Quebec's Federal Transfers - Living on Borrowed Time?

Since most provinces fiscal situation "lives and dies" by relying on Federal transfers, I wanted to take a look at how much Quebec, Canada's most likely to separate province , relies on Ottawa.

Here is a chart showing how each province benefits from Ottawa's largesse in order from west to east:

Here is the same data in graph form showing the size of the federal transfers to the provinces from the least to the greatest:

Quebec, as Canada's second most populous province, naturally comes in second place with overall transfers of $17.431 billion in fiscal 2012 - 2013.  Of the $57.609 billion in transfers this year, Quebec accounts for 30.3 percent of the total.  In case you were wondering, according to Statistics Canada, at the end of 2011, Quebec had 23.1 percent of Canada’s total population.

Here is a graph showing the even more telling per capita transfer for each province from the least to the greatest:

Quebec sits in the middle of the pack, well below the three Maritime provinces and Manitoba but 50 percent higher than Ontario.

Here is a graph showing the history of federal transfers to Quebec since fiscal 2005 - 2006:

Quebec's transfers have risen by $5.291 billion or 43.6 percent from the benchmark level of $12.140 billion in fiscal 2005 - 2006.  Growth in Quebec's transfers have increased very little since fiscal 2010 - 2011 and, if one looks back, between the benchmark fiscal year and fiscal 2010 - 2011 when transfers plateaued, in that five year period, Quebec saw its transfers rise by 43.4 percent or a compound annual growth rate of 7.46 percent, well above the national rate of inflation as shown here:

Here is a graph showing Quebec's historical per capita transfers:

Quebec's per capita transfers peaked at $2204 per man, woman and child in fiscal 2010 - 2011 and have fallen back slightly to $2170 in fiscal 2012 - 2013.  This is still up 35.5 percent from the benchmark year of 2005 - 2006 and works out to a compound annual growth rate of 6.6 percent from the benchmark year to the peak year, again, well over the rate of inflation over that period of time as noted previously in this posting.

In closing, where does the Federal transfer get allocated?  In fiscal 2012 - 2013, of the $17 billion and change, $6.77 billion or 39 percent goes to Quebec's health care system, $2.735 billion or 15.7 percent goes to social programs and $7.391 billion or 42.4 percent goes to equalization, a program that "equalizes the fiscal capacity of the have-not provinces" for those of you that are not Canadian.  Looking at Quebec's 2012 budget, these equalization payments make up 24.5 percent of the province's total revenue (including Federal transfers plus own source revenues) and, with total expenditures of $70.879 billion in fiscal 2012 - 2013, Federal transfers will supply 24.6 percent of the province's spending needs.

As I have stated previously, one wonders how Mme. Marois and her Pequiste counterparts can possibly think that Quebec can do it on their own.  Without billions of dollars of annual transfers from Ottawa, an independent Quebec would certainly find itself in an interesting fiscal situation very, very quickly.

Quebec's Fiscal Picture and The Chances of Successful Sovereignty

Now that the votes are being counted in Quebec's election, I thought it would be prudent to take a look at their fiscal picture, comparing it to the rest of Canada's provinces and see what kind of situation faces the province's next government.  

Let's open by looking at how the Dominion Bond Rating Services (DBRS) rates Quebec's long-term debt compared to its peers:

Quebec sits in the middle of the pack with an "A high" rating.  According to DBRS the "A" rating suggests the following that seem to apply to Quebec in specific:

1.) GDP growth may have been steadily below average or inconsistent in previous years.

2.) Tax burdens may already be somewhat high, limited the ability of government to raise taxes if needed.

3.) Government has reduced ability or willingness to manage downturns through meaningful expenditure restraint or revenue-raising initiatives.

4.) The borrowing platform may be somewhat narrow and is generally limited to Canada.

5.) Unfunded public sector liabilities are large and growing.

6.) Less co-operative relationship with senior government and overlapping areas of responsibility.

One example of a growing public sector liability in the province is the City of Montreal's pension plan; this plan now accounts for 13 percent of the city's operating budget, even more than the amount that is spent on public transit.  This is not a sustainable or healthy situation.

Now, let's take a look at specific provincial deficit and debt statistics from TD Economics.  Please note that I'm using the 2012 - 2013 budget estimates for both statistics:

Quebec's forecast deficit for fiscal 2012 - 2013 looks quite good compared to its provincial peers, coming in roughly one-third the size of Ontario's and sitting right in the middle of the pack.  Quebec's overall projected debt doesn't look quite as good, coming in second highest behind Ontario and well above the rest of its peers.

Let's look at my favourite metric, per capita debt.  Please note that population data is current to the end of 2011 and is taken from Statistics Canada's database for consistency:

Quebec has the highest per capita debt level, coming in at $22,369 per man, woman and child.  Ontario is in second place with a per capita debt of $19,524 and Newfoundland and Labrador are in third place with a per capita debt of $16,647.  Alberta comes in with an actual surplus of $3,439 for every Albertan.

Let's look at how Quebec's debt has grown over the past two and a half decades:

Now let's look at how Quebec's debt-to-GDP level, now the highest in Canada by a wide margin, has grown over the same time period:

While Ms. Marois may be caught in the "sovereignty loop", Quebec's fiscal picture is a far cry from healthy and must be considered before the PQ rattles the "sovereignty sabre" yet again.  This is particularly apparent if one considers the fact that the Harper government consistently threatens that they will wean Canada's have-nots from federal transfers which are expected to total $17.431 billion  for Quebec in fiscal 2012 – 2013 as shown here:

Without billions of dollars in annual federal transfers, Quebec's illusion of fiscal prudence will vanish along with its ability to "go it alone" without the rest of Canada.  Let's hope that saner heads prevail.

Gilles Duceppe; He's Still Singing the Sovereignty Song

In Saturday's National Post, this article discussed a letter that Gilles Duceppe, Leader of the Bloc Quebecois sent to the international community this past week. His letter, available here, informed the international community that they should brace for another referendum on Quebec sovereignty and that there is currently a strong political movement to make Quebec a sovereign nation. Apparently, the letter was sent from the Leader's Office in the Canadian House of Commons to the leaders of various nations around the world, including the United States and countries in Europe, South America and Asia.

In the letter, Mr. Duceppe claims that Quebeckers have a strong desire for freedom and independence; they wish to make all of their own laws, collect their own taxes and act on their own behalf on the international stage. The letter goes into the history of the failed first sovereignty referendum in 1980, the failed Meech Lake Accord, the rejected Charlottetown Accord and the failed but very close second Quebec sovereignty referendum of 1995. Mr. Duceppe then outlines the history behind the Clarity Act that he claims "contravenes every international and democratic practice...". He states that the parties in Quebec's National Assembly have all agreed that the wording of any future referendum shoudl be the prerogative of the National Assembly aand that it is no business of the Canadian government.

Here's a quote from the letter regarding Mr. Duceppe's interpretation of how Canada regards Quebec:

"Twenty years after the Meech Lake Accord fell through and fifteen years after the 1995 referendum, a recent scientific survey has shown that Canadian opinion toward Quebec has hardened. Whether it is about language, culture, immigration, public finances, international relations or simply respect for Quebec's constitutional jurisdictions, a large majority of Canadians refuse to compromise. In fact, 61% of Canadians refuse to even consider negotiations ro (sic) reach a constitutional agreement with Quebec.

A large majority of Canadians do not want to open the door to an agreement with Quebec. This leaves the Quebec nation with no recourse but sovereignty..."

I gather he thinks Canadians really don't like Quebeckers. I would disagree with him on that count. It's Quebec's politicians we don't really like, but then again, we aren't that fond of our own politicians either.

He states that the "conditions are ripe" for another sovereignty referendum; he also states that the "international community will be invited to formally recognize Quebec as a sovereign nation.

Let's take a quick look at Mr. Duceppe's resume as an MP for the Bloc. He has been in Parliament for 19 years, 10 months and 2 days (effective today) so he will qualify for a very large, Canadian taxpayer-funded pension and, because he is already 63, he could collect the pension at any time after his service to Canada ends. His base salary as an MP is $157,731; in addition, as a Leader of another Party in the House, he receives an additional salary of $53,694 for a total salary of $211,425. I've also taken a screen capture of his MP expenses from the April 1, 2008 to March 31, 2009 period as released in the Individual Members Expenditures publication:

His total office expenditures for the fiscal year were $446,967. In comparison, Jack Layton, Leader of the NDP had expenses of $548, 783 but then again, Mr. Layton's objective is not to form a sovereign nation. I'd have to say that he doesn't really seem to object to spending Canadian's tax dollars.

Let's also take a quick look at the financial situation for Quebec. Their net provincial debt for 2009 - 2010 is projected to be $142.8 billion, the second highest in Canada after Ontario. Their net debt works out to 47.5% of their GDP, by far the highest in Canada, in fact, 8.1 percentage points ahead of the next highest province (Nova Scotia). Their per capita debt is $18,246, also the highest in Canada. Quebec's projected deficit for 2009 - 2010 is $4.3 billion, second only to Ontario and, like most provinces, they project returning to a balanced budget in 2013 - 2014. To help them balance their budget, Quebec will increase it's blended sales tax by 1 percentage point next year and an additional percentage point the following year, raise tuitions for post-secondary education, increase fuel taxes and reduce program spending growth.

A demographic summary posted on the Government of Quebec website states that Quebec will have among the oldest populations among industrialized societies in 25 years if past trends remain consistent. At one time, Quebec had among the lowest birth rates in Canada; a program to encourage parental leave has led to an increase in the birth rate in recent years, however, the provincially-run program cost the Quebec treasury $817 million in 2006, hardly an insignificant expenditure for a province with a large debt. Back in 1988, the Quebec government also introduced a program called the Allowance for Newborn Children; bonuses of $500 were paid for the first child and up to $8,000 for a third child. The program was cancelled in 1997; it was deemed a partial success but the general fall in birth rates since that time will prove problematic in the future.

Quebec is also deemed a have-not province and as such, qualifies for equalization payments. Quebec's totalequalization payment in 2010 - 2011 was $8.552 billion. In addition, in 2010 - 2011, Quebec will receive transfer payments for Health ($6.093 billion) and Social programs ($2.587 billion). The following chart shows that total federal financial support for Quebec in 2010 - 2011 will be $19.266 billion, in that same year, their own projection is that the province will generate $49.164 billion of its own revenue. It it is readily apparent that Quebec revenues rely heavily on transfers from the Canadian government, in fact, about 28 cents of every dollar of revenue the province receives comes from the Canadian government.

Quebec, on its own, would certainly face some very major, and perhaps insurmountable, financial hurdles without the assistance of the Canadian government. Demographics and their mounting debt are working against any hope of balancing their budget should they attempt to balance it on their own.

I am suspicious of Mr. Duceppe's motives for writing his letter at this juncture. In the most recent EKOS poll for the week of June 2nd to 8th, 2010, only 35.8% of Quebeckers state that they would vote for the Bloc, about the same as the combined vote for the Conservatives and the Liberals. That is hardly a ringing endorsement for both the Bloc and for sovereignty. Perhaps Mr. Duceppe is concerned that the Bloc is becoming redundant in its own home province; maybe he wishes to stir up the fires of separatism once again to preserve his own future and that of his Party.

I wish Mr. Duceppe and Quebec all the luck in the world, from what I can see, they've got a long, winding and tough road ahead of them.