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Deficit slayed, Quebec needs to turn its sights on taxes

It’s not often that Quebec can lecture Ottawa about fiscal discipline, but Premier Philippe Couillard earned that right the hard way.

Jacques Boissinot/THE CANADIAN PRESS

It's not often that Quebec can lecture Ottawa about fiscal discipline, but Premier Philippe Couillard earned that right the hard way. As his debt-strapped government prepares to table another balanced budget, on the heels of the deficit-laden document tabled this week by federal Finance Minister Bill Morneau, Mr. Couillard finally has a fiscal dividend to brag about.

In almost any other province, that would mean tangible tax relief. But except for the accelerated elimination of the provincial health tax, a measure that will cost the government $180-million in 2017-18, Quebeckers are unlikely to end up with much more in their pockets after next Tuesday's budget. Any additional tax relief is likely to be modest at best.

Most Quebeckers seem fine with that. Despite having the lowest average disposable income of any Canadian province or territory, and a top marginal income-tax rate that kicks in at around $104,000, Quebeckers are not on the verge of a tax revolt. If anything, polls show they want more public spending on health, education, daycare and family benefits.

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One reason for that is a highly progressive tax system. A couple with two children can earn almost $57,000 before paying a single cent in income tax. More than 37 per cent of 6.3 million Quebeckers who filed a tax return in 2013 paid no income tax at all. Those earning more than $100,000, while accounting for 5.6 per cent of all tax filers, paid 39 per cent of all income taxes.

More important perhaps, Quebeckers, more than most Canadians, believe in the efficacy of the state and accept higher taxes as simply the price to pay for social programs more generous than those in the rest of Canada. Subsidized daycare and parental leave are staunchly defended as public goods that encourage higher work-force participation rates and healthier work-life balance.

But at what point do high taxes and bigger government produce diminishing returns?

A few voices in the wilderness have dared to suggest a link between Quebec's higher taxes and its lower economic dynamism. But the Coalition Avenir Québec is the only political party that promises tax cuts, though even its platform makes Alberta's NDP government look right-wing. Indeed, Alberta's March 16 budget had a whole chapter touting the Alberta tax advantage, especially for the wealthy, relative to other provinces.

Recent data on disposable income should provide a gut-check moment for the Couillard government. In 2015, Quebeckers were dead last in Canada with an average disposable income of $26,857, according to an analysis released last week by the Institut de la statistique du Québec (ISQ), the provincial equivalent of Statistics Canada. The gap between Quebec and the rest of Canada has widened steadily since 2005, with Quebeckers' average disposable income falling to 82.3 per cent of the level in the rest of Canada in 2015, compared with 87.3 per cent a decade earlier.

Quebeckers on average collected $1,063 more than other Canadians in government transfers, such as Old Age Security and employment-insurance benefits. Were it not for such programs, average disposable income would have been lower still.

Defenders of the status quo were quick to seize on the ISQ report to argue that Quebeckers face a lower cost of living – especially in housing – compared with residents of Alberta, British Columbia and Ontario, who had an average disposable income of $40,704, $33,011 and $30,980 respectively. But there are reasons some things cost less in Quebec, and anemic long-term growth is one of them.

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Defenders of the Quebec model also point out that the disposable-income gap between Quebec and Ontario has narrowed in recent years. But that is more a function of Ontario's decline than Quebec's rise. It's hardly an argument for complacency.

With a population that's aging more rapidly than in Alberta and Ontario, Quebec needs to get serious, and fast, about boosting disposable income. Consumers, not governments, are what drive any economy.

Quebec's heavy debt burden means it would be irresponsible for Mr. Couillard to slash taxes if it only led to the recurrence of structural deficits. But between expanding the welfare state and holding the line on spending to reduce taxes, the choice should be clear. Be especially wary of governments that talk about reinvesting in health and education when the main beneficiaries of such spending only end up being doctors and teachers, thanks to their superior bargaining power.

Mr. Couillard finally has an opportunity to create a Quebec advantage – a more competitive tax system – while Alberta wallows in the red. He shouldn't waste this moment.

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About the Author

Columnist Konrad Yakabuski writes on politics, policy and business for The Globe and Mail’s Comment section and Report on Business. More

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