Charest avoids repeating his 2003 daycare mistake

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The Gazette, Sunday, March 22, 2009

Jean Charest's first fall from grace with Quebec voters occurred in 2003. In his first budget after taking office, his Liberal government raised daycare user fees from $5 to $7 a day.

Of course, daycare didn't cost $5 or $7 a day. It cost more like $50, even then, and the remainder is paid by the taxpayers. But Quebec, with only 20 per cent of the daycare-eligible kids in the country at the time, had 50 per cent of the subsidized daycare spaces. It was getting expensive for the treasury.

Raising what parents paid by $10 a week was an entirely reasonable attempt at burden sharing. It was also part of Charest's determined attempt to allocate his political capital to what he called a "re-engineering of the state."

But Quebecers saw it differently. Parents saw him taking 10 bucks a week out of their pockets. Voters saw him attacking a sacred trust, one of many costly covenants in the generous "Quebec model" nanny state.

Charest's approval and trust numbers went south, and did not recover in the remainder of the government's term, leading to the precarious Liberal minority that was returned in March 2007.

At the beginning of his third term, newly restored to a majority, Charest was not about to make the same mistake again in the first budget of this mandate. User fees for other government services, such as driving licences, will be allowed to rise by the rate of inflation, though only in 2011. But daycare user fees will remain at $7 a day. Lessons learned, chapter one: Leave daycare alone.

For the rest, the budget will see an increase in the QST of one per cent, to 8.5 per cent, also in 2011. By then Charest could well be preparing his post-political career. Not that he's a lame duck, at the beginning of a mandate that could stretch to the fall of 2013. But chances are that whatever blowback accompanies the sales tax increase will be felt by Charest's successor.

Since the 7.5-per-cent QST is a compound tax on top of the federal GST, Quebec has already taken two revenue hits for the Harper government's reduction of the goods and services tax from seven to six to five per cent.

Charest didn't complain about it at the time, since Stephen Harper was keeping a campaign promise. In any event, there was a nudge-nudge, wink-wink: Quebec got more than equivalent revenues back, from increased transfer and equalization payments from Ottawa. The price of resolving the fiscal imbalance in 2007 was silence on the GST cut.

This week's Quebec budget is not by any means draconian. It simply reflects the reality of hard times. In the month of January alone, the Quebec government's revenues went off a cliff, plunging by 19 per cent.

After all the hard work, and some of the creative accounting, which went into achieving balanced budgets, Quebec, like Ottawa, is returning to deficits. Quebec, like Ottawa, predicts a return to surpluses only in fiscal 2014.

But Quebec's deficit projection of $7.7 billion for the next two fiscal years is proportionately quite modest beside the $18 billion forecast for Ontario. Quebec's economy is about two-thirds the size of Ontario's, so on a proportional basis, a $12 billion deficit would not be out of line, except that Ontario's manufacturing sector has been much harder hit by the recession than Quebec.

And as a percentage of output, the key number for ringing alarm bells, Quebec's deficit will come in just over 1 per cent of GDP. Ontario will hit around 4 per cent. Ottawa's deficit forecast of $34 billion in the next fiscal year is about two per cent of GDP.

For a government in real difficulty, you have only to look to the United States, where Washington's $1.75 trillion current deficit is more than 12 per cent of GDP. That's a deficit-to-GDP ratio that hasn't been seen since the end of the Second World War. And America's debt to GDP ratio is dangerously close to 100 per cent. (Canada's is near 25 per cent, and Quebec's debt to GDP ratio is a bit more than 33 per cent.)

Since Canada's economy, including Quebec's, is driven by exports, this province, like this country, is not immune from a decline in consumption elsewhere. Quebec's two largest customers are the U.S. and Ontario.

But in terms of fiscal stimulus, Quebec's pump-priming of the economy amounts to 4.9 per cent of provincial GDP, compared to 4.1 per cent for Ottawa and 4.1 per cent for the U.S., for all the money Barack Obama is throwing at the problem.

Only last fall, when Charest was seeking a new mandate, his Finance Minister Monique Jérôme-Forget was still predicting modest growth of 0.6 per cent this year. Now Forget is predicting negative growth of 1.2 per cent this year.

What's the difference? That was then, in a campaign. This is now, in the reality check.

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