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«Quebec Prosperity Initiative Quebec’s Government Indebtedness: Unnoticed, Uncontrolled Edited by Sean Speer MARCH 2014 Quebec Ontario Vermont ...»

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Prosperity Initiative

Quebec’s Government Indebtedness:

Unnoticed, Uncontrolled

Edited by Sean Speer

MARCH 2014







Executive Summary........................ 1

Jason Clemens and Sean Speer

1. The State of Quebec’s Indebtedness................. 5

Filip Palda, Hugh MacIntyre, and Charles Lammam

2. Comparing the Indebtedness of Quebec and Its Neighbours...... 19 Marc Joffe, Sean Speer, and Frazier Fathers

3. The Past and Future of Quebec’s Public Debt............. 31 Joel Emes and Sean Speer About the Authors............................. 43 Acknowledgments............................. 45 Publishing Information........................... 46 Supporting the Fraser Institute........................ 47 Purpose, Funding, and Independence..................... 48 About the Fraser Institute.......................... 49 Editorial Advisory Board........................... 50 Executive Summary Jason Clemens and Sean Speer Quebec is Canada’s most indebted province. It currently has the largest government debt of any Canadian province when measured relative to the size of its economy (GDP). This dubious distinction and its implications for the Quebec economy, the government, and the population have attracted only limited attention in the province.

The essays collected in this publication are designed to provide readers, particularly Quebec readers, with a better sense of where the province’s indebtedness stands today, expectations for the future, and warnings about the likely costs of inaction.

Part of the reason for gathering this collection together was to respond to the limited debate in the province—and to the Quebec government’s inaction—despite the magnitude of the province’s government debt. In fact, the government recently delayed its plan to eliminate the province’s deficit and seems poised to continue growing its debt levels.1 The essays in this collection point to the immediate challenges facing the province, compare its indebtedness with that of other Canadianprovinces and several US states, and provide different scenarios for its future.

The truth about Quebec’s indebtedness The first essay provides a basic primer on the current state of Quebec’s indebtedness. The collaborative effort between Quebec-based economist Filip Palda and the Fraser Institute’s Charles Lammam and Hugh MacIntyre explains the general details of Quebec’s government indebtedness, how it has evolved over time, and some of the consequences of the province’s high level of indebtedness.

As the authors explain, Quebec’s net direct debt has grown in nominal terms—that is, without adjusting for the effects of inflation—from $37.6 billion in 1990/91 to $175.5 billion in 2012/13. This indebtedness level now represents

1. The Quebec government tabled its 2014/15 budget on February 20, 2014. The fiscal data in this essay series do not reflect budget changes.

2 Quebec’s Government Indebtedness: Unnoticed, Uncontrolled Speer • Fraser Institute 2014 49 percent of Quebec’s GDP, the highest percentage of all Canadian provinces.

Interest payments on the debt (what is typically called debt service costs) were $9.8 billion in 2012/13, or over 11 percent of government revenue.

These figures actually understate the province’s indebtedness because they do not account for debt accumulated by other levels of government in Quebec, or indirect debt such as that coming from government leases or pension liabilities. Once these other factors are incorporated into the calculation, the full magnitude of Quebec’s high level of government indebtedness becomes clear. After accounting for its share of the federal debt and for the province’s municipal debt, Quebec’s total net direct debt from all levels of government is $307 billion or 85.8 percent of its GDP. Finally, once indirect debt from the federal, provincial, and municipal levels of government are added, Quebec’s overall government debt increases to $955.7 billion for 2011/12, or nearly 277 percent of the provincial economy.

Clearly, Quebec’s government indebtedness is worryingly high and requires public engagement and government action.

Quebec’s government debt: not just the most indebted in Canada The second essay, by Marc Joffe, Sean Speer, and Frazier Fathers, compares Quebec’s indebtedness to that of its neighbours in Canada and the United States.

When compared to Ontario, Quebec’s net debt as a share of GDP is higher and its debt service costs as a share of revenue greater. These findings may surprise some readers; Ontario’s indebtedness has received considerable media and political attention while Quebec’s has attracted less notice. But the fact is plain: Quebec’s indebtedness is the highest among Canada’s provinces.

The authors also compare Quebec’s debt level with that of 24 US states— including New York, which, like Ontario, has attracted considerable attention for its high government debt. (The essay compares the bonded debt of each jurisdiction, rather than net debt, because US states generally do not complete financial reports in the same rigorous manner as Canadian provinces, which means net debt statistics are not readily available for the US comparators.

Bonded debt is a fair representation of indebtedness and captures almost all of Quebec’s outstanding debt.) Quebec’s total gross outstanding bonded debt for 2011 (the last year for which we have data) was $160.8 billion, representing approximately 47 percent of the province’s GDP, a level that greatly exceeds that found in any of the 24 States examined. At 17.1 percent of GDP, Vermont has the highest bonded debtto-GDP ratio in the United States. Quebec’s debt is more than 2.5 times that level. New York, which has the highest total bonded debt in the United States, reaches levels close to Quebec’s in real terms, but when expressed as a share of GDP, its bonded debt is only 12.3 percent of the state’s GDP.

Quebec’s debt servicing costs are also very high; as a share of government revenues, its debt services rates are the highest amongst Canadian provinces 3 Quebec’s Government Indebtedness: Unnoticed, Uncontrolled Speer • Fraser Institute 2014 and more than double the worst US state when interest payments on total bonded debt are shown as a share of revenue. If the province’s debt was divided up equally amongst all Quebeckers, it would be 16 percent higher than the next Canadian province ($21,787 for Quebec vs. $18,717 for Ontario), and its per person bonded debt would be more than double that of the worst US state ($20,162 for Quebec vs. $9,021 for Alaska).

This comparative analysis shows that Quebec’s indebtedness has reached such a level that the province’s residents must insist that the government take action to curb the province’s debt.

Gazing into the future: possible scenarios for Quebec’s indebtedness The third and final essay in the collection projects possible future deficits and debt levels based not only on the status quo, but on alternative policies the Quebec government might choose to follow. Fraser Institute Senior Fellow Joel Emes, along with Sean Speer, carried out this analysis to give Quebeckers a sense of where the provincial debt will likely head if the government takes no action.

Emes begins the essay by examining and explaining how Quebec arrived at a point where net debt in the province grew to reach roughly half of the province’s economy by 2012/13. This is important because, as the entire collection outlines, this significant debt accumulation has contributed to much higher interest payments for the province than it would otherwise have to bear.

The essay presents a series of possible projections of Quebec’s future deficits and debt. It first projects Quebec’s future debt assuming the status quo is largely maintained. The assumptions are based on current market conditions and patterns of taxation and spending consistent with those from the previous 10-year period. Emes concludes that given this established pattern of fiscal behaviour, Quebec’s net debt could reach over 57 percent of GDP by 2022/23.

Emes then considers alternative scenarios and the necessary steps that could bring provincial debt growth under better control. The government’s own debt target of 45 percent requires limited policy change to achieve relative to the status quo. But the author also discusses what would need to be done to lower Quebec’s debt-to-GDP ratio to 23 percent, the 2012/13 weighted average of the other provinces. This more ambitious plan would require a significant departure from recent spending levels, including maintaining program spending at 1 percent per year for a decade (which would represent a cut in real per capita spending) or eliminating all capital expenditures over the same period.

These alternative scenarios illustrate that any real break from recent trends will require a full debate about the role of government in Quebec and involve major reforms in the delivery of provincial government services.

Overall, this collection strives to give Quebeckers a better sense of the province’s government debt, how it accumulated, how it compares with other jurisdictions, and what steps might be taken to bring it under control.

1. The State of Quebec’s Indebtedness Filip Palda, Hugh MacIntyre, and Charles Lammam The Quebec government has officially backed away from a previous commitment to balance the provincial budget in 2013/14 and said that it will now balance in 2015/16.1 This delay in balancing the budget will only add to the existing legacy of debt accumulated by the province. And that legacy of debt is not insignificant: Quebec currently has the largest debt level of any Canadian province when measured relative to the size of its economy.

The importance of Quebec’s indebtedness has simply not received the public attention it deserves, nor does it seem to be a pressing priority for the provincial government.2 The purpose of this essay is to examine the overall state of Quebec’s indebtedness and highlight the magnitude of the problem. The essay is broken up into three sections. The first defines a particular type of government indebtedness and the one that receives most attention, namely direct debt, and discusses why it matters. The second section examines various measures of Quebec’s direct debt. The final section discusses another type of government indebtedness that includes government liabilities beyond direct debt, referred to as indirect debt, and how such liabilities can impact the government’s financial position.

1. Québec, Ministère des Finances et de l’Économie (2013). Update on Québec’s Economic and Financial Situation: Fall 2013. Government of Québec. Available at http://www.finances.gouv.qc.ca/documents/ Autres/en/AUTEN_updateFall2013.pdf.

2. The Quebec government has stated an objective for reducing its gross direct debt from 53.6 percent to 45.0 percent of the total economy (a 16 percent reduction) between 2012/13 and 2025/26. But given this target is far into the future (over a 14-year period), the timeline can hardly be called a pressing priority. See Québec, Ministère des Finances et de l’Économie (2013). Update on Québec’s Economic and Financial Situation: Fall 2013. Government of Québec: D17. Available at http://www.finances.gouv.


Chapter 1 in Sean Speer, ed., Quebec’s Government Indebtedness: Unnoticed, Uncontrolled. Quebec Prosperity Initiative. © 2014 Fraser Institute http://www.fraserinstitute.org.

6 The State of Quebec’s Indebtedness Palda, MacIntyre, and Lammam • Fraser Institute 2014

1. What is Government indebtedness and why does it matter?

Government indebtedness refers to legal commitments or contracts of a government with an individual or a group regarding the borrowing and repaying of financial obligations as well as commitments to provide certain benefits or transfers to qualifying individuals or groups. Put another way, government indebtedness means that the government owes people money in the future, either as a result of borrowing or as a result of a promised stream of future benefits.

Many different types of indebtedness exist for the government but the most commonly talked about is direct debt, which refers to the accumulated borrowing by a government and its agencies over time. Direct debt constitutes a direct legal contract or obligation on the part of the government to repay these borrowings. Another way to think about direct debt is deferred taxation. That is, debt incurred today plus interest is money that will have to be repaid by taxes in the future.3 Other forms of indebtedness that do not fall under the definition of direct debt are referred to as indirect debt. In Quebec’s Public Accounts, direct debt includes the debt of government departments and agencies as well as health and social services networks.4 Quebeckers should be concerned about their government’s direct debt for many reasons. For a start, empirical research has found that a negative relationship exists between high public direct debt and economic growth.5 This negative relationship can be explained in different ways but one important

3. For seminal work on debt as future taxes, see: Barro, Robert (1974). Are Government Bonds Net Wealth. Journal of Political Economy 82, 6: 1095–1117. For a less technical work, see: Law and Clemens (1998). The Ricardian Equivalence Theorem: Back to the Future? Fraser Forum (February). Available at http://oldfraser.lexi.net/publications/forum/1998/february/terminology.html, as of December 11, 2013.

4. Québec, Ministère des Finances et de l’Économie (2013). Public Accounts 2012-2013: Volume 1.

Government of Quebéc. Available at http://www.finances.gouv.qc.ca/documents/Comptespublics/en/ CPTEN_vol1-2012-2013.pdf.

5. One of the most influential papers examining the connection between government debt and economic growth is by Harvard professors Carmen Reinhart and Kenneth Rogoff. See: Reinhart, Carmen,

and Kenneth Rogoff (2010). Growth in a Time of Debt. American Economic Review 100, 2 (May):

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