Finance Minister Raymond Bachand presented his budget yesterday at 4:00 PM; it is a bold budget introducing a long list of higher, and in many cases, totally new levies or taxes. Many polls of the Quebec population show that Quebeckers appeared less allergic to "revenue increase" than to "governmental services reductions". Bearing in mind that at least 40% of Quebeckers do not pay any income tax; ( In Ontario, the comparable figure is 30%), it should not be surprising that a majority favors the maintenance of services over tax decreases even if Quebec is already the most taxed province in Canada. Day care at 7$ per day, lower electricity costs, lower education fees and "wall to wall" subsidized (i.e "free") cultural events and festivals benefit potentially 100% of the population, not only 60%. And they all vote!
Quebec's liberal government learned it the hard way, when the resolution of the so-called "fiscal imbalance" with the Federal government resulted in a massive additional increase of transfer payments to Quebec; the government used this money to reduce the tax burden of the middle-class. Let's just say that this tax reduction reaped at least as much criticism as compliments for the Charest Government.
Quebec faces an increasingly unmanageable debt burden in proportion to its gross domestic product ("GDP"). Using the internationally recognized OECD measures of "net debt", and by considering its portion (based on % of population) of the Federal debt, Quebec's "total net debt" represents 55,9% of GDP; This would be the debt level in an eventual independent Quebec. At this level, debt is worrisome, worst than the average of OECD countries (41,3%) and of Canada as a whole (22,4%); in fact, by this measure, only Italy, Japan, Belgium and Greece fare worst.
Quebec tackles the problem by essentially taking back most of the tax decreases granted since 2003. In effect, these current and announced tax increases will recover more than $4 billion of $5.2 billion in tax reductions during that period.
New and higher old taxes...
The QST already scheduled to raise by 1% on January 2011 ( last year's budget measure) will increase by another 1% on January 2012. This will bring the nominal rate to 9.5% and the effective rate ( because the tax applies to the GST) at 9.95%. The total sales tax burden for Quebec consumers will be 15%, roughly the same level that existed before the federal conservative government reduced the GST from 7% to 5%; effectively, as predicted, Quebec is filling in this "tax void".
However, the "buck" doesn't stop there. Health costs alone represents 45% of all the government's program expenses and these costs have been increasing faster than revenues. To solve this, Mr. Bachand introduces a new "health tax" starting at 25$ per year per adult in 2010 and increasing progressively to $200 by 2012. In addition Quebec plans the introduction of an additional usage-based health franchise; details are not provided but the budget is already forecasting revenues of $500 million from it in 2013. This new "health franchise" will be added to the income tax bill based on the number of actual visits to the doctor. These measures will permit a 5% increase of total health expenditures.
Similarly, Quebec's roads, bridges and infrastructures are falling down and must be updated. To finance these expenses the fuel tax is increased by 1 cent per liter on April 1st, further 1 cent increases are also scheduled for April 1, 2011, 2012 and 2013 bringing the fuel tax to 19,2 per liter on April 1 2013. Since this fuel tax is included in the price of gas, the QST and GST are also collected on these new tax raises.
Moreover, the regions of Montreal and Quebec City will be allowed to charge a supplementary tax of 1,5 cent a liter to finance development of mass transportation. Thankfully for Gatineau's consumers and vendors, Quebec announces it will "revise" the adjustment of fuel taxes in "border regions" to allow gasoline vendors near the border to remain competitive. Outaouais dealers currently benefit from a 2 cent per liter reduction from this measure; accordingly this local reduction may be increased in the near future.
These measures are not enough to get back to the "zero-deficit" target by 2014. Accordingly, electricity costs will progressively increase by 3,7% per year starting in 2014 till 2018; thus electricity costs will go from 3.07 Cents per kW/h to 3,79 Cents per kW/h. As of September 2012 education costs will also increases by not yet announced amounts; payroll taxes will also increase for the banking sector; mineral mining dues will also increase and will be applied on a "mine by mine" basis disallowing transfer of losses to lucrative drilling site in order to reduce the amount of dues payable. A new small tax is also applied to large consumers of waters ( i.e water bottling plants.)
What does it means...
The cumulative effect of these measures is drastic, and it will hurt mostly the middle-class; for example, for a family earning two salaries totaling $75,000 per year with 2 kids the growing yearly impact is as follows: $410 in 2011, $899 in 2012 and $1 134 in 2013 when most increases are in effect; then electricity costs will soar by 3,7% a year. In addition the kids had better not be sick and visit the doctor too often. These are not inconsequential numbers for a family of four living on $75,000 a year.
Arguably, these are necessary measures if the public wants to retain a certain level of public services; nevertheless will the increasingly unpopular government be able to sell all these new taxes ? It remains to be seen. Let's look at the dollar amounts in terms of increased revenue; this shows where the money is really coming from. Only major items are listed.
- QST raised to 9.5%: $3.15 billions
- Energy costs increases: $1.6 billion
- New "health tax": $945 millions
- Fuel tax increase: $480 millions
- Payroll tax increase for banks $112 millions
What about reducing costs?
All these measures would be unpalatable if the government did not at least attempt to also contribute to the "war effort"; in fact, Mr. Bachands boasts that 62% of the contributions to eliminate the deficit will not be supported by taxpayers but achieved through better management and costs reductions.
The Finance Minister says the government itself will generate $6.9 billions in savings to attain the "zero deficit" objective within four years. Essentially he wants to save $ 5.2 billions by limiting the increase of expenditures. On average, from 1999 to 2009 program expenditures have increased at a yearly average rate of 4.8%; last year's budget fixed a ceiling increase of 3.2%; they now realize it is not enough. Accordingly, the plan is to limit expenses increases to 2.9% this year and to 2.2% for the next three years. The difference between $6.9 and $5.2 is mostly achieved by the objective of reducing "tax evasion"; to this effect, Revenue Quebec becomes " Agence de Revenu du Québec" ( Quebec's Revenue Agency).
The plan is to target mainly "complex tax planning strategies", undeclared income in the construction industry and undeclared sales in restaurants. The remaining savings will come from elimination of bonuses, salary freezes for MPs and Ministers and replacing only one out of two civil servants leaving or retiring.
These are lofty, ambitious objectives, possibly unrealistic. But the guesses of Mr. Bachand had better be good because many tax increases will likely happen after the next election. By then the government may be able to sell the idea of suffering now to benefit later and avoid passing on current and past debts to the children and next generation. But if the government is unable by election time to control its expenses, taxpayers will be tempted to punish a government not shy to dig in their pockets but unable to control its expenses. A big, courageous gambit but will this budget fly or be killed by "Real-politiks". Again, only time will tell.
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