To finance a tax cut, the Coalition avenir Québec (CAQ) is proposing to reduce payments to the Generations Fund by 39%, limiting them to $3 billion per year. To satisfy voters in the short term, the long-term balance of Quebec’s public finances is being harmed.
Posted at 3:00 p.m.
The CAQ can thus pride itself on lowering taxes without reducing the public services offered to the population. Indeed, the pandemic has revealed that massive reinvestments in our public services are necessary and it seems that a majority of citizens think so too. On the other hand, by amputating the Generations Fund, the CAQ is harming future public services.
The Generations Fund aims to repay the public debt and achieve a form of intergenerational equity. The government is paying nearly $3.5 billion into it this year, a sum that grows every year. The kitty is invested on the stock markets and the return is generally higher than the interest on the public debt, so that it is reimbursed more quickly than if it were reduced directly with the help of budgetary surpluses. One-time payments are then made to reduce the debt.
Partly thanks to the Generations Fund, the public debt has reached a sustainable level. However, Quebec’s public finances will deteriorate in the medium term, barring a miracle.
Driven by the costs of technological innovations and by the aging of the population, health expenditure will increase considerably. Forecasters don’t all agree, but healthcare spending is expected to rise from around 9% of GDP in 2019 to between 13% and 16% of GDP by 2050.
Such an increase represents about as much as the current budget for public education, an additional amount that Quebecers will have to pay each year. However, the aging of the population will reduce the growth potential of the economy so that governments will have to make difficult choices to deal with rising health care costs.
It is therefore important to be careful. Prudence suggests that the government reduce its debt in order to give itself the necessary leeway to deal with the fiscal constraints of the coming decades. Otherwise, the government could invest in programs that will allow us to prepare for the challenges of tomorrow, by increasing our environmental resilience, or improving the health of the population, for example.
Reducing state revenues is not a sign of caution.
Depending on its terms, the CAQ’s tax cut will reduce the value of the Generations Fund by $8 to $10 billion by the end of the mandate of the next government, which is currently worth about $15.7 billion. This amount, which will satisfy voters in the short term, will not be available to solve the challenges of future generations.
It must be recognized that today’s citizens are facing unprecedented inflation and that the government must react. Sending periodic amounts to citizens seems to me to be a preferred avenue, since the government can target certain categories of the population based on their income, without harming its public finances in the medium term.
Converselytax cuts permanently reduce the government’s fiscal capacity and only benefit taxpayers, who represent 4.5 million people out of 8.45 million Quebecers.
Certainly, the CAQ is right to point out that Quebec maintains the highest tax burden in North America. On the other hand, Quebecers also receive many more public services than other North Americans.
To give just a few examples, our family policies are by far the most generous on the continent, support for vulnerable people is better developed, access to education is considerably cheaper and we are the only ones to have public drug insurance. .
These public services can certainly all be improved, but it is not by lowering taxes that we will achieve this.
The CAQ displayed a rather centrist fiscal policy in its first mandate, by not reducing the tax burden of Quebecers (as a proportion of GDP) and by investing in public services. This tax cut positions it more clearly on the right, perhaps in reaction to the rise of the Conservative Party of Quebec.
By cutting taxes now, the government decreases the fiscal room for future governments, thereby limiting potential increases in government spending. Moreover, since it is politically difficult for a government to increase its revenues, tax cuts often result in subsequent reductions in public services when the economic situation deteriorates.