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Business Commentary François Legault wants to solve Quebec’s productivity problem

When Quebec Premier François Legault says he wants to wean his province off the massive equalization payments it receives from Ottawa, his goal is about more than simply getting the province off its fiscal reliance on the federal dole. It’s about climbing out of the daunting productivity hole that Quebec has been mired in for decades.

“When you take the GDP per capita, we’re about 20 per cent lower than the rest of Canada,” Mr. Legault said in Toronto this week when he and I sat down to discuss his newly elected government’s economic strategy. “With Ontario, the difference is 17 per cent. It’s a lot of money.”

This relative lack of economic capacity is at the crux of Quebec’s “have-not” status among Canadian provinces in the federal equalization program. Indeed, Quebec is, by far, equalization’s biggest beneficiary: It will receive $11.7-billion in the 2018-19 budget year, more than 60 per cent of the program’s total payments. Those funds make up nearly 11 per cent of Quebec’s budget revenues.

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Mr. Legault isn’t proposing to simply hand that money back. Rather, his plan is to close the per-capita GDP gap between Quebec and the rest of the country so that its economy is no longer a chronic have-not qualifying for equalization handouts, and will no longer need the funds to make its budgetary ends meet.

“We need to reduce the difference in wealth between Quebec and the rest of Canada. Right now, we’re too dependent on equalization payments,” he said.

It won’t happen overnight.

“If we did 1 per cent better growth than the rest of Canada, it would take 20 years to completely erase this difference,” he said. “We won’t do that in four years of a mandate. But we have to start somewhere.”

Previous governments have already made a start that will make Mr. Legault’s job a little easier. First, he inherited a balanced budget. Second, the province successfully closed a sizable gap in the share of its adult population participating in the labour force, thanks chiefly to its funding of a groundbreaking low-cost child-care program that has encouraged many more women to work.

But Stéfane Marion, chief economist at Montreal-based National Bank of Canada, noted the closing of this important labour gap has done nothing to reduce the per-capita GDP gap, which has persisted for decades. Quebec now has just as much of its population committed to producing its goods and services, yet it is still producing 20 per cent less than the rest of the country.

The logical conclusion? “It has to be a productivity gap,” he said.

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Essentially, Quebec is unable to produce the same amount of goods and services with the same amount of labour as other parts of the country. Last year, Quebec’s labour productivity was 13 per cent below the national average, as measured by GDP for each hour worked, the most commonly used productivity gauge.

The key factor in this underperformance, Mr. Marion believes, is a shortage of business investment. While Quebec accounts for nearly one-quarter of Canada’s population, it saw only 13 per cent of the country’s spending on business structures, machinery and equipment last year.

For a long time, Quebec’s political climate hasn’t done it any favours in attracting and retaining investment, especially from outside the province. Mr. Legault argues Quebec “lost 50 years fighting about the sovereignty of Quebec instead of fighting attracting private investment and creating well-paid jobs.”

But even when uncertainty about the province’s future wasn’t looming over investment decisions by businesses, successive provincial governments have resisted outsiders taking ownership of prominent Quebec businesses. While the province’s cultural and economic history more than explains its reluctance to allow key companies to end up under non-Quebec control, this position has nevertheless created a long-standing sense in the global investment community that Quebec is not entirely open for business.

One consequence of this may be that Quebec’s business community is made up of a much larger proportion of small businesses than neighbouring Ontario – another factor that restrains productivity, due to lower economies of scale. Mr. Marion also noted Quebec has a lower rate of new business formation than Ontario and the rest of Canada.

Mr. Legault sounds determined to change that. He’s talking about improving incentives to businesses to set up shop in Quebec, increasing export opportunities for Quebec companies, reducing red tape to make it easier to operate in the provinces. This week he said he would match a proposed Ontario cut to the corporate tax rate.

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“I want to make sure that if companies have to decide where they will put their next plant, that the best place will be Quebec,” he said.

A noble goal. Yet Mr. Legault has also said he wants to protect and nurture Quebec ownership of head offices in the province. He’s defined the problem, but whether he can overcome Quebec’s political realities and truly open the province for investment may be easier said than done.

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