Actualis



March 2009
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Jumpstart the economy now. Pay in 2011.

Kiss the good life goodbye! That’s more or less the message to be gleaned from the budget tabled by Quebec’s Minister of Finance last Thursday. Might as well get used to it, because the bill we’ll be hit with in 2011 is going to be a hefty one.

All told, the era of balanced budgets only lasted a decade, and the era of tax reductions was even shorter. In presenting her 2009-2010 budget, Finance Minister Monique Jérôme-Forget announced that the Quebec government will be running a deficit for the next four years. Many analysts are predicting that those four years could become five, six, or even more if the minister’s assumptions are less than fully realized. Some are even talking about a structural, rather than cyclical, deficit.

We’ve had better Marches.

Don’t expect much more from the government

The first conclusion to be drawn from this crisis budget is that Quebec families won’t be able to count on the government for another boost in their disposable income anytime soon. Since the year 2000, successive tax reductions, both provincial and federal, not to mention the 2% reduction in the GST, meant that households saw their net income rise noticeably. In retrospect, these years of declining taxes, low inflation, and reasonable interest rates will soon look like the good old days, even if we didn’t necessarily realize it at the time. We still have some breathing room in 2009 and 2010, but now is the time to start preparing for 2011.

What will 2011 bring?

In 2011, assuming that the economy has started to recover and we are all on a firmer financial footing, the government will begin to pass the burden of its deficits along to us taxpayers. This will be done in two main ways:

  • by increasing the Quebec sales tax by one percentage point;
  • by indexing certain government services (drivers’ licences, birth certificates, etc.) to the cost of living.

 

The government expects the QST increase to bring in additional revenue to the tune of about $1.2 billion. However, the government’s own calculations show that it needs to find close to $4 billion in order to start mopping up the deficit. In fact, it only expects its planned initiatives to drum up approximately 40% of the required amount. Where will the other 60% come from?

Care to bet on tax hikes and broader fee increases?

In the meantime

We do have a few morsels of good news, though. For example, the tax credit for child-care expenses has been adjusted so that more families can take advantage of it. As well, parents who receive parental insurance benefits will now be entitled to the credit. RESP regulations have also been relaxed, and the refundable QST credit will be going up (but not until 2011). Finally, a number of measures have been harmonized with the latest federal budget, notably those pertaining to the deductibility of losses incurred within an RRSP or RRIF after death.

Anything else for individuals? Not really.

Businesses have to pick up the ball

On the other hand, the government unveiled a range of measures for businesses, primarily SMBs, in the hope that they will pick up the slack and get the economy moving again. These measures include:

  • bringing back the QSSP, which allows taxpayers to deduct 150% (100% after 2009) of their investments in listed companies with less than $200 million in assets; will this tax break convince individuals to channel their savings into our small and medium-sized businesses?
  • providing higher tax credits for investing in Fondaction (CSN), and a wider range of eligible investments for the Fonds de solidarité (FTQ); these two funds provide development capital for Quebec companies;
  • raising the income threshold for the small business tax rate to $500,000;
  • improving the accelerated depreciation measures for computers, software, and some other kinds of equipment;
  • extending the training and e-business development tax credits to new sectors;
  • introducing a tax holiday for certain companies involved in research and development.

 

Looking south for hope

According to many analysts, these measures don’t really add up to a recovery plan. Could that be because once the natural increase in health care and education costs is factored in, and once the drop in tax revenue from businesses and individuals is absorbed ($2.5 billion is nothing to sneeze at), there won’t be much left for Quebec to invest in the kind of “major 21st century projects” being initiated in the United States?

Unless it is prepared to massively increase Quebecers’ tax burden (at the risk of making things worse), the Quebec government can only hope that the U.S. economic stimulus plan will be a success and, as an indirect result, inject some energy into our own economy.



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