Published in the Montreal Gazette on March 15, 2011
By Pierre Fortin
In the budget speech that he delivered in March 2010, provincial Finance Minister Raymond Bachand indicated that, if no changes were made to revenue and expenditure trends, the Quebec government was headed for a fiscal deficit of $12 billion in 2013-14. This would have been a huge deficit. Laying off all provincial public servants could not have solved one-third of this financial impasse.
Where did this deficit come from? A small part (no more than 10 per cent) arose from the aftermath of the 2008-09 recession. But mainly it was “structural.” Population aging was about to slow down economic growth, while adding to pressure on health spending. The tax cuts that the government had announced previously were making a dent in tax revenue. Infrastructure investment was gathering speed. Current government expenditures were growing faster than the size of the economy. Federal transfers were projected to slow down. Even worse, the path followed by the deficit was explosive. In the absence of corrective measures, it would balloon up to $27 billion in 2019-20. In other words, any delay in dealing with the problem would only make it worse.
The minister did not really have much choice. He was morally responsible for protecting the financial integrity of the government. In 1996, the then-Quebec premier, Lucien Bouchard, had to fly secretly overnight to New York to beg a credit-rating agency not to lower Quebec’s rating. Understandably, Bachand had no taste for repeating this experience. As a result, his 2010 budget gave us a “plan for return to fiscal balance” that was meant to eliminate the $12-billion deficit and bring back fiscal balance in 2013-14. So far, the plan includes $5.7 billion of spending cuts, $1.2 billion in tighter control of tax avoidance and evasion, and $4.3 billion of increases in taxes and user fees for honest citizens.
The minister’s financial strategy has been starkly criticized by the left, whose opposition to the budget has been organized around a coalition of labour unions called the Social Alliance. They fear that the announced spending restraint is premature, will plunge Quebec back into crisis, and destroy the province’s social democracy based on extended government services. The alliance’s humanitarian motivation is commendable, but its arguments are not very convincing. The recession in Quebec was shallow and the recovery is proceeding at a normal pace. There is no perceivable job crisis. The only brand of social democracy that can survive (and I have a heartfelt wish we can have it) is the one that pays its bills. Governments in financial distress have never been a good thing for social progress.
Meanwhile, Quebec public opinion is giving its massive support to an early return to fiscal balance and a reduction in the size of government. Quebecers are dissatisfied with the 2010-11 budget, but, contrary to the Social Alliance, it is because they oppose the tax increases and are deeply skeptical about the government’s ability or determination to cut spending and achieve fiscal balance by 2013-14.
How can the 2011-12 budget to be presented Thursday appease the skepticism? First, the recommendation by the Social Alliance to put off fiscal consolidation should be rejected. Bachand should state clearly that he is staying the course on his announced strategy, which relies largely on spending restraint. This will obviously be difficult. Even if Quebecers support that restraint in the abstract, fierce resistance is to be expected from any particular group that will be threatened with losing the slightest concrete financial benefit. The problem is that there are many such groups in Quebec, because the provincial government’s presence is felt everywhere. The person who has the mission of saying no, Treasury Board Minister Michelle Courchesne, will need our firmest support.
Second, the expenditure-control operation should be based on an in-depth review of existing practices (the intelligent approach), and not only on blind cuts in government services (the stupid approach). In particular, reorganization of the health-care and social-services sector is a matter of urgency. It now accounts for 45 per cent of current government expenditures. After the nine reports of Messrs. Rochon, Côté, Arpin, Anctil, Clair, Bédard, Deschênes, Ménard and Castonguay, it might be a good idea to declare that the time for true action has come in this area.
Third, the economy needs help to deal with the challenge of an aging population. The faster economic growth will be, the faster tax revenue will increase and the less the government will have to cut spending and raise tax rates and user fees. The buttons to push here are well-known: educating our children, expanding access to external markets for our businesses, warding off monopolies, taxing consumption rather than income, building our public infrastructures, and foster social trust. Nothing more!
Pierre Fortin is emeritus professor of economics at Université du Québec à Montréal. He is the author of a recent C.D. Howe Institute commentary, “Staying the course: Quebec’s fiscal balance challenge.”
