The offices of the Quebec Ministry of Finance sit kitty-corner to the Château Frontenac, amid North America's oldest real estate. For its first century, the Renaissance-style edifice housed Quebec's Superior Court. In fact, the building, which became the provincial finance headquarters in 1983, has been deemed a historic site--its now dormant courtroom cannot, by law, be altered in any way. To enter it is to be transported back in time. It is here that some of Quebec's most famous cases, the ones that still nourish the collective psyche, took place. Like the sensational 1920 trial of Marie-Anne Houde, sentenced to hang for the relentless abuse that ultimately claimed the life of her 10-year-old stepdaughter, Aurore Gagnon. The story of Little Aurore, known simply as Quebec's "child martyr," still carries such freight in the province that a 1952 movie version of her short and tragic life is currently the subject of a big-budget remake.

A few doors down and across the hall from the courtroom is the office of Yves Séguin. It is fitting, in a way, that Quebec's new finance minister has taken up residence in what was once a judge's chamber. Since he was named to the pivotal post by neophyte Premier Jean Charest in April, Séguin has effectively put Quebec Inc. on trial. He is out to remake the very foundations of the relationship between business and government in the province. At least, he says he is. On tabling his first budget in June, Séguin set the tone for his tenure with a noninterventionist twist on the famous Kennedy phrase: "Rather than asking what the state can do for us, let us ask ourselves what we can do without the state."

Skeptics will dismiss the discourse as the hyperbole of a new minister who has yet to confront the inertia of government. They risk being surprised. Séguin, 52, has always had a knack for reading the public mood. If he has embarked on a mission to get the state out of Quebec's boardrooms, it is likely because he believes the climate is ripe for it. "It is the first time since the Quiet Revolution that a lot of the old ways are being questioned," says Clément Gignac, chief economist at Montreal-based National Bank of Canada. "It's a big shift in philosophy. We've got a Republican-style government now."

Séguin was a rising young star in the cabinet of Robert Bourassa when he quit as revenue minister in 1990 over the then-Liberal government's decision to harmonize its provincial sales tax with the GST. It was a matter of principle, he said then. Whether or not the move was also calculated to distance himself from one of the most hated policies in Canadian history, his timing was bang on. Both the provincial Liberals and federal Conservatives were trounced in subsequent elections.

Despite a reputation as a straight talker unafraid to criticize his own team, Séguin-an accomplished pianist in his spare time-was endlessly courted by federal and provincial parties of all stripes during a 12-year hiatus in the private sector. He spurned every advance. Until now. He is already considered the leading contender to replace Charest if the latter returns to federal politics one day.

Ambition aside, Séguin says he has returned to government "to finish a job I started." He earned the nickname "the Robin Hood of taxpayers" during his previous political incarnation for his dogged determination to simplify Quebec's tax system and favor the little guy. "I have never liked taxes," Séguin, who is a tax lawyer, says without a hint of irony. "I resigned over the GST because I thought it was an unfair tax. Income taxes, sales taxes--I have always fought to reduce them. Always."

Now, he is finally in a position to do something about it. Séguin has promised to slash Quebecers' personal income taxes by 27% over five years, starting with a $1-billion cut next year that rises to $5 billion annually by 2008. The goal is to bring Quebec's tax rates--the highest in the country--in line with the Canadian average. It is an ambitious, some say impossible, objective in an economic climate of slowing growth and employment. Barring a miracle, it will require enormous cuts to program spending--outside the sacrosanct spheres of health and education, in which Charest has vowed to significantly boost expenditures.

Séguin has started by weaning business from the abundant state supports it has relied on since the Quiet Revolution. In his first budget in June, Séguin slashed most tax credits to business by 25%, or $760 million annually. He promises it is just the beginning of the reforms, ones that will fundamentally change a government that reached the acme of interventionism under Parti Québécois Premier Bernard Landry into one of the least meddlesome in the country. "An American state government rarely goes beyond contributing 20% to a private-sector project," Séguin notes. "In Quebec, where the government is involved, the average is 50%, and there are lots of projects where it's 70%. That is just unreasonable. We need to achieve a more normal state of affairs."

That won't be easy in a province that has always prided itself on being different, and where the state has, for the past 40 years, played a preponderant role in economic development. But it may not be as tough as realizing Séguin's plan to wrest billions more from Ottawa annually. That plan involves forming a common front of premiers in order to correct a "fiscal imbalance" with Ottawa that, Séguin contends, shortchanges the provinces by $8 billion a year. Quebec alone is out $1.5 billion to $2.5 billion annually under current federal-provincial arrangements, according to Séguin. And with spending in provincial spheres of jurisdiction (read: health) projected to outpace revenue growth for years to come, while Ottawa wallows in surpluses, the situation will only get more out of kilter.

Séguin is betting the provinces are sufficiently fed up to launch a united strike against the federal government. Indeed, at the annual premiers conference in Charlottetown in July, the provincial leaders signed on to Charest's proposals to create both a Council of the Federation and--the name says it all--a Secretariat for Information and Co-operation on Fiscal Imbalance. The premiers-only council will hold its founding meeting in Quebec City in October, where it will entertain a plan from the Secretariat for reforming the system of equalization payments to the provinces.

Séguin is the Secretariat's one-man brain trust. No one knows as well, or has his mind for, the hopelessly complex domain of fiscal federalism. Two years ago, he chaired a provincial commission on the topic. And for the next two at least, the Secretariat he championed will be headquartered only a few doors down from his office in the Quebec finance building. Once the first to pack up its marbles and go home, Quebec is now organizing the game. No one is more responsible for that than Séguin.

Séguin was born in remote Val-d'Or, in Quebec's northwestern Abitibi district, where his father labored in the gold mines that sustained the region's economy during the 1950s. The family moved to Hull when Yves, the youngest of three boys, was 7. The Séguins were apolitical, but early on in life Yves betrayed an inclination toward elected office. "I was always class president," he notes proudly. "I always liked being out in front."

Séguin started as a psychology major at the University of Ottawa, but switched to law when he learned the latter offered better prospects for a job. Lucky for him, because the switch allowed Séguin to discover his passion for tax law. (Well, somebody has to be passionate about it.) "I adore complicated, complex matters," he explains. "Sometimes in life, you find something and you just click with it." In 1977, Séguin got a job at one of Ottawa's biggest accounting firms, Maheu, Noiseux (now part of Deloitte & Touche ), without so much as a CA designation. "They never looked at my résumé. So I guess they hired me thinking I was an accountant. Anyway, by the time they found out, they figured it was OK."

No kidding. In fact, they promoted the eager 26-year-old. It was just after the watershed 1976 election that brought the PQ to power in Quebec. Ottawa is a border town, so Séguin, as the newly named head of the firm's tax department, passed his days giving tax advice to Quebecers wanting to transfer assets to Ontario. The exercise only seemed to make Séguin, if not embrace sovereignty, then at least grow more attached to his home province. In 1980 he moved back across the Ottawa River for a job at one of the Outaouais region's leading law firms, Beaudry, Bertrand and Associates. Partner Paul Bertrand remembers being impressed by his young colleague. "He was only really at the beginning of his career, yet he gave off an aura of self-confidence," Bertrand recalls. "It was clear his time at the firm would only be a stepping-stone."

In 1982, Séguin was picked by the big-league Montreal law firm Martineau Walker (now Fasken Martineau) to open its Quebec City branch. During his stint there, Séguin became the French media's favorite talking head on the arcane intricacies of tax law. He revealed himself as a natural communicator, comfortable in front of the camera. Inevitably, political recruiters came calling. Until then, Séguin had never entertained a political career, much less for the Liberals. His two older brothers had been PQ supporters. (Indeed, brother Raymond was named a provincial judge under PQ Premier Jacques Parizeau.) But Bourassa proved persuasive. "By sheer dint of being asked to run, I ended up saying, 'Why not?'" Without deep roots in the region, and facing a popular incumbent PQ cabinet minister, Séguin became the Liberal candidate in the Montmorency riding east of Quebec City in 1985. He won handily.

Séguin, a political rookie, made no secret of the fact that he coveted the revenue portfolio. Barely 18 months after his election, he got his wish, and immediately impressed his colleagues with a plan to simplify Quebec's tax system. He scored points with the public, too. In 1989, he had his own two-hour TV special on a major network to explain his new, easier-to-understand tax form and to field calls from the public. The show was such a ratings hit--more than a million Quebecers tuned in--that he repeated the exercise in early 1990. "It bothers me to see big companies hold a news conference to announce a fabulous deal worth many hundreds of millions of dollars in profit, and two weeks later they're bragging that they don't pay income tax," Séguin said in April 1990. "It's fine for them to tell me it's legal. I say, let's change the law." The media had found a darling.

Séguin's profile rose even further when he emerged as one of the most nationalist members of the Liberal caucus during the dying days of the Meech Lake Accord, the federal-provincial entente that was to recognize Quebec as a "distinct society" in the Canadian Constitution. The accord died in June 1990 when two provincial legislatures failed to ratify the deal. It was taken personally in Quebec, pushing support for independence above 50% in the polls. Faced with cuts in transfer payments from Ottawa, a rising federal debt and the GST, even Séguin conceded that "profitable federalism no longer exists." It might, he concluded, be worth considering other options. "Call it sovereignty, call it autonomy, call it national affirmation--that's not important. We can face up to any situation. We are no longer afraid. That's a new phenomenon. And who is better placed than the minister of revenue to tell you that, economically, Quebec has everything it takes?" Séguin's credentials as a Quebec-firster, a prerequisite to attaining higher office in the province, were firmly established.

Unfortunately, Séguin's political career came to an abrupt halt later that year when Bourassa spurned his advice and decided to harmonize Quebec's sales tax with the new federal goods and services tax. "Let's be frank, the GST exasperates me," Séguin said a week before resigning in September 1990. For Séguin, the new harmonized tax--ironically, introduced by Charest's then-government--was "imperfect and unfair," he asserted, because it lightened the tax burden of wealthy corporations by $1.5 billion while digging deeper into the pockets of the poorest and most vulnerable members of society. "In order to 'untax' 30,000 businesses, we're going to tax three million ordinary Quebecers? The debate is there.... You can call me Robin Hood or Che Guevara if you want. I have convictions." Political analysts wondered at the time whether Séguin's departure was more the result of being passed over for the finance post after the 1989 election than a clash of ideals. Séguin did not deign to respond. Two days after his resignation, he gave a piano recital of his own composition at the Grand Théâtre de Québec. Citing the French poet Jacques Prévert, he told the audience: "There are no small things, there are no great things. There are only things we believe in and things we do."

In little more than a decade in the private sector, Séguin held down more than half a dozen different jobs, from big-name corporate lawyer to the Bank of Montreal's No. 2 executive in Quebec. In between, he ran the Canadian operations of la Compagnie générale des eaux--the precursor to Vivendi Universal SA--when it unsuccessfully floated a proposal to privatize Montreal's water supply. None of the roles appeared to fully suit him. Then, in 2001, Landry tapped him to head up a commission to investigate and recommend ways to correct the fiscal imbalance with Ottawa. It was a role tailor-made for Séguin. It also irked Liberals that he had accepted a PQ appointment. On learning of Séguin's nomination, Charest could not hide his bitterness. "Mr. Landry has reduced the unemployment rolls by one," he snapped--a direct jab at Séguin and his inability to hold a job for long.

Six months into his tenure as chair of the commission, in October 2001, Séguin faced the toughest test of his life. He was struck by a variant of the deadly flesh-eating disease, the bacteria spreading throughout his blood system. "They pump you full of an astronomical quantity of the best antibiotics available, make a sign of the cross and wait 30 hours," Séguin says in recalling the ordeal. Faced with death, he re-evaluated life. "I simply realized," he says, "that I wanted to put my energies into things of which I would be proud for having contributed."

In the following months, he met with Charest, who needed Séguin more than Séguin needed the Liberals. As he prepared for an election, Charest lacked a star candidate from the financial community. By early 2003, Mario Dumont's upstart, right-wing Action Démocratique du Québec (ADQ) had overtaken the Liberals in support among francophone voters, and had attracted big business names such as Canam Manac's Marcel Dutil and ex-National Bank of Canada executive Léon Courville to its ranks. It was no secret that the ADQ was also courting Séguin. So was the PQ, which was experiencing a resurgence in the polls under a rejuvenated Landry. The Liberals faced being reduced to a stump of seats in English Quebec. Charest's political career hung in the balance. A defeat provincially would surely end his aspirations of one day moving into 24 Sussex Drive.

Under the circumstances, Séguin had an unbeatable hand. Charest had little choice but to promise him a safe seat, Outremont, and the finance portfolio if the Liberals were victorious. Séguin still hesitated. It was only after his three children--Mathieu, 21, Sara, 18, and Olivier, 15--came to him after hearing rumors of his candidacy in the media that he says he made up his mind. "They said, 'Dad, you quit politics, but politics never quit you. If you decide to run, we'll support you.' I would never have run otherwise." Séguin's wife, Marie-Josée Nadeau, an executive vice-president and corporate secretary at Hydro-Québec, also knew where her husband's passion lay. She's a former chief of staff to a Liberal cabinet minister. Politics brought her and Séguin together in the first place.

While a Liberal victory was no sure thing when Séguin announced his candidacy in March, it was a no-brainer by election day on April 14. In unveiling his first cabinet, Charest gave each member a concise assignment. "We are the most taxed people on the continent," he told Séguin. "You are going to rid us of that title." To do so, Séguin faces daunting obstacles, not the least of which is a budgetary shortfall of as much as $4 billion that the Liberals inherited from the PQ. Séguin managed to table a balanced budget for 2003-2004, but only, in part, by making steep cuts to business subsidies, canceling spending increases and capital tax cuts announced by the previous government, and using up this year all of the $800 million in federal transfers that the PQ had set aside for health spending over the next three years.

The budgetary gap will be even tougher to bridge next year. Economic growth is faltering. In March, PQ Finance Minister Pauline Marois predicted Quebec's economy would expand by 3.5% this year. In his June budget, Séguin downgraded the projection to 2.5%. Now, many economists think Quebec will be lucky to achieve 2% growth. While the province led the country in employment growth in 2002, creating 118,000 jobs, it lost 32,700 jobs in the first eight months of this year, sending the unemployment rate to 10% in August--a five-year high. In his budget, Séguin predicted Quebec would create 61,000 new jobs this year. He'll do well to stanch the losses already experienced.

"If Séguin wants to table a balanced budget and cut taxes next year, he's going to have to reduce the size of government a lot more," concludes National Bank's Gignac. It's a nasty job. Pierre Fortin, an economist at Université du Québec à Montréal, puts it this way: The untouchables--health, education and interest on Quebec's $112-billion debt--account for $38 billion, or almost 70% of the province's $55-billion budget. So, unless Séguin can increase revenues elsewhere, the $5-billion income tax cut he has promised within five years has to come out of the remaining $17 billion in program spending. "It's a risky strategy," Fortin says of Séguin's promised tax cut. "If he proceeds too quickly, the Liberals risk repeating 1966 all over again."

Back then, Premier Jean Lesage was booted out of office by an electorate traumatized by the rapid change wrought by the Liberals' Quiet Revolution. Already, Charest's Liberals are testing Quebecers' tolerance for change. They have signaled an end to the province's popular universal $5-a-day day care system. They have unfrozen electricity rates, allowing Hydro-Québec to apply to the provincial energy board for an increase next year. They have slashed regional development funds and reneged on a PQ promise to contribute $220 million toward a proposed $1-billion expansion of an Alcoa aluminum smelter in Deschambault, throwing the project into doubt. They have alienated social activists by vowing to cut off able-bodied welfare recipients who don't look for a job. Quebec's powerful union movement is vowing to fight Charest's plans to contract out more government services and exempt businesses with less than $1 million in revenues from an obligation to spend at least 1% of their payroll on employee training. The Liberals have irked the arts world with cuts to film-production tax credits. They have sent the high-tech and biotech sectors into crisis mode by slicing 12.5% off Quebec's much-envied research-and-development tax credit program.

Perhaps Séguin's reputed political antennae have told him Quebecers are ready for all this upheaval if the result is a more dynamic economy. Almost two-thirds of Quebecers voted in April for either the Liberals or the ADQ, both of which were peddling right-of-centre policies. That must say something about their preparedness for change, about their desire for a politics that focuses on something other than constitutional cleavage. Or does it? "Analyzing the election results is like trying to detect a signal amid a lot of interference," says Fortin. "But there is, I think, a movement in the population toward greater individual responsibility." Still, there has been no major realignment of the political spectrum. And there is no certainty that Quebecers' recent flirtation with a three-party system is anything but that. "The PQ got a fright, but it still elected more than 40 MLAs and many young ones," concedes Laval University political science professor and ADQ president Guy Laforest. "The Liberals won a bit by default. The electorate wanted change and concluded that the ADQ wasn't ready to govern."

There is one issue, however, on which a large majority of francophone Quebecers agree: that fiscal federalism is stacked in Ottawa's favor. Hence, the all-party support for Séguin's quest for a better deal. A Conference Board of Canada report prepared for Séguin's 2001-2002 fiscal imbalance commission projected that, given current trends, the federal surplus would balloon to $90 billion by 2019, while Quebec would face a $5-billion deficit. Between now and then, Ottawa would amass surpluses totaling $570 billion, while Quebec would fall $60 billion deeper into debt. Federal politicians, including then-Finance Minister Paul Martin, ridiculed the study, suggesting such long-term projections are impossible to make. But Séguin's cause has gained supporters in every provincial capital.

One solution to the imbalance floated by Séguin involves the outright abolition of the Canadian Health and Social Transfer (CHST); instead, Ottawa should simply hand over GST revenues to the provinces. The value of CHST payments--made up of cash and tax points--has seesawed over the past decade, falling precipitously in Martin's 1995 budget, and rising only slowly since then. In February, Ottawa agreed to increase the cash transfers by $10 billion over three years, and kick in another $2 billion this year if the 2002-2003 federal budget surplus comes in over $5 billion (something Finance Minister John Manley has since deemed a long shot). The provinces are happy to get the cash, but they hate the way Ottawa goes about giving it--begrudgingly and arbitrarily. "It's insulting," Séguin says. "Take the $2 billion extra we're supposed to get this year. Mr. Manley hasn't said 'no' outright, but he says that maybe Ottawa won't be able to honor its promise. But if Ottawa really believed that it needed to invest in health, why couldn't it make that a priority in its budget?"

A quick end to this type of quarreling could be achieved, Séguin says, if Ottawa would simply give up control of the GST. There is a neat symmetry at work in such a trade-off. The sales tax brings in about $28 billion a year; Ottawa transfers about $20 billion in cash to the provinces under the CHST. The difference, about $8 billion, is the amount the provinces are currently being shortchanged, says Séguin. He sees no irony in the fact that he is now seeking jurisdiction over a tax that, a decade ago, he could not in good conscience administer. Quebec already collects the GST on Ottawa's behalf, he notes, and if the province controlled the tax it could choose to reform it as it wished. If Ottawa has so far refused to consider the idea, Séguin is undeterred. "There is a new balance of power taking root as the provinces organize themselves. Ten or 15 years ago, it was always Quebec, all alone, that complained. Now, the provinces are on the same wavelength."

Fortin, however, sees a more fundamental obstacle. Federal program spending has fallen to about 12% of GDP, from 17% in 1994. Withholding cash transfers is Ottawa's sole means of coercing the provinces into respecting the terms of the Canada Health Act. "The impression in Ottawa is that if it continues to reduce its role in the economy and health care, the federal government will simply cease to be relevant," Fortin says. No prime minister, certainly not Paul Martin, would want to preside over that outcome.

Séguin, however, has a secret weapon in Charest. No Quebec premier has ever known Ottawa and the rest of the country as well as Charest, and none have enjoyed the goodwill of their federal and provincial counterparts as solidly as the Mulroney-era cabinet minister. "Inasmuch as Mr. Charest's 'Canadian baggage' was an obstacle to him becoming premier in Quebec, the moment he was elected it became a huge advantage," says Laforest.

The question remains: Can Séguin and Charest form an effective tag team, or will their relationship disintegrate into a Chrétien-Martin hatefest? Séguin is clearly more nationalist and less interventionist than his premier and, despite his protestations, may have leadership ambitions of his own. The pair are just embarking on a major overhaul of their government--the buzzword "re-engineering" is on everyone's lips in Quebec City--and its relationship with Ottawa. The Charest-Séguin alliance will be severely tested in the months to come. But Séguin, a man who has faced death more directly than most, is not thinking about that now: "In the past couple of decades, the citizen has become disconnected from government. You see it in low voter turnout, in the rise of the black market. No one trusts the government anymore. If I am able, just a bit--without pretension and beyond the heaviness of the task that awaits me--to change that, I'll be content."

Gravy drain

Will business put up with Quebec's R&D tax credit cuts?

Quebec has long been Canada's fiscal paradise for research. But Finance Minister Yves Séguin's first budget has led many to worry the gravy train has passed. Before, firms were eligible for a reimbursable tax credit equivalent to 20% of R&D costs. Now it's down to 17.5%. "That 2.5% could make all the difference between being competitive or not when foreign multinationals consider granting a world R&D mandate to their Canadian subsidiaries," warns Howard Silverman, president and CEO of Montreal-based Corporate Affairs International, which advises companies on site selection. "Combined with the appreciation of the Canadian dollar, you could be talking about a 3.5% difference in costs. That makes Quebec even less competitive. It's very scary."

Séguin retorts that Quebec's R&D tax credits are still the most attractive in the country, if not on the continent. And site-specific tax credit programs--like former premier Bernard Landry's pet project, la Cité du Multimédia, which enabled high-tech firms to claim a tax credit worth up to 40% of labor costs if they located in a certain Montreal office complex--have been outright sinkholes. The five site-specific programs created under Landry will cost the government $252 million this year, Séguin says. He adds that only 5,370 of the 17,551 jobs at these sites are actually new positions, as opposed to jobs that already existed at other locations. The net cost to the taxpayer for each new job created is $30,000, says Séguin. He suspended new applications for the programs in his budget.

Silverman--who has helped the Quebec operations of Swedish communications giant Ericsson AB win five world research mandates since 1990, boosting its engineering staff from 10 to 1,700--worries Séguin has set the wrong tone. "Many of my clients fear that this is the end of these kinds of incentives," he says. "I think we're giving investors the wrong impression, because in the world of site selection, you've got to play to be in the game. Séguin's decision may come back to bite him."