The budget Quebec Finance Minister Nicolas Marceau tables Thursday will head straight for the shredder if a provincial election is called next month, as expected. But one of the document’s dominant themes will live on through the campaign: the return of the fiscal imbalance.
A decade ago, the so-called déséquilibre fiscal became the hobby horse of former Liberal premier Jean Charest and his finance minister, Yves Séguin, who argued that Ottawa’s chronic budget surpluses were the result of a structural imbalance that starved the provinces of critically needed cash.
The cleanest fix would have been for Ottawa to cut its tax rates, creating room for the provinces to raise theirs. But for Quebec, this wouldn’t do, since its citizens already faced the highest tax burden in Canada. So, the “solution” involved sharing federal surpluses (raised mostly in richer provinces) with have-not provinces.
As a new Prime Minister keen to court Quebec, Stephen Harper took the bait. Not only did his government substantially increase cash transfers for health care, it adopted a new equalization formula that produced an immediate windfall for Quebec – money that a politically weakened Mr. Charest returned to voters in the form of a tax cut on the eve of an election.
We didn’t hear much about the fiscal imbalance for a while. When the recession hit and Ottawa began running record deficits, it became harder to argue that fiscal federalism was skewed against Quebec. But with last week’s federal budget heralding surpluses as far as the eye can see, Mr. Marceau dropped the gauntlet: “Everything is in place for a return of the fiscal imbalance.”
It’s true that if Ottawa’s future finances look rosy, Quebec’s look terrible. Two recent independent studies – one led by economists at Sherbrooke University, the other by a group at HEC Montréal – depict a province headed for a fiscal wall and a lower standard of living unless there are major structural reforms.
Even former Parti Québécois premier Jacques Parizeau, who has spent most of his 83 years defending his province’s more interventionist economic model, this month declared himself “worried about Quebec’s economic future for the first time in 30 years.”
He won’t soon be feeling lighter. There is no sign that Premier Pauline Marois, whom polls show poised to win a majority, is willing to tackle the tough stuff.
The PQ governs like the Liberals, putting patches on the gaping wounds but perpetuating the policies that are slowly killing the patient. But no quick fix is in sight. Mr. Harper’s government, which felt burned by Mr. Charest, won’t play the fiscal imbalance game again. Beginning in 2017, federal cash transfers for health care, which have been growing at 6 per cent annually, will increase at half that rate. The squeeze on Quebec’s finances will tighten dramatically.
Mr. Marceau got some relief in December, when Ottawa quietly confirmed in the Canada Gazette that a much-anticipated renegotiation of the equalization formula won’t be happening after all. The current equalization accord expires next month, and there had been plenty of calls from Western Canada and Ontario for a new formula to reflect new economic realities. Instead, Ottawa renewed the current formula until 2019.
This helps Quebec in the short term. Since its economy has been performing relatively less well than even plodding Ontario (a trend that is forecast to continue), Quebec will get 18.5 per cent more in equalization cash this year than last. Its $9.3-billion compares to $2-billion for Ontario, which will experience a 37-per-cent drop in one year. Total federal transfers to Quebec will reach $19.6-billion, the most of any province, although PQ minister Jean-François Lisée still complains that Quebec gets less per capita than Prince Edward Island.
Ontario Finance Minister Charles Sousa won’t get far protesting that his province is being “ripped off.” But blaming Ottawa is Politics 101 in Quebec.
Beyond the histrionics, the facts are clear. In 2012, Ottawa raised $44.5-billion in taxes in Quebec, but spent almost $61-billion there, according to official provincial accounts.
It’s not a one-way street in Quebec’s favour; interprovincial transfers are critical to the smooth functioning of the Canadian economic union and Quebec buys almost $70-billion in goods and services from other provinces.
But Mr. Marceau’s revived fiscal imbalance talk isn’t just aimed at winning votes in the coming election. Without more help from Ottawa, hard choices loom for Quebec.