Why Quebec has Canada's hottest economy – and growing equalization payments - The Globe and Mail

Quebec Premier François Legault has set the ambitious long-term goal of increasing his province’s economic growth to the point that it no longer needs or receives equalization payments.

The province’s fiscal update last week showed that Mr. Legault is making some progress on that goal, with Quebec upgrading its growth forecasts as it rebounds quickly from the effects of the coronavirus contraction.

“The pandemic will be just a bad dream, starting next fiscal year,” said Robert Hogue, senior economist at the Royal Bank of Canada.

The Finance Ministry also laid out how Quebec has narrowed the income gap with Ontario since 2017, part of a push to eliminate that gap entirely by 2036.

And several pages earlier in that same document, the Finance Ministry mentioned that equalization payments to the province would jump to $13.474-billion next year, $355-million more than was forecast in the spring budget.

What’s more, Quebec’s share of equalization payments through to fiscal 2025-26, while declining, will also be higher than forecast in the budget. The province now says it will receive 54.2 per cent of federal equalization payments in 2025-26, up from the earlier projection of 53.1 per cent.

That Quebec’s nation-leading prosperity can coincide with richer equalization payments is a testament to just how far the equalization program has veered from its original purpose of ensuring that provinces can provide roughly comparable services at roughly comparable levels of taxation.

Driving that deviation is the funding formula put in place by the Harper government 13 years ago, aimed at keeping a lid on the cost of equalization as Alberta’s supernova energy revenues dramatically inflated the fiscal disparities between the provinces. Then, the decision to tie growth in equalization payments to the three-year average growth in national nominal gross domestic product acted as a ceiling on costs.

Now, it’s acting more like a fast-moving escalator. This year’s exceptional surge in nominal GDP will inflate the amount the federal spends on equalization – something that Quebec flagged as the source of its rising revenue from equalization.

It is worth noting that even with the revised projections from Quebec, the province is forecasting a decline in its share of equalization payments, a not-small drop from its two-thirds share in 2019-20 to just over half of the total, four years hence.

That does reflect, in part, the progress the province is making on Mr. Legault’s vision. But it will take many more years of above-average growth to close a prosperity gap that has been decades in the making, Mr. Hogue says.

Taxing questions

Responding to a recent Tax and Spend on the jump in payroll taxes in 2022, one commenter contended that Canada Pension Plan contributions aren’t a payroll tax at all, but just a forced savings plan.

That claim has some merit, at least from a worker’s point of view. CPP contributions don’t vanish into the government’s general revenue, and do heavily influence the eventual pension benefits received.

But as the Fraser Institute wrote when the Liberals first put in motion the plan for higher contribution rates, the CPP has some very tax-like characteristics. Chief among them: It’s a government-imposed obligation. You cannot decide to invest your money elsewhere, or simply spend it.

And the CPP is not a personal savings plan. You do not have a CPP savings account. What you have is a non-binding promise by the federal government to pay you a certain amount in the future – a promise that is subject to revision. The Fraser Institute noted that Ottawa has previously boosted contribution rates without increases to benefits several times in the past. Or, you could turn that around to say that Ottawa cut benefits relative to contributions.

Either way, it’s clear the CPP is much more akin to a tax for workers than a personal savings plan. And for employers, it’s quite clearly a tax.

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Equalize you, equalize me: Speaking of equalization, the Institute on Municipal Finance and Governance has published a new paper as part of its Urban Project, arguing provinces should fully get into the equalization game – but as the entities paying out funds to municipalities. The authors acknowledge there would be a myriad of complexities to work out but that a province-to-municipality equalization program “... is an essential element of a fair and efficient system of local public finance.”

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Why Quebec has Canada's hottest economy – and growing equalization payments - The Globe and Mail
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