Quebec Finance Minister Marceau...Now You See it, Now You Don't...

Abracadabra!

 It's always hilarious to see the various finance ministers put on a brave face and paint some pretty awful budget figures in the most favourable light that they can.

Of particular interest is the latest from Quebec finance minister Nicolas Marceau, whose description of Quebec's current financial situation borders between fantasy and prevarication.

You'll recall that when the Parti Quebecois came to power, they immediately announced that the finances of the province were in much worse condition than anticipated.
This is standard operating procedure for all newly elected governments, who get a free shot at the outgoing party, telling voters that they can't live up to election promises because of the undisclosed financial train wreck that the previous government left behind.

And so, the PQ was able to back off on the promise of abolishing the Liberal party imposed health tax which they campaigned against and also shrugging off the idea of freezing or rolling back tuition in Quebec universities with impunity.
Blame Charest!

All this was to be expected and had the Liberals overturned the PQ they would have done the same thing.
And so Nicolas Marceau told us that it would be impossible to balance the budget in the first year of the PQ mandate, but promised a zero deficit in the second year.

In November last, Mr. Marceau predicted a deficit of $1.5 billion and yesterday confirmed that the deficit would be just about hundred million more than the predicted, at $1.6 billion. He seemed very proud that his prediction was more or less on target!
But was it really?

Mr Marceau claimed that the government had done a masterful job of keeping the increase in budget spending to just 1.2% by controlling expenses. In the last year of the Charest government, the increase was 2.5%

J-de-M..Deficit smaller than Anticipated?...R U kidding me!

But what Marceau failed to mention is that spending was kept artificially low by cutting over $200 million in subventions to Quebec school boards, who then turned around and taxed back the money via school taxes.
A neat accounting trick!
It's a gambit called 'getting a dog off the books' and dishonest companies use the strategy to appear less in debt by creating a subsidiary and downloading it with company losses, losses which while remain the responsibility of the parent company, but which are removed from the parent company's balance sheet.

And let us not forget the $700 million, one-shot payment that Quebec received this year from Ottawa for harmonizing sales tax, which was never put in the calculations because it wasn't a sure thing.

Let us also remember the $1.9 Billion one-time charge that the government is taking in relation to the PQ's decision to close the Gentilly 2 nuclear plant, bringing the real deficit up to about $3.5 billion. Link

And things are going from bad to worse on the revenue front with sales tax and income tax bringing in almost $2 billion less than last year, with no respite in sight.

It isn't any shock that Mr. Marceau and the PQ have abandoned the zero-deficit promise they made during the election campaign, it is an impossibility given the fixed overhead and the catastrophic drop in revenue.

As I told you in the last post, Marceau is keeping his cards close to his vest, refusing to divulge what is really going on, vis-a-vis revenues and next year's budget. He has already announced that the health tax will not be repealed again, but other than talking about controlling expenses and expenditures, he isn't saying much about a balanced budget, because it is an impossibility.
And readers, let me remind you that I told you this was the future many months ago, not because I am prescient, but because I can do sums.

The opposition smells a rat and have been demanding the financial information for over a month, met by stoic silence and stonewalling by the minister.
They were so furious at being ignored that they sent a bailiff to Marceau's office and served him a subpoena to appear before a Parliamentary finance committee, where he will be forced to cough up the numbers!

With resource projects collapsing, Hydro revenue receding, consumer spending on the decline and the unemployment rate on the rise, it doesn't auger well for the financially strapped province.
The only private investments Quebec seems able to muster are those attached to large government subsidies and in reality they are in the grand scheme, but a pittance.

Without massive tax increases, the financial ship of state cannot be righted, because the shortfall in revenue is just too great and the growth of current economic activity has not kept pace with increasing government expenditures.
Until the government cuts back its expensive entitlement programs or increases revenue, deficits will pile up.
But increasing taxes isn't the panacea one would expect, because the amounts raised, are offset by decreases in consumer spending and decreased economic activity.
We are finally seeing the effects of hitting the "T" point on the Laffer curve. Explanation
As the government increases taxes, revenues actually decrease!

I am anxious to see if Marceau will reinstate the decrease in the exemption for capital gains income, (which he cancelled after the investment community rose in protest)  the effect which will have Quebecers taxed at a substantially higher rate for investment income than other Canadians.
Retirees (like myself) who live on their investments will just pack up and move, rather than see the taxes owing on investment income rise by up to 50%, only in Quebec.
Again, such a move will never raise the taxes contemplated. We are fast approaching a revenue wall, not because Quebecers don't have the ability to pay more and accept a reduced lifestyle, but rather because enough can just pick and leave. Companies, as well.

Alternate to increasing revenues through higher taxes, the government could try to improve the investment outlook for resource based companies, instead of threatening them with higher taxes and royalties.
Resources are the one area that Quebec badly under-exploits.
Until the PQ understands that they can't tax their way into solvency, we are bound for a Greek tragedy.

If you really want to understand the investment climate in Quebec, read this;

Investors ‘more comfortable’ putting money into gas projects in Iraq than Quebec: banker

And so the PQ has two choices, either cut expenses drastically or make Quebec more hospitable to resource development.

Which will it be?

I going with door Number #3....none of the above.

If you fundamentally don't understand or accept what the problem is, you can't really come up with a fix.

But wait a second...we actually are in a FIX, but not the good kind!