Will the Legault government keep its promise of a tax cut? A step back on this electoral commitment would be tantamount to starting a second term badly, especially since it was camped within a larger envelope of anti-inflation shield. But it is true that the pandemic has bluntly shed light on, even exacerbated, the many problems and deficits in the supply of government services, particularly in health and education. And there is this looming recession. Place to choose!
During the last election campaign, a CAQ government promised to reduce by one percentage point the rate of the first two tax brackets, which are currently 15% and 20%. The Research Chair in Taxation and Public Finance at the University of Sherbrooke (CFFP) estimates the cost of this promise at nearly $1.9 billion for the 2023-2024 fiscal year, a bill that must however be paid for by a reduction payments to the Generations Fund.
The Institute for Socioeconomic Research and Information (IRIS) has calculated that people with incomes of $100,000 will be eligible for tax relief of more than $800 each year. In comparison, people earning a salary of $50,000 will save $328 in tax contributions per year. The suggested amendment will offer no gain to taxpayers whose income is below the first tax table, which represents 35% of the Quebec population.
One could also add that the whole thing should be put in the perspective of a study by the Federal Reserve of Boston indicating that in the United States, the marginal propensity to consume goes from 97% in the so-called lower quintiles of disposable income, to 48% in the upper segment, a difference that would not be so different in Canada. Not to mention that this lowest income bracket devotes proportionally more resources to food, housing and other current expenses meeting basic needs – where inflation hits the hardest – than to services and discretionary expenses. .
That said, while government revenues are gorged with inflation, individuals and households have to deal with an erosion of their purchasing power under the weight of a rise in the cost of living higher than that of income particularly felt on the prices of housing and the grocery basket. Not to mention the recurrence effect of inflation, which has been accelerating since the spring of 2021. In food alone, food prices increased by 11% in Quebec last year, according to a report published by 26 university researchers, and is expected to grow another 5-7% this year.
Offset indexing
Another element to consider is the indexation of the tax system, which is based on a lagged inflation measure. The indexation rate is calculated by the change in the consumer price index (CPI) excluding alcohol, tobacco and recreational cannabis between the twelve-month period ending September 30 and that ending September 30 September of the previous year. For 2021, the indexation was 1.26% while, for the whole year, the average increase in the overall CPI was 3.8%. For 2022, the indexation rate was 2.64%, while we are talking about an average annual increase of 6.6% in the overall CPI.
Small consolation, the indexation rate drops to 6.4% this year, a shortfall for Quebec estimated at 2.3 billion, against 898 million in 2022 and 424 million in 2021. And we expect that inflationary pressures are diminishing considerably, under the effect of year-on-year growth, but also of the slowdown in economic activity. The Bank of Canada expects CPI growth to be around 2.6% in the last quarter of this year, landing on the 2% target in 2024.
In addition, according to the forecasts of the Order of Chartered Human Resources Advisors, Quebec employers plan to grant average salary increases of 4.4% in 2023, compared to 4% in 2022. The Order recalled that these forecasts took account of the effect on the wage structure of the 7% increase in the minimum wage, which will come into effect on May 1.
As for the impact of the Generations Fund on the public debt, the CFFP recalled in its brief that the current objective of reducing the gross debt to 45% of GDP has already been achieved and that that of the debt representing the accumulated deficits would be in March 2026. But that the achievement of the objective of a net debt to GDP ratio equivalent to the current ratio of all the provinces excluding Quebec must be postponed for five years if the Legault government goes forward with his tax cut project. “The objective would therefore be reached in 15 years instead of 10, that is to say by March 31, 2038”, which is in line with the horizon of 10 to 15 years adopted by the government, underlined the Chair.
So much for the diversion of a portion of the payments to the Generations Fund. The fact remains that Quebec is urged to put the bulk of its resources into consolidating its service offer and its mission expenditures, strengthening the energy transition, tackling the poor state of the infrastructure head-on and stimulating investment in the increase in productivity in a context where the shortage of workers imposes a greater level of substitution between labor and capital, to take up a reading by Jean-Pierre Aubry, independent economist.