Sunday, May 20, 2012

Quebec's Fiscal Situation - The Necessity of Austerity

Quebec's austerity measures which include the raising of tuition fees for its post-secondary students have been headline news in Canada recently and now Quebec's September election is front page news.  In light of that, I thought that it was time to do a brief posting on Quebec's financial situation.

Let’s start by looking at Quebec’s debt.  Quebec is Canada's second-most indebted province after Ontario and has the misfortune of having a bond credit rating that is in the lower middle of the pack, well below Alberta, Saskatchewan and British Columbia, Manitoba and below New Brunswick and Ontario at A+ (Standard and Poor's), the same rating as Nova Scotia.  This poor rating makes it more expensive for Quebec to service its debt.  Quebec's total debt in fiscal 2011 - 2012 is estimated to be $170.9 billion; this compares to Ontario's estimated debt of $237.6 billion.  Quebec's debt nearly twice the size of all other provinces combined (excluding Ontario).  Here is a graph showing how Quebec's net debt has risen since 1986 - 1987:

Quebec's debt-to-GDP is estimated to be 51.2 percent in 2011 - 2012, the highest in Canada by a very wide margin with Ontario coming in second place at 37.2 percent and Nova Scotia coming in third place at 35.2 percent. 

Here's a graph showing how Quebec's debt-to-GDP ratio has grown since 1986 - 1987:

In the March 2012 budget, the Charest government noted that the deficit for fiscal 2011 - 2012 was lower than predicted in the fall, coming in at $3.3 billion or 1.0 percent of GDP compared to the estimated deficit of $3.8 billion.  A large part of this improvement is due to a decrease in spending on interest owing on the debt of nearly $300 million, mainly on the back of lower interest rates.  That said, in fiscal 2011 - 2012, Quebec spent $7.452 billion on debt interest charges which works out to 11. 4 percent of revenues and 12.1 percent of program spending.  Projecting forward, even as the debt hits $183.4 billion in fiscal 2013 -2014, Quebec does not anticipate debt interest charges in excess of 12.2 percent of revenue.  Best of luck!

As an aside, Quebec's headline austerity measure, the increase in the Quebec Sales Tax from 8.5 percent to 9.5 percent on January 1st, 2012 had an impact on consumer spending in the province as consumers hastened to make purchases before the tax increase.  I can only imagine how many provincial treasurers are watching this move with great interest.

Here is a graph showing how and when Quebec plans to return to budgetary surplus:

Here is a graph showing how Quebec plans to cut the annual growth rate of spending increases from an average of 5.7 percent annually from 2006 to 2010 to an average of only 2.8 percent from 2010 to 2014:

I find this interesting, particularly since Quebec's population, like that of the rest of Canada, will be aging and availing themselves of more and more of the province's health care over the coming years yet, Quebec plans to spend less.

Quebec's objective is to reduce its very high debt-to-GDP ratio from a peak of 55.3 percent to 45 percent by 2026 as shown here:

My suspicion is that this too will be a difficult target to meet, particularly if interest rates on its existing debt rise to historical norms.  As well, should another deep recession become entrenched in the global economy, it will be very difficult for a future Quebec government to avoid spending additional funds to stimulate the economy just as they did during the Great Recession.  As well, Quebec has booked $825 million in "new measures" which will consist of either revenue raising or expenditure restraint that will take place from 2014 - 2015 onwards.  Since these "measures" have not been identified, they provide a downside risk that the plan to cut debt and deficit will not be met.

Quebec's economic growth is projected to be rather modest, particularly when compared to the rest of Canada as shown here:

This sub-par growth forecast is due in large part to softness in job creation and an expected slowdown in the province's housing market.  Sales of existing homes and new home construction levels are both declining and this decline is expected to continue through 2013.  Interestingly enough, TD Economics projects that Quebec's housing prices will correct in the range of 10 to 15 percent by the end of 2013.  When all economic data is tallied, the government assumes that GDP will grow by 1.5 percent in 2012 and 1.9 percent in 2013, slightly less optimistic than TD's forecast.

While Quebec's move toward fiscal balance are admirable, there are many unknowns in the equation that may prevent fantasy from becoming reality.  Quebec has traditionally relied rather heavily on transfers from the federal government as shown here:

If the Harper government follows through with its plans to wean Canada's have-not provinces from the federal teat, Quebec may find it impossible to meet its fiscal goals.  As well, when interest rates return to normal levels, Quebec's expenditures on debt interest payments will become an ever-increasing portion of its overall spending.  Since Quebec is already Canada's most highly taxed regime, if the province hopes to meet its targets, it has only one choice - cut spending now.

No comments:

Post a Comment