Big businesses say Quebec’s proposed income tax cut is the wrong approach at the wrong time

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Big business in Quebec is coming out against an income tax cut promised by Premier François Legault’s government, a stand that puts it in rare alignment with trade unions ahead of provincial budget day next week.

The Conseil du patronat du Québec (CPQ), a business group representing about 70,000 private and parapublic employers in the province, including major banks and manufacturers, says the goal of lightening Canada’s heaviest personal tax burden is laudable. But it says the government’s timing and approach are all wrong.

“It’s the whole context that makes it not the best idea right now,” said Norma Kozhaya, the organization’s chief economist and vice-president of research. If Quebec had a budget surplus, allocating it to tax cuts might make sense, but that’s not the case right now, she said.

Quebec is projecting a deficit for fiscal 2022-23 of $4.8-billion, or 0.9 per cent of nominal gross domestic product.

Mr. Legault’s government is widely expected to follow through on an election pledge to cut taxes when it presents its budget next week, the first of its second four-year mandate. But the Premier and Finance Minister Eric Girard are coming under pressure from many business leaders and economists to scrap the plan or at least delay it – proving there are deep divisions on the best path forward.

The government has promised to implement a one-percentage-point cut to the two lowest tax brackets starting this year, with more cuts later if it remains in power. The Premier has said the government “has a duty to help Quebeckers” deal with the rising cost of living by offering permanent relief from high interest rates and inflation.

A recent survey by Léger Marketing for the Canadian Federation of Independent Business found 64 per cent of respondents in favour of tax cuts for individuals and small business. As François Vincent, vice-president for Quebec for the CFIB, puts it: “If we always shovel this forward to some time in the future, we’ll never get there.”

But a significant number of individuals and groups have come out against the idea, many of them questioning the wisdom of the move during prebudget consultations. Last month, a group of 53 economists and financial analysts argued in an open letter that it would be “imprudent” to give up such a significant budget margin for what will amount to an average tax cut of $300 a person.

Quebec’s four largest unions also oppose the plan, saying the government is on the wrong track by depriving the public treasury of essential resources at a critical time. “In the context where public services are cracking everywhere and where they are reaching several breaking points, it is incomprehensible and irresponsible,” they said in a joint statement.

The government has proposed paying for the cut in part by capping annual deposits to the Generations Fund, a pool of money set up in 2006 with the explicit goal of repaying Quebec’s debt. The fund, which is managed by the Caisse de dépôt et placement du Québec, is financed in part by royalties from Hydro-Québec and has a current book value of about $19-billion.

Ms. Kozhaya said financing tax cuts by freeing up money from a fund set up to ensure generational equity steers away from the principles of responsible debt management that Quebec has adopted in recent years. And she raised a point many economists continue to make: Giving people more money to spend is counterproductive because it doesn’t stop inflation, it can contribute to it.

Mr. Legault’s administration has largely failed to justify the tax cuts from a macroeconomic perspective, said Emna Braham, the executive director of the Institut du Québec, a public policy research group. “That’s why so many economists seem to be uncomfortable with it.”

The government has already twice given Quebeckers cash payments to help offset rising living costs – the first worth $500, for people earning less than $100,000 a year, and the most recent worth as much as $600 a taxpayer. It also increased a refundable tax credit for seniors at a projected cost of about $8-billion over six years and set a 3-per-cent limit on indexing government fees.

No other province comes close to the affordability relief that Quebec has offered. According to Desjardins Group research published in December, Legault government transfers to households to blunt the impact of inflation are worth $5.1-billion for fiscal 2023, more than half of the almost $10-billion earmarked by all provinces combined.

According to the Association des Économistes Québécois, a non-partisan group, introducing tax cuts would only add fuel to the fire. Like the CPQ, it says the idea is good but the timing is terrible.

“People are talking about an economic slowdown, but fundamentally there is a labour shortage and the unemployment rate is at a historic low” in Quebec, said Louis Lévesque, head of the group’s public policy committee. “So any new spending or tax cut the government introduces right now will speed up inflation trends. We don’t need to be stimulating demand right now.”

If the government moves ahead with tax changes, Mr. Lévesque said, it should engineer them to address the labour-shortage problem. It could, for example, introduce specific tax incentives to encourage people to work more, he said.

Mr. Girard last provided a public update on Quebec’s finances in December, saying the province’s financial situation had improved since the spring 2022 budget thanks to an increase in economic activity early in the year. But he warned that the slowdown already under way will worsen in coming quarters as households come under increasing financial pressure and the synchronized tightening of monetary policy in other countries dampens the appetite for Quebec exports.

Mr. Girard said the province remains on track to balance the books by the 2027-28 budget year.