The news came as a surprise: Quebec now has a budget surplus. This is good news for a province that writes most of its budget in red ink. While this surplus is cause for celebration, already many commentators have proposed that it be "re-invested."
Re-investment, of course, is code for more spending. To have a balanced budget, it's important to control spending and create a situation where budgetary balance is normal and surpluses are even expected. And these surpluses should be used the way the government previously announced they would be used: half to cut taxes, and half to lower the public debt.
Quebec is the most taxed jurisdiction in Canada and the U.S. Efforts should be made to change that. Today the public sector debt amounts to over $278 billion.
It's important to note that the majority of the efforts made by Quebec to achieve a balanced budget have come from tax increases, not spending cuts. The government has made significant efforts not to increase spending as quickly as it has in the past, which is absolutely essential if the goal is sound public finances. Still, this is problematic as balanced budgets achieved through tax increases tend to be more fragile than those achieved through spending cuts.
Furthermore, too many people conflate a rich state with a rich society. While governments can create conditions for economic growth, they can also stand in the way. If they spend too much (and too inefficiently), they will sooner or later tax and regulate too much as well. By skinning the sheep instead of shearing it, growth is stifled. This is the case in Quebec, which compares poorly to other provinces and states in North America, especially with regard to taxes on individuals with lower incomes.
When you tax something, you are bound to get less of it. Quebec's tax burden falls largely on earned income, which means that we are bound to see fewer workers, fewer savings and less investment. While there are debates over the positive effects of tax cuts, it is generally agreed that cutting taxes tends to increase economic growth – especially if taxes are burdensome relative to other areas.
Consider a recent report published by the National Bureau of Economic Research in the United States looking at tax rates between 1946 and 2012. In that study, it was found that a one per cent reduction in tax rates increased the number of hours worked by 0.8 per cent – and this is for a country where participation in the labour market is already well above the proportions observed in Quebec. Another recent study found large negative effects on personal income as a result of higher taxes on corporate income.
Numerous studies show that beyond a certain point, the net social gains from government spending fall. This is likely the case for Quebec, and efforts to curtail spending are thus still warranted. At the end of the current budgetary plan, government spending relative to the economy will still be above the levels observed in 2003 and on par with the historically high plateau observed in the 1980s.
We can debate which taxes should be cut first and how best to proceed. What is not up for debate is the fact that Quebec has a heavy tax burden relative to other jurisdictions in North America. Nor can we deny the general conclusion of the economic literature that burdensome taxes undermine economic growth and the living standards of the population.
During the last election, the Liberals campaigned on promises of tax cuts when the budgetary situation would allow. The economic case they made was sound. Isn't it time to act on those promises?
Jasmin Guénette is Vice President of the Montreal Economic Institute. The views reflected in this op-ed are his own.
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