Quebec Budget 2009: “La Belle Province” Another Casualty of the Global Downturn

By Pedro Antunes, Marie-Christine Bernard, Sabrina Browarski  |  Version française

Introduction

“Timely measures for troubled times” could easily be Quebec’s mantra in Budget 2009. Borrowing from the federal finance minister’s playbook, the Quebec Ministry of Finance “leaked” many of the key details of its fiscal plan in the weeks leading up to its budget release. The primary new measures introduced in Budget 2009 for the coming fiscal year appear modest at face value—only $22 million of fiscal relief and $81 million of new infrastructure spending. However, given the current economic climate and the historic $51-billion Québec Infrastructure Plan tabled in January 2009 (of which $42 billion is earmarked for spending by 2013), it is apparent that Quebec is committed to staving off a prolonged recessionary cycle.

Many of the measures introduced in Quebec’s new infrastructure plan and Budget 2009 align with the Conference Board’s view on how to mitigate the effects of the current recession.¹  At a time when slower economic growth impinges on revenue collections, Quebec has prudently opted to increase the Quebec sales tax (QST) by one percentage point, starting in 2011. Careful offset has been provided to low-income families in the form of enhanced sales tax rebates and $500 million in increased funding to the Employment Pact over three years. On the business side, targeted productivity-enhancing tax relief will provide modest stimulus to innovative sectors of the economy.

A return to fiscal balance will be the major challenge facing Quebec in the years ahead. With cumulative deficits of $11.6 billion in the cards over the next four years and a ballooning provincial debt (the most burdensome in Canada), it will be incumbent upon the provincial treasury to restrain spending wherever possible if balanced budgets are to be achieved by 2013–14. Given that the bulk of new provincial spending hails from the recent infrastructure announcement, Budget 2009 will provide virtually no new economic stimulus in 2009.

The Fiscal Plan

The deterioration of the Quebec economy over the last several months as a result of the global financial downturn will prompt the first provincial deficit in a decade. A sharp collapse in projected revenues, combined with a commitment to sustain total program spending growth of 4.5 per cent this year alongside rising health-care financing costs, will delay a return to balanced budgets in Quebec until 2013–14. Fiscal year 2009–10 alone will see health-care spending rise by 5.7 per cent, or $1.5 billion.

In the four months since its November 2008 economic update, the Quebec Ministry of Finance has downgraded its fiscal outlook for 2009–10 from a budgetary balance to a $3.9-billion deficit—even after drawing down $295 million from the remaining budgetary reserve. Now, with stimulatory measures in the works, the Quebec government expects to post cumulative deficits of $11.6 billion over the next four years. Furthermore, there will be no interruptions in payments to the Generations Fund, with the fund’s value reaching $3.5 billion by March 2011.

In response to challenging economic conditions, the Quebec government announced a total of $826 million worth of new economic support measures in 2009–10 and further spending of $607 million in Budget 2009. These measures will be implemented in addition to the nearly $51-billion Québec Infrastructure Plan tabled in January 2009. Furthermore, growth in program spending will be reined in to 3.2 per cent only in 2010–11—after the brunt of the U.S. downturn has been felt. Total program spending will be $2.2 billion higher than previous budgetary targets. This will drive the province’s net debt as a share of provincial gross domestic product (GDP) from 42.5 per cent to 46.2 per cent in only two years! By 2010–11, Quebec’s net debt will reach a troubling $145 billion.

The provincial treasury openly acknowledged the vital importance of a return to fiscal balance in Budget 2009, in which it tabled an optimistic road map that will steer Quebec back to balanced budgets by 2013–14. The first pillar of the plan entails the sustained reduction of total program spending growth to 3.2 per cent by 2010–11. Second is the one-percentage-point increase in the QST—from 7.5 per cent to 8.5 per cent—that will take effect on January 1, 2011. The increase will enable the province to generate nearly $1.3 billion in new own-source revenues by 2013. A third pillar is the indexing to inflation of all public service user fees, save the $7-a-day child care plan. Fourth is an ambitious anti-tax evasion and avoidance campaign by Revenue Quebec that will pull in an estimated $900 million of tax revenues by 2013. Finally, Budget 2009 commits the government to find an additional $3.8 billion in unspecified revenue or expenditure cost-saving measures to ensure the province’s return to fiscal balance.

Revenue Measures

Although Budget 2009 introduces some targeted fiscal relief to those most affected by the economic downturn, some prudent planning is implemented to ensure sustained provincial revenue collections.

Most notably, the one percentage point increase in the QST (valued at over $4 billion over the next five years) will provide some well-timed budgetary offset to declining own-source revenues. The expectation of higher future consumption taxes will encourage households to increase spending now, at a time when the provincial economy is hardest hit by the global downturn. On a revenue-equivalent basis, an increase in consumption taxes triggers the smallest productivity loss in the broader economy relative to other tax increases.² Furthermore, since consumption taxes are not applied to goods and services sold abroad, the increase in the QST will not hamper the competitiveness of Quebec’s exports. The refundable Quebec sales tax credit was also raised in tandem with the QST (to the tune of $250 million at annual rates) to ensure that the increase in consumption taxes has no impact on the financial situation of low-income households.

A number of other modest, targeted measures will provide support to Quebec households. Collectively, $145 million of personal income tax reductions over the next two years were announced, including a refundable tax credit for the purchase or lease of new “green” vehicles, an enhancement in the tax credit for child care expenses, and the increase in the QST credit. As well, Quebecers will be able to benefit from a temporary new stock savings plan that will provide a 150 per cent tax deduction for investments in shares of eligible Quebec businesses with assets of less than $200 million. The plan will be in effect until December 31, 2010.

Nearly $100 million in business tax relief was extended in Budget 2009 through to 2010–11. In particular, Quebec mirrored the federal government’s decision to raise the tax threshold on small business income from $400,000 to $500,000. Accelerated depreciation measures were announced for the purchase of computer and manufacturing and processing equipment, and generous tax holidays were introduced for natural gas well production and for the commercialization of intellectual property to promote near-term investment and innovation.

Expenditure Measures

Several expenditure measures were announced in an effort to help businesses and laid-off workers cope until the economy recovers. The Quebec government in partnership with the Caisse de dépôt et placement du Québec and the Fonds de solidarité FTQ will launch a new $825-million fund to finance venture capital funds. In addition, the government will provide an extra $65 million over the next two years to the forestry sector. The provincial government will extend significant stimulus to the economy in the next year by raising public infrastructure investment to nearly $9 billion this fiscal year, compared with $4 billion just two years ago. In total, the provincial government plans to invest $41.8 billion between 2008 and 2013. The budget included an additional $1.5 billion in spending to develop infrastructures in the northern part of the province, of which $363 million will be spent in the next two years. The province is also implementing a new $500-million capital expenditure program for the installation of municipal bio-energy production equipment. As well, the government accelerated a $200-million plan to modernize management of public dams.

The government also chose to focus on employee training in this budget in order to help meet the current labour challenges and those the province will be facing in the next few years as baby boomers start to retire. The provincial government will improve and broaden the Employment Pact by injecting an additional $500 million in worker-training programs in order to increase labour force participation. Combined with contributions from the federal government and the private sector, $1.5 billion has now been committed to the plan over the next three years.

¹ See, for example, our December 2008 briefing Fixing the Recession: Policy Guidance for Canada and Governments Everywhere.

² For details, see our Accelerate Business Tax Reform to Boost Canadian Competitiveness    (August 2008).

Pedro Antunes Director

Marie-Christine Bernard Associate Director

Sabrina Browarski Economist