Quebec’s quiet fiscal revolution

Traditionally Quebec has had a reputation for being a problem child in Canada when it comes to public finances. High taxes, chronic deficits and mounting debt are familiar descriptors. But as the province’s recent fiscal update shows, Quebec is starting to move past its traditional reputation.

While it’s early, all signs point to a quiet revolution. Indeed, Quebec is showing the rest of Canada that, with a commitment to reform, it’s still possible to balance the budget, rein in public debt and reduce taxes.

For example, after six consecutive deficits, the Couillard government made some tough decisions to balance the books. As this week’s fiscal update reveals, the province posted a $2.2 billion surplus in 2015/16 and is on track to balance the budget in 2016/17 and beyond. Few provinces can boast the same.

Balancing the budget is of course just the first step. Two major fiscal problems confront the province: high debt and uncompetitive taxes. Fortunately, the fiscal update shows that progress is being made on these fronts as well.

Relative to the size of the provincial economy, Quebec is Canada’s most indebted province. Tackling this heavy debt burden—which if distributed equally among Quebecers would cost each man, woman and child approximately $22,000—is imperative because research shows that a high level of government debt can hinder long-term economic growth and reduce prosperity.

There are short-term consequences, too. Governments, like families, must pay interest on the money they borrow. The provincial government currently spends more than $10 billion in debt interest payments each year, meaning more than 10 cents of every dollar collected by the government goes to paying debt interest—not the programs Quebecers value (health care, education, daycare, etc.).

Quebec’s shift to a balanced budget allows the government to begin tackling its debt problem. In fact, the province reduced its gross debt by $610 million last year, the first reduction in gross debt since the late 1950s, according to the government. More broadly, the government plans to reduce net debt (gross debt minus financial assets) from 49 per cent of GDP in 2015/16 to 42 per cent by 2020/21.

Taxes also require bold action. In recent years, Quebecers have faced 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 44.6 per cent of income.

A balanced budget opens up fiscal room for Quebec to cut taxes. A step in this direction was taken in the fiscal update, as the government announced it will eliminate the health premium two years earlier than planned.

While progress is being made on both taxes and debt, there is still a long road ahead before Quebec truly gets its fiscal house in order. The provincial debt burden will still be relatively high at 42 per cent of GDP under the current plan.

On taxes, much more needs to be done, especially with the province’s highly uncompetitive personal income tax system. A Quebecer earning $50,000 faces the highest provincial income tax rate in the country at 16.62 per cent—more than twice the provincial rate in British Columbia.

For Quebecers earning $150,000, their 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.

When it comes to addressing its fiscal problems, Quebec is at least heading down the right path. That’s more than most Canadian governments can say.