Quebec’s balanced budget boosts spending, cuts income taxes

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While most Canadian finance ministers are struggling to keep a lid on deficits, Quebec's Liberal government will boost spending and cut taxes on the strength of a healthy economy, growing revenue and a third consecutive balanced budget.

With one more budget to go before the 2018 provincial election, Finance Minister Carlos Leitao has already started handing out modest pre-campaign goodies. He announced about $1-billion in income-tax cuts and opened the wallet to boost spending by 4.1 per cent, mainly on health care and education.

Mr. Leitao cracked jokes and needled reporters Tuesday in an upbeat financial exercise that contrasted with dismal recent budgets in Alberta, Saskatchewan and Ottawa. In the Prairies, governments are struggling to keep massive deficits under control while Justin Trudeau's government is letting red ink spill, hoping to spur economic growth. Ontario is expected to bring its budget into balance next month, but it won't be easy.

Despite a positive short-term outlook, Quebec is still constrained from a true boom by debt and demographics. The province is aging more rapidly than any other province. The working-age population is shrinking and care for the elderly will pose a growing strain on the health system expected into 2030 and likely beyond.

The province's $207-billion debt has started to decline slightly as a percentage of the size of the economy (52.7 per cent of gross domestic product), but remains second only to Newfoundland and Labrador on the provincial debtors list.

"Unlike other provinces, balancing our budget was not optional, we had no choice," Mr. Leitao said. "Our demographic component constitutes a significant impediment to future economic growth. Now that our financial situation has improved considerably, we can fund our basic services appropriately."

The province anticipates revenue growth of 3.7 per cent for the coming year, a projection Mr. Leitao described as conservative, fuelled by the province's relatively healthy economy. The unemployment rate is 6.4 per cent, a level not seen since the 1970s. The welfare roll is half the size of 20 years ago, and economic growth in 2016 was 1.7 per cent – ahead of the United States and the Canadian average.

The financial plan should allow the province to meet its aim of a balanced budget for the next five years, according to Luc Godbout, an economist at the University of Sherbrooke. "It's positive," Dr. Godbout said. "The tax cuts are such they won't handicap the ability to balance the budget for years. There are no grand measures; what they've done is within their means."

For Parti Québécois finance critic Nicolas Marceau, the spending increases weren't enough to make up for the lean early Liberal years that saw effective cuts in schools and hospitals. Even last year, with budgeted spending increases, the government failed to actually spend the money, boosting the surplus. "It's another budget of pretty promises and these budget increases will never be felt on the ground," Mr. Marceau said. "There have been a number of promises in the last couple years that have not materialized. I see no reason to believe them."

Quebec's spike in program spending didn't just start with Tuesday's budget exercise. The Liberals started their mandate with two lean years, but Mr. Leitao reported spending last year rose 3.8 per cent – a full 1.1 percentage points higher than he had budgeted. Part of his current tax cut plan reaches back to last year's budget exercise to reimburse a health tax already collected from Quebeckers.

The retroactive phase-out of the health tax combined with an increase in the basic tax exemption and tinkering with the formula for calculating tax credits will add up to a $1-billion tax cut for 2017-18. A couple earning $45,000 each will keep about $510 a year in tax savings.

The province still posted nearly a $1-billion surplus for 2016-17 on top of $2-billion in debt repayment. Mr. Leitao insisted he has worked in contingencies for any unanticipated economic downturn, with $2-billion set aside in a contingency fund and $2.4-billion for debt repayment for 2017-18.

François Legault, the leader of the conservative Coalition Avenir Québec, pointed out Quebec incomes still lag behind its neighbours and the budget does little to boost economic growth to levels that would allow the province to catch up. "The government has no ambition," Mr. Legault said. "They're playing penny-ante politics instead of managing our long-term prosperity."