Quebec budget delivers dose of austerity — and a reality check

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Quebec has always felt like a little pocket of Europe within North America. So it's fitting that the new provincial government's first budget contains a lot of what we've seen out of Europe lately: austerity, tax hikes and economic disappointment. It's the necessary medicine for Quebec's increasingly unhealthy debt condition – but it won't taste good.

The minority Parti Québécois (PQ) government has budgeted a $1.5-billion deficit in the fiscal year ending March 31, 2013 – down from $2.6-billion last fiscal year – and committed to balancing the budget in the 2013-2014 fiscal year. It's boosting its annual contributions to the province's contingency reserve fund, to safeguard against downside surprises to its projections. It reiterated the previous Liberal government's targets for reducing overall debt as a percentage of gross domestic product (GDP).

The budget contains little to inspire the voters (or, more to the point, the opposition parties that hold sufficient seats to vote the budget down) yet it recognizes that spending beyond its means has become the province's biggest obstacle to prosperity. Quebec is about $170-billion in debt. Its net provincial debt exceeds 50 per cent of its GDP – and that doesn't include the province's proportional share of the net federal debt load. Add them together, and you're in the neighbourhood of 85 per cent of GDP. That's not quite European-crisis territory (most troubled euro-zone countries are north of 100 per cent, and Greece is about 170 per cent) – but it's unquestionably too high for comfort.

As Canadians learned from their federal government in the 1990s, even big deficit and debt monsters can be tamed when you're in the midst of one of the greatest economic expansions in history. Quebec does not enjoy that luxury now. The new budget projects real GDP growth of only 0.9 per cent in 2012, down from the already weak 1.5-per-cent projection when the 2012-2013 budget was drawn up last March. Real GDP growth for 2013 has been pencilled in at 1.5 per cent, down from 1.9 per cent in the previous projection.

Slower GDP growth generally reduces expectations for tax revenues, yet the PQ has an answer for that – raise taxes. It will jack up levies on the rich, on alcohol and tobacco, on financial-institution payrolls. On the other side of the ledger, it's cutting infrastructure spending to the tune of about $1.5-billion a year for the next five years.

Setting aside the notoriously poor state of Quebec's infrastructure, the tax hikes and spending cuts – as any austerity-mired European economy will tell you – are a double-edged sword. They remove stimulus and drain consumer pocketbooks, creating a further drag on an already sluggish economy.

But Quebec does have something going for it that Europe's troubled economies do not: It sits in a part of the world with decent growth prospects. The Canadian and U.S. economies are both forecast to grow at about a 2-per-cent annual clip this year and next – far from stellar, but much better than in the euro area, which may well be in recession through 2013. While Quebec's internal forces will be fighting deficits at the expense of growth, those external North American economies should cushion the blow.