If cleaning up public finances is an achievement worth rewarding, Quebec voters should re-elect Philippe Couillard in a landslide on Oct. 1. The province’s Liberal Premier has delivered – spectacularly – on the promise he made in 2014 to put the budget on a sustainable track.
Back then, observers were skeptical that a government led by Mr. Couillard, or by anyone for that matter, would be up to the task of righting the province’s fiscal ship. With a slow-growing but quickly aging population, Quebec seemed headed for a prolonged fiscal decline, if not a sudden cliff.
After a string of increased deficits after the 2009 recession, the province’s gross debt was the highest in Canada at 54 per cent of gross domestic product, fully 10 percentage points above Ontario’s. With the highest taxes of any province and an overburdened health-care system sucking up spending, however, there were few options available to the new Couillard government as it sought to realize its core campaign promise of a balanced budget.
Yet, Quebec’s public finances are now arguably the healthiest of any province. The provincial government is swimming in surpluses and paying down its debt, which has fallen to 49 per cent of GDP. This week, the government even earned kudos from the auditor-general for tabling “plausible” fiscal projections for the next three years.
In 2017, the federal Parliamentary Budget Office singled out Quebec in its annual report on fiscal sustainability. The PBO concluded that Quebec could cut taxes or raise spending by the equivalent of 3 per cent of GDP without threatening the sustainability of its public finances. In dollar terms, that amounts to about $11.7-billion in annual fiscal room to manoeuvre.
If that sum sounds familiar, it corresponds with the amount that Quebec is projected to receive this year in equalization payments from Ottawa. But while past Quebec governments could also count on generous federal fiscal transfers, only Mr. Couillard’s has achieved fiscal sustainability.
Indeed, no other province comes close to Quebec in fiscal flexibility. Alberta would need to cut spending or raise taxes by 4.6 per cent of GDP to achieve fiscal sustainability. Postboom Newfoundland and Labrador had a so-called “fiscal gap” of 6.5 per cent of GDP in 2017.
On Monday, Quebec Auditor-General Guylaine Leclerc announced that the government generated a surplus of $2.3-billion in its 2017-18 fiscal year, or fully $1.45-billion more than Finance Minister Carlos Leitao projected in his March budget. Quebec’s economy grew by a bouncy 3 per cent in 2017, producing higher tax revenues than anticipated.
That means Quebec will need to withdraw only $637-million from its $6.8-billion stabilization fund to balance the books in 2018-19. The fund leaves the next government with a healthy cushion to weather a short economic downturn or more protectionist measures by the United States.
Mr. Leitao has announced the government will withdraw $10-billion over five years from its separately constituted Generations Fund to pay down debt directly, saving the government more than $1-billion in annual interest costs. Even so, Quebec’s finances are so strong that deposits into the fund, which is meant to reduce the province’s net debt and which is managed by the Caisse de dépôt et placement du Québec, are projected to exceed withdrawals over the next three years.
The other party leaders competing for Mr. Couillard’s job on Oct. 1 all argue the Liberals have gone too far, too fast in their zeal to balance books. They say public services have taken a huge hit. That assessment is largely in the eye of the beholder, however, and ignores the intense pressure Quebec was under from credit-rating agencies to get its fiscal house in order.
Since Mr. Couillard took office, the agencies have been suitably impressed. So have investors. After decades of paying higher-risk premiums, the Quebec government has lately been able to borrow money at lower interest rates than Ontario.
Of course, Quebec’s taxes are still too high. As a result, disposable (or after-tax) income per capita is the lowest in the country. At $27,723 in 2016, its was $5,200 less than in the rest of Canada and about $4,500 below the level in Ontario, according to the Institut de la statistique du Quebec.
The Couillard government slightly reduced the tax burden in 2017 by abolishing a short-lived health tax and by raising the basic personal exemption. This year, it cut school taxes in some regions. But the tax relief has not been enough to make serious dent in the tax differential between Quebec and the rest of the country.
Besides, Quebec’s tax system is highly progressive and most families earning less than $50,000 receive generous government transfers and face a negative income tax rate. As a result, Mr. Couillard’s Liberals, trailing in the polls, are now vowing to boost health and education spending, tackle poverty and offer free daycare for four-year-olds.
Unfortunately for Mr. Couillard, righting Quebec’s finances does not appear to be much of a vote-getter.