A post-pandemic euphoria grips our politicians on the campaign trail. We would like to believe it, but the tax cuts promised by the Coalition avenir Québec (CAQ) and the Liberals pose a problem.
Posted yesterday at 9:00 a.m.
These announcements will appeal to the greatest number, but they will aggravate inflation, which these parties nevertheless want to alleviate. What will a tax cut be worth, if it leads to higher mortgage payments?
Now is not the time to stimulate an overheated economy as the Bank of Canada hikes interest rates to calm things down.
This sudden generosity comes from reading with rose-colored glasses Pre-election report on the state of Québec’s public finances.
Its projections over five years are however to be taken with tweezers, even if they are based on assumptions that the Auditor General considers “plausible”, because rarely has the situation seemed so risky.
There is a rapid budgetary recovery, thanks to the expected reduction in expenditure linked to COVID-19, but above all to the increase in income, boosted by surprising inflation.
If we measure the growth of the economy in real terms — removing the effect of inflation — we note that the government taxes nominal incomes, which include inflation. Last year, real GDP grew by 5.6%, but nominal GDP grew by 12.5%! This year, we expect 3.4% in real terms and 9.6% in nominal terms.
In the summary table of the report, the bottom line shows for the current fiscal year a deficit of only $729 million, instead of the $6.5 billion in the March budget. And again, it comes after a provision of 2 billion for economic risks and support measures, as well as a payment of 3.4 billion to the Generations Fund.
For the next four years, the forecast deficit varies from $1.3 billion to nearly $2 billion, but always after a provision of $2 billion and the contribution to the Generations Fund. In short, if we were certain of avoiding a recession or any unforeseen shock, we could hope for a balanced budget, not a surplus that we don’t know what to do with.
However, the risk of recession is high. Desjardins foresees it next year, the National thinks that we will avoid it. Healthy prudence invites you to keep the provision just in case.
Review the Generations Fund
The question of the Fund calls for a nuanced answer, when next March the gross debt will reach 40% of GDP, beating the target of 45%. This objective needs to be reviewed. Instead, it would be better to target the net debt (gross debt less financial assets), which allows a comparison with the other provinces.
Last March, Quebec’s net debt stood at 38% of GDP, compared to 33% for the provincial average. Rather than a quantified target, we should aim for a ratio slightly below this average, whatever it may be, in order to be among the best students and earn the good graces of the markets during storms.
The CAQ finances its tax cuts by diverting 39% of the sums dedicated to the Fund, whose goal is to reduce intergenerational inequity.
If the sources of revenue devoted to the Fund are too abundant for the new target, it would be preferable, once inflation is under control, to devote part of them to reducing the other major intergenerational debt, that of climate change.
The tax burden of Quebecers is the heaviest in North America, but with debt still high, there is discomfort in borrowing to reduce taxes, without being in recession and believing this stimulus to be more effective than public investment.
Relieve inflation
We had forgotten the pain of high inflation, after 30 years almost 2%. But not everyone suffers equally. The people hardest hit have incomes that do not keep up with inflation – often retirees – or incomes so low that they have no leeway to absorb higher prices, without cutting essentials.
Conversely, the winners are those who have debt, the real weight of which is eaten away by inflation. Particularly if they have a fixed rate mortgage, lower than inflation, or if their income follows the cost of living.
Economists recommend limiting aid to the poorest, but the political temptation to water the middle class seems irresistible during the election campaign.
The assistance for low-income seniors from the Liberals and the CAQ is appropriate. The $500 budget and $400 or $600 payments promised last week are pro-inflation, but at least they’re non-recurring and roughly offset the tax escalation that won’t happen until January.
The 1% cuts by the CAQ and the 1.5% cuts by the Liberals to the first tax brackets are difficult to justify. Prime Minister Legault invokes them to increase growth, when the economy is struggling to meet demand, and to promote participation in the labor market, when the participation rate has never been so high.
The two sides of the economy had accustomed us to more rigour.