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The Quebec government made a bold move when proposing a tax cut in its most recent budget. But it seems to have sidelined a key objective of its economic development strategy: closing the gap in living standards with Ontario by 2036. If this objective is not brought to the forefront, the consequences for the Quebec economy could be particularly significant.

Right target, wrong plan

In a report released in conjunction with the budget, the Centre for Productivity and Prosperity – Walter J. Somers Foundation concluded that the goal of catching up with Ontario by 2036 should be a minimum threshold to be met if the province is to reduce its cumulative economic lag relative to the OECD19 group of economies (essentially, the richest countries).

And with good reason: like Canada as a whole, which is at risk of falling behind the OECD19 group by 2060, Ontario is falling behind the major western economies. This means that if Quebec does not catch up with its neighbour, its economic lag in the OECD will be even greater than it is now.

In principle, concrete actions have been initiated to catch up with Ontario. In addition to having placed productivity at the heart of Quebec’s recent strategy to support research and investment in innovation, and in various action plans tabled, particularly with respect to regulatory and administrative relief and export recovery, the government considers that it has “taken several important initiatives to promote business productivity, particularly with respect to investment” (Budget 2022-2023 – Plan budgĂ©taire, page E7).

The job creation aberration

But in practice, the strategy deployed by the government apparatus is likely to be futile. Despite changes in form over the past few years, the core of Quebec’s economic development strategy is still based on a tax-based approach that aims to create jobs.

Not only is this an aberration in a context of labour scarcity, but this approach goes against the needs of the economy by distorting the balance of competition, when it is precisely the lack of competition that is holding back the development of the Quebec – and Canadian – economy.

In addition to the geographic constraints of the Canadian territory, the Canadian institutional and regulatory framework runs counter to the forces of competition in the domestic market by giving precedence to the protection of jobs and the growth of the size of companies. This reality is exacerbated by Quebec’s public policies on economic development, which also give precedence to jobs and large firms rather than relying on competitive forces to increase the competitiveness of its economy and, ultimately, its productivity, which determines our standard of living.

In such a context, a major reform of the economic development strategy must quickly be initiated to get the Quebec government apparatus out of its job protection logic.

Giving Quebec the means to achieve its ambitions

In contrast to the trend of the past 25 years, this reform must ensure the development of an economic environment that will promote the performance of a maximum number of companies rather than selecting and supporting the so-called best ones in the vain hope that tax incentives (loans, subsidies) for a few of them will generate results for the remaining mass of companies.

In essence, a major rethink will have to take place to move the government apparatus away from its logic of job protection and firm size growth, and reorient its industrial policy to generate the incentives that would normally be offered by a competitive market to encourage small firms to engage in this type of activity. In the meantime, the government can move quickly to improve the competitiveness of the small-business tax system.

Rather than continuing to offer old-fashioned credits to a small number of businesses, the government will surely achieve better results by reducing the tax burden on all businesses. A good first step would be to abolish the health-care levy, a tax that takes billions of dollars each year from the payroll of businesses – whether they make a profit or not – and whose perverse effects have been widely demonstrated.

In short, instead of trying to artificially determine in advance which companies will win, the Quebec government would do better to create the most favourable climate for all companies, without favouritism and with equal rules for all, so that the best ones win. Quebecers will win, too.

For more details, see: ProductivitĂ© et prospĂ©ritĂ© au QuĂ©bec – Bilan 2022 by Jonathan Deslauriers, Robert GagnĂ© et Jonathan ParĂ©, Centre sur la productivitĂ© et la prospĂ©ritĂ© – Fondation Walter J. Somers, HEC MontrĂ©al, Mars 2023

Also from Jonathan Deslauriers and Robert Gagné: Le puzzle de la productivité canadienne

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Jonathan Deslauriers
Jonathan Deslauriers is executive director of the Centre for Productivity and Prosperity – Walter J. Somers Foundation.
Robert Gagné
Robert GagnĂ© is a full professor at HEC MontrĂ©al and director of the Centre on Productivity and Prosperity – Walter J. Somers Foundation.

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