Premier François Legault’s government in Quebec pledged to cut taxes in an effort to “create wealth” and “increase Quebec’s economic potential.”

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The province with the highest taxes plans to spend $9.2 billion cutting them Back to video

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The promise was the highlight of the province’s annual budget tabled on March 21. Though Quebec has the highest taxes in the country, the province also funds services such as colleges, daycare, and community health clinics to a degree that other provinces don’t. The Legault government will put $9.2 billion toward the tax cut through 2028, which the government said will result in tax savings of $1.7 billion per year for 4.6 million Quebecers.

“By reducing the portion taken from personal income, we improve their ability to consume and save,” said Finance Minister Eric Girard in a speech on March 21.

The province will record a deficit of $4.6 billion in the fiscal year that ends at the end of the month, better than the previous year’s shortfall of $7.4 billion, and exceeding Girard’s earlier forecast of $5.2 billion.

Though the province is running a deficit, the budget sets out plans for increased spending, not less.

Legault and Girard will implement an income tax cut despite the idea’s unpopularity in business circles.

In late February, 53 economists and financial analysts published an open letter in La Presse, a Montreal daily newspaper, arguing against the cut, saying that it would be “inappropriate, inequitable and counterproductive,” because, in these difficult economic times, the government should be trying to conserve resources.

However, Legault’s Coalition Avenir Québec (CAQ) is making good on an electoral promise to reduce tax rates by one per cent for two income brackets in 2023, and also to cut income taxes by 2.5 percentage points over the next 10 years.

The government will fund the initiative by pulling from the Generations Fund, a fund dedicated exclusively to repaying Quebec’s debt, replenished primarily using revenue from Hydro Quebec, the province’s energy utility. The fund currently stands at $19.2 billion. In order to offset the withdrawal of 2.5 billion this year and next, the government said it will reduce its deposits by about $2 billion per year.

The budget “strikes a balance between fiscal sustainability and strategic investments in key sectors of the province’s economy while delivering on a major election platform,” wrote Scotiabank Global Economics in a note. Reducing payments to the Generations Fund was a good move, the note continued, because it gives the government some flexibility. The downside is that it also reduces the government’s ability to use it to reduce its debt, although Quebec has been working on reducing its debt since the early 2010s, so it is still in relatively good shape, Scotiabank said.

One of the reasons some oppose tax cuts is that they could stoke inflation, which is running at its fastest pace in decades. But that hasn’t deterred Legault from using fiscal policy to augment households’ disposable incomes. In the previous budget, Legault handed out cheques to help Quebecers earning under $100,000 a year cope with inflation and rising gas prices, despite push back from opposition parties that, instead, suggested freezing electricity rates or removing the provincial gas tax.

Rising interest rates and higher inflation will slow gross domestic product growth this year, the budget predicted. GDP growth fell to 0.6 per cent, compared with growth of 1.6 per cent from 2021 to 2022. Looking ahead to 2024, Girard predicted growth would bounce back, landing at around 1.4 per cent.

The budget also includes $615 million in funding to assist with the labour shortage, as well as $5.6 billion for a “better performing and more human” health-care system.

“It is undeniable that Quebec will experience a slowdown in its economy in 2023,” Girard said in his speech. “The risks of a recession remain, but Quebec’s resilience allows us to be optimistic about our chances of escaping it.” He added that the wealth gap between Ontario and Quebec continues to narrow.

This was Girard’s fifth budget since the Coalition Avenir Quebec was elected in 2018.

• Email: mcoulton@postmedia.com | Twitter: marisacoulton