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Small Fixes Won't Solve Quebec's Deep-Rooted Fiscal Problems

12/05/2014 05:50 EST | Updated 02/04/2015 05:59 EST

There are times when a problem can be solved with a small fix and perhaps a little tinkering. And there are times when a big fix or fundamental reform is needed. Quebec's government finances fall into the latter category. While the recent fiscal update takes small steps towards improvement, it falls short of what the province needs to truly get its fiscal house in order.

The backdrop is a Quebec economy historically hampered by weak performance compared to other Canadian provinces and even U.S. states. Whether it's economic growth, job creation, the unemployment rate, or investment growth, Quebec underperforms.

And the future doesn't look much better as the government downgraded Quebec's economic growth forecasts which are already low relative to competing jurisdictions. With lower growth comes less prosperity and fewer job opportunities for Quebecers.

There are many reasons for Quebec's relatively poor economic performance but shaky government finances in the form of sky-high debt and uncompetitive taxes are among the most important.

How bad is it?

Quebec currently has by far the largest provincial government debt burden in Canada at 50 per cent of the economy. As of 2013/14, provincial government debt is over $181 billion or roughly $22,000 per Quebecer.

An immediate consequence of high debt is interest payments swallowing up government revenues. In 2013/14, 11.3 per cent of government revenues went to interest payments. That means more than 11 cents of every dollar collected by the government went to paying interest on the debt and not on programs that Quebeckers care about or tax relief.

And tax relief is important because Quebec is among the highest taxed jurisdictions in North America.

Over the past few 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. As a result, average Quebec families are among the most heavily taxed in Canada with a total tax bill eating up 44.7 per cent of their income.

Personal income taxes are particularly problematic in Quebec. The top provincial income tax rate in Quebec (20.97 per cent) is the second highest in the country and kicks in at a relatively low income level compared to other North American jurisdictions. This uncompetitive combination discourages entrepreneurship and the cost is seen in less economic dynamism and fewer jobs and opportunities.

Big problems like this require big fixes.

Since coming to office, Premier Philippe Couillard has repeatedly expressed the need for a change in fiscal direction. His government's first budget in June took important first steps such as launching a program review looking for ways to make government programs more efficient. This month's fiscal update announced further changes with the goal of returning to a balanced budget in 2015/16 after seven consecutive deficits.

The Couillard government should be applauded for its willingness to confront the serious fiscal challenges facing the province. But given the severity of the problem, much more needs to be done.

Contrary to headlines declaring austerity and spending cuts, his government is not planning to actually reduce spending. From 2013/14 to 2017/18, program spending is slated to grow by 11.1 per cent to $71.5 billion from $64.3 billion. The annual growth in spending is expected to slow to 0.7 per cent next year before increasing to 2.3 per cent in 2016/17 and 2.8 per cent in the following two years. While the plan is to slow the growth in spending, there is no cut.

Actual spending reductions, coupled with reforms to the delivery of programs, would create the fiscal room for the government to reduce the tax burden on Quebecers - something that the Couillard government has acknowledged with the creation of an independent committee to evaluate the province's tax system and recommend ways to improve it.

While the government has talked the talk on taxes, it has yet to walk the walk. In fact, the fiscal update announced additional tax increases including plans to levy a temporary (until 2017) increase to payroll taxes on financial institutions such as banks and credit unions.

Quebec's fiscal problems run deep so small fixes won't cut it. More fundamental reform is needed to put Quebec on the right fiscal track.

This piece was co-written by Hugh MacIntyre, Fraser Institute analyst.

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