Québec's Even Closer To Collapse

Quebec's finances keep looking worse

JAY BRYAN
The Gazette
Thursday, February 09, 2006

Sure, the grass always looks greener on the other side of the fence. But if you're a Quebec taxpayer, there's a good reason: it really is.

The latest evidence comes from a new ranking of government finances by the Fraser Institute, Canada's crusading free-market think tank. Quebec ranks a lowly ninth among provinces this year, saved from falling to dead last only by Prince Edward Island's even sadder performance.

This reprieve might not be long-lasting, though.

Niels Veldhuis, the institute's associate director of fiscal studies, notes that rankings are based on a five-year average of indicators linked to taxation, spending and indebtedness, and Quebec's performance is worsening.

For example, Quebec's total score now benefits from modest cuts in personal income taxes, but these happened nearly five years ago, so they'll no longer be considered in next year's report. As well, an increase in the corporate income tax rate begins this year and will hurt the coming year's ranking.

Like any attempt to reduce a huge, complex topic to a single number, the Fraser Fiscal Performance Index, as the institute likes it to be known, is open to criticism.

It assumes, for example, that government taxation and spending are best kept under strict control. But there are lots of people, especially in Quebec, who would challenge this preference.

As well, the Fraser report doesn't do much to adjust for the fact that different provinces have different economic circumstances. Alberta has topped the rankings for years, partly because of good management but also partly because of good luck.

Quebec's really big problem these days, jokes BMO Nesbitt Burns economist Douglas Porter, is that "it doesn't produce oil."

Porter isn't inclined to be too critical of Quebec's performance, given the fairly weak economic growth it has seen in recent years. But he does note that after nearly three years in office, the Charest government has failed to deliver promised tax cuts and has an undistinguished record of controlling spending.

And while a reader will want to keep the institute's ideological preferences in mind, they don't seem to undermine the rankings' value fatally.

Let's take government spending, where Quebec shows up particularly badly, as an example. It is measured as an average of four yardsticks, only one of which penalizes total spending.

Three-quarters of the spending measure is linked to whether it grows faster than population, economic output or total personal income. This is reasonable, since even a social democrat would acknowledge that government spending can't grow faster than its revenue base without eventually damaging the economy.

Sadly, that's the trend in Quebec, which is part of the reason why this province's ranking is trending down after having improved early in this decade.

In 2000, Quebec ranked dead last among the 10 provinces, but by 2004 it had moved up to sixth, helped along by modest corporate and personal tax cuts.

Since then, the province's financial position has worsened. Taxes remain exceptionally burdensome, while debt is rising. Spending is growing faster than population, faster than personal income and faster than total economic growth, a situation that's obviously unsustainable.

The Charest government recognizes this, points out Carlos Leitao, chief economist at Laurentian Bank Securities, and that's why it has shifted focus from its failed effort to cut taxes. The new target is indebtedness, which must stop growing to avoid sapping growth still further.

Leitao sympathizes with the government's financial squeeze and he isn't too judgmental about its failure to clean up the province's books at a time when revenues are far from abundant and cost-cutting quickly runs into strong opposition.

Still, he notes, this government came to power expecting to trim a padded civil service that, proportionately, employs many more people than other provinces to provide services that are not notably superior. Had it done so, its finances would be healthier today.

History is not necessarily destiny, Veldhuis points out. British Columbia, which has little oil, cut spending and taxes and bootstrapped its way from No. 8 in the rankings a few years ago to No. 2 this year.