THE BLOG

Quebec's Budget Is the Next Step in a Recovery Plan

06/03/2014 11:38 EDT | Updated 08/03/2014 05:59 EDT

Premier Couillard's government will table its first budget on June 4 and early signs suggest it's not going to be business as usual. "The time for cosmetic changes is gone... We must act firmly and decisively. And we will," Couillard said in reference to fixing Quebec's deteriorating government finances.

Quebecers have to wait until budget day to see if the premier's comments actually translate into concrete actions. But at least he has acknowledged there's a problem and that's an important first step on the road to recovery. The next step is to set out a plan that fixes the problem; Wednesday's budget needs to deliver in this regard.

From what is the government in need of recovery? An addiction to deficit spending, government debt, and high taxes.

Its chronic reliance on deficit spending caused the debt to balloon to $175.5 billion in 2012-13 from $37.6 billion in 1990-91. The increase in government debt over this period far outpaced benchmarks like growth in the economy, population and inflation.

Today, Quebec's debt amounts to approximately 50 per cent of the economy -- the highest among all the provinces.

Or to put it differently: each Quebecer owes $21,708 in provincial government debt, the most in the country by over 15 per cent.

Despite clear evidence of a deep-rooted debt problem, successive governments have largely avoided taking corrective action. In fact, in February's pre-election budget, the previous government delayed its plan to balance the budget by two years and did nothing to ensure that the revised timeline would be met. According to Mr. Couillard, February's deficit projections are grossly understated and his government will have to cut spending just to meet the stated targets.

That means even larger spending reductions and/or program reforms are needed to stabilize or reduce provincial debt. Reforming health care is an important part of the solution given this portfolio's large and growing share of total spending. A recent study directed by former finance minister Raymond Bachand concluded that the growth in health care spending must be constrained to make provincial finances sustainable over the long-term.

But Quebec's fiscal challenges go beyond deficits and debt. Part of the recovery plan must address the province's high tax burden and lack of competitiveness. Consider that Quebec families face the second highest total tax burden in Canada that, on average, eats up 45.8 per cent of income.

A recent onslaught of provincial tax hikes -- including increases in sales, personal income, payroll, health, mining, and corporate income taxes -- is partly to blame. Some of these tax hikes have especially damaged provincial competitiveness and the ability to attract and retain skilled workers, investment and jobs. For instance, Quebec's combined top federal and provincial income tax rate is now 49.97 per cent and kicks in at an income level that is low relative to every other North American jurisdiction.

A high tax rate and low income threshold discourage entrepreneurial risk-taking and the cost is seen in less economic dynamism and fewer jobs and opportunity. Improving Quebec's tax competitiveness therefore ought to be part of the government's recovery plan.

As the saying goes, the first step is overcoming denial and the premier's recent comments suggest he understands the magnitude of Quebec's fiscal problems. The next step requires a bold plan to rein in government debt and improve tax competitiveness. The upcoming budget is a chance to move the province forward.