The Quebec budget: Will good economics be good politics?

The media are reporting that economists are singing the praises of the Quebec budget, and if asked, I'd add my voice to that chorus. This is the work of adults who take their responsibilities seriously, and the Charest government is to be congratulated for finally paying attention to what economists have been telling successive governments - PLQ and PQ - over the past generation.

The can was not kicked forward: The budget acknowledges that something has to be done, and announces measures to do something. We don't see this often enough, so we should applaud when it does happen. 

The tax mix: The Quebec government eschewed what would be an easy political sell (tax the rich corporations!) and moved to increase the QST by another ppt beyond the one-point increase announced in last year's budget. If you're not willing to reduce services - and apparently the Quebec government isn't - then this is the least-disruptive way of generating extra revenues.

Electricity prices: It never made sense to charge consumers prices that were half the marginal cost of production. But it turns out that increasing electricity rates is more problematic than you might think. According to my colleagues Jean-Thomas Bernard and Gérard Bélanger, some 38% of the increased revenues will be clawed back in the way of reduced equalisation payments from Ottawa. Even though the Charest government is going to have to pay 100% of the political cost of this measure, it will only receive 62% of the revenue it generates.

Health care premiums: Ontario has already started down this road, and the Quebec maximum premium of $200 is much lower than Ontario's $900. On the other hand, the Ontario premium is scaled to income; I would have liked to have seen the same idea in the Quebec budget.

University tuition: The freeze on tuition ended a few years ago, and although they have been rising at a slow pace since, they are still well below the Canadian average outside Quebec. Now they will go up further, although we won't know by how much until September or so. This is yet another good idea, and long overdue.

Gasoline taxes: An increase of 1¢/l is not really that big of a deal, but if you're looking for ways to generate revenue, this is a good one.

"Solidarity tax credit": In other words, 'giving money to poor people'. Any responsible tax shift toward consumption taxes must be accompanied by a system of transfers to compensate low-income households for their lost purchasing power, so it was good to see this part as well. Existing transfer programs - the QST rebate, property tax credit - are being bundled together and their funding is being increased to compensate for the effects of all those tax increases on low-income households. Now that we have a program dedicated to direct transfers to low-income households, we can start to think of building on it down the road - perhaps a guaranteed annual income?

Comments

[Guillaume]

You do omit talking about the only thing that didn't move: personal income taxes. Whatever their merits, all of the above measures are clearly regressive and are only modestly redeemed with a low-income tax credit. In the current context (e.g. the Bush tax cut is about to expire), would it be that painful to raise income taxes on the rich by a small amount? Or create an additional taxation level?

[Bob Smith]

The real problem with the healt care premium is not that it is not linked to income (it is, crudely, in the sense that people with incomes below a threshold amount are not liable to pay it), but that it isn't linked the health care use. Or, better yet, linking the premium both to use and income (so that the per-use charge is a function of the patients income). While the proposed approach may raise revenue, the alternative approach would raise revenue and/or discourage use (or, at least, make patients think about whether visiting the doctor for their cold is worth it).

[Stephen Gordon]

Guillaume: My thinking these days is that the tax system should be designed to generate the most revenues while reducing economic growth the least. The best way to deal with inequality is to focus on a progressive system of transfers. See this post and this one.

[Yohanna]

Broadly agree with the post, and with the budget, except on the health care premium, which I too find too regressive and would like to see modulated. Interesting though that nobody is discussing the efficiency of a stand-alone tax for health. Won't its management eat up at least some of the revenue before it gets, like all other revenue, into the consolidated fund? Will the AG really be able to tell whether all health premium did go to health?

My biggest concern, however, is the announced per-use charge and the long-term impact it may have on the health system. Bob's comment is spot on: people will think twice about consulting for their cold. But it's not necessarily a good thing if thet wait until it degenerates into something worse (and more expensive to treat). People will consult when they're sick, but what about those annual check-ups, will we start spacing them out more to save money (especially low-income households)? Perhaps a good compromise would be to get one free visit per year per person - two for kids under 5 - or something like that.

[Darren]

"While the proposed approach may raise revenue, the alternative approach would raise revenue and/or discourage use (or, at least, make patients think about whether visiting the doctor for their cold is worth it). "

Discouraging use is not a great idea. There are already time incentives for not wasting your time at the doctor. You WANT people going to a doctor semi regularly and getting their bp checked, etc. This avoids problems down the road. In other words, that cold might not be a cold... you might want to get an xray to make sure it isn't lung cancer.

People like to think that rising health care costs are due to "unnecessary use", but I suspect that is a very unimportant part of the story.

[Andrew F]

Indeed. I think rising cost is likely more due to the fact that we can and are treating more things that we used to.

It's good to see a government doing some sensible things on the revenue side, even though I still shake my head at a lot of things Quebec does on the spending side. I only wish Ontario would build on the changes it's already made and have the courage to raise taxes when and where necessary. I don't think McGuinty will be the premier to do it, unfortunately, and his putative replacement (Hudak) sounds like a pretty dim bulb himself.

[Darren]

"Indeed. I think rising cost is likely more due to the fact that we can and are treating more things that we used to."

Yep. As JK Galbraith pointed out in The Good Society, back in the old days "Doctors had fewer remedies to offer. Death was quick, and cheap".

[travis]

Why would you sing its praise when it does not deliver progressive redistribution after the fact? Many people would agree with you, even other economists, if you would preface your tax arguments with the caveat that it, and you, will only support them if and only if the transfer component is built in. But sadly you do not. You praise a regressive budget and make no effort to assess the degree to which the proposed Solidarity Tax credit actually compensates. So you lack legitimacy here. All it would take is line to the effect of: "while I praise the restructuring of the tax mix I am concerned that it fails to include the necessary measures to mitigate the regressive effects." At some point you are going to have to really stick to what you say: efficient taxation with redistribution; or you are going to have to just say efficient taxation and inequality be damned. So far you have it both ways.

[Nick Rowe]

Darren: "Discouraging use is not a great idea. There are already time incentives for not wasting your time at the doctor. You WANT people going to a doctor semi regularly and getting their bp checked, etc. This avoids problems down the road."

I totally disagree. There is an excess demand for doctors' services. Given that fact, charging a fee will NOT decrease use. It's supply-constrained, not demand-constrained.

Charging a fee will discourage use by some people, but will encourage use by others. And that's a good thing. Right now, with no fee, people with too much free time have nothing to discourage them from seeing the doctor. And that just increases the waiting time, and discourages other people who don't have free time from seeing the doctor.

Rationing doctor visits by waiting time is very unjust, as well as very inefficient.

All those accursed people carefully getting their semi-regular check up, and going to the doctor every time they have the sniffles, mean that I can't get to see a doctor when I really need one. And man that pisses me off!

[Andrew F]

Should we include reimbursements for poor people who go for non-frivolous reasons (leave it to the doctor to determine whether it was a frivolous visit)? I hate the idea of poor people avoiding the doctor's office because going might mean Kraft dinner for a week.

[Stephen Gordon]

From one of the budget documents (292-page pdf), pp 119-121:

"With the solidarity tax credit, the government is replacing three measures by a single program...Currently, these three tax credits provide tax assistance of $840 million to low- and middle-income households. In comparison, the solidarity tax credit will grant support of $1 350 million to households—$510 million more than the three existing tax credits."

"The amounts of the new tax credit were determined as follows:
-The amounts were established using the 2010 amounts of the three tax credits.
- In addition, the amounts were raised in 2011 and 2012 in keeping with the tax increases announced in the budget.
- Lastly, the amounts will be indexed as of 2013, according to the indexing rate of the personal income tax system."

According to the tables on the pages that follow, people at the lower end of the income distribution will be better off after the changes in taxes and transfers.

[travis]

It is not true. They rolled the previous three tax credits into one and re-dubbed it the Solidarity Tax credit. The previous three tax credits were presumably there to counter some of the regressive effects of previous budgets. So it is double counting. The most conservative estimate would be that 385$ of the newly created Solidarity tax credit comes from the previous tax credits. In its own documents the governments says the maximum payout under the new Solidarity Tax credit is 510$. Do the maths the new improved, all in one tax credit does not even cover the 200$ health care premium let alone all the other regressive tax measures in the budget. If you do some very back of the envelope calculations for a model family of four with family income 25,000$ and just forget the double counting it still does not cover the increase. You have such keen eye for efficiency why not redistribution too? Clearly you have the math skills so what gives?

Nick,

"Charging a fee will discourage use by some people, but will encourage use by others. And that's a good thing. Right now, with no fee, people with too much free time have nothing to discourage them from seeing the doctor. And that just increases the waiting time, and discourages other people who don't have free time from seeing the doctor."

Your premise is flawed. Here is what happens in the real world. You charge a fee per visit and poor people start rationing so they go only when they are really in the pan. Bronchitis turns into pneumonia, an ear infection turns into hearing loss etc., etc: a classic pennies wise pound stupid policy. But what is worse people like you feel more like going to the doctor because initially the waiting room is less packed and the wait time is less so you start using medical services more. The end result is the same as before the initial surcharge. But, even where this scenario is not the dynamic doctors do not like to take a pay cut, so in the case where there are less patients they simply find more reasons for their existing clientèle to come back. Perhaps you do not buy what I am selling then maybe go read this by a health economist from UBC that did his economic studies from the UofT and Harvard. http://www.chspr.ubc.ca/files/publications/1998/hpru98-05D.pdf

[Nick Rowe]

Travis: there are money-poor people, and time-poor people. Right now the system is biased against the time-poor. Doctors visits are free for the money-poor, but expensive for the time-poor. So the former are unrationed, but the latter are rationed.

That is unfair. It is also inefficient.

There are two inefficiences:

1. Paying a fee is a transfer of resources, from patient to doctor; waiting in line is a total waste of resources. It's like throwing peoples' time away. It's even worse than involuntary unemployment, because at least the involuntary unemployed can spend their time in the garden, or somewhere where they want to be.

2. The money-poor will have a lower marginal benefit of using doctors' services than the time-poor. So the total benefit will be increased if doctors visits were re-allocated away from the money-poor towards the time-poor.

So, even if you are right (as you may well be) that preventative visits are a good thing. we have a total misallocation of preventative visits, because the money-poor are making too many preventative visits and the time-poor none at all. The time-poor may have bronchitis turn into pneumonia, ear pain turn into hearing loss, too.

Plus, rationing by fee may increase the total supply. Rationing by waiting time does nothing to increase supply.

Again, when there is excess demand, as there currently is, quantity is determined by the supply-side.

[travis]

Nick you would need to assume that the frivolous visits are made up almost entirely by poor people who do not work. Most poor people are working poor so waiting for them is both a loss of income and a loss of time. We could make the argument using the standard declining marginal utility conjecture that the incremental loss of income we loose waiting is less precious to us than the income the working poor person looses. In any case the report makes clear the user fees do not work to ration visits (maybe the fees were set to low), they have been shown not to decrease the waiting times for a number of reasons. Read the study. A more fruitful policy approach is to sniff around government funding of seats and tuition costs for medical schools and the provincial medical associations which do their level best to restrict supply. Part of what is going on in Quebec is that the previous PQ gov de-funded seat in medical schools while keeping the tuition freeze in place thereby choking off supply. I dread the mandatory three month infant visit because it is a minimum 2 hour wait to see the doctor. What is really infuriating is that any nurse can weigh and measure a baby and give an inoculation shot; or diagnose strep throat for that matter. So a lot of the supply story is an inefficient use of existing medical assets.

[ClaudeB]

I am sorry to interrupt the cork-popping sounds coming from the economics department faculty lounge at the De Sève building, but prof. Gordon missed a few things in the analysis of the Bachand budget.

Take the "general" heritage pool rates increases. Well... it's not that general, since L rate customers (aluminum smelters and the like) will be "exonerated" from the 1¢ increase (http://www.budget.finances.gouv.qc.ca/Budget/2010-2011/fr/documents/DiscoursBudget.pdf , page 37).

These customers may be few (150 on 3.9 million), but according to the latest Hydro-Québec forecasts (http://www.regie-energie.qc.ca/audiences/EtatApproHQD/%C3%89tat%20d%27avancement_2009.pdf , see table 2.1, page 10), they use 38% of all power sold by HQ on the Quebec market (71/186 TWh in 2017) and their consumption is expected to grow at an average rate of 1.1% per annum (2.1% for aluminum).

So, basically, D, G and M rates (residential, general and small business) customers will bear 100% of the burden of the new generation required to service increased demand of the freeloaders in the large industrial sector. I may be wrong, but that's not what Bernard and Bélanger advocated (http://www.irpp.org/po/archive/apr08/belanger.pdf) when they estimated that each new job in a smelter is costing ratepayers between $255k and $730K.

No wonder why Quebecers are so skeptical of this government, plagued as is it with corruption and conflicts of interest.

[Stephen Gordon]

Oh, I would certainly agree that it's not perfect, but it is an improvement.

[travis]

Stephen I was wrong and you are technically right. The budget is mildly progressive to income neutral for the lower segments of the working and non working poor. Although only if hydro, and the proposed per visit medical fees are omitted. I am not sure that the governments claim will stand that all in by 2014 the purchasing power of the bottom will have been protected as their figures are all nominal.

[Stephen Gordon]

The medical fees are included (notes to Tables 38 and 39 in the budget document I linked to earlier), and the hydro fees don't kick in until 2014.

In the budget speech, there's this line in the discussion of the electricity rate increases:

"Less affluent households will be shielded from the impact of the rate increases. The new solidarity tax credit I announced earlier will be adjusted to account for the higher rates."

At this point, I'm prepared to take the government at its word. Since low income households don't spend very much in the first place, it doesn't cost very much to compensate them for lost purchasing power. And presumably the political cost for reneging on such a promise to those in poverty would be so large that a govt wouldn't try it.

But I will be following this file in future budgets.

[westslope]

So if these accounting changes risk costing Quebec $400 million per year in reduced equalization payments, why did Quebec proceed? Have the equalization payments become a source of national embarrassment?

Of all the provinces, the Quebec provincial government is well endowed with sharp economists. What am I missing here? Bernard and Bélanger only hint at the government's calculations.

I also note in Bernard and Bélanger's article that the government take was increased from 50% to 75%. So government debt will decline, the credit rating will go up, and Hydro Quebec's borrowing costs and needs will increase.