worrying given that outmigration from the province is skewed towards younger workers.

The goal of reducing Quebec’s reliance on equalization is a good one. But it will not be easy. Setting the goal is the first step—a bold plan is now needed to achieve the levels of economic growth required to meet that objective.

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