Saturday, September 1, 2012

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.


  1. I remember seeing some numbers back in the early 80's that suggested 50% of federal transfers went to Quebec. I don't have those numbers and I don't know what the percentage would be now. However I have always wondered if those who seek a political solution to their perceived language problem, that is become a separate country, either do not understand the inherent fiscal problems of such a move or are deliberately misleading the public by keeping them in the dark about such problems.

    Having lived in Quebec and gone to a Quebec university (all in French), I came to understand the problem, if there is one, isn't the difference of culture, it is the difference of language. If Quebec thinks it is going to get a break on the world stage about their language, they are sadly mistaken. Even at Université Laval, it was interesting to note the number of professors who did their post graduate work in the United States obviously in English. French may have once been the international language but it's English now. Within Canada, Quebec gets support for its language, its culture and its finances. As a separate country, I doubt anybody fully appreciates what that would entail financially and never mind the language and culture, at the end of the day what counts is paying the bills to keep the lights on. If Quebec has storm clouds on the horizon because their own fiscal house needs to be put in order, separating from Canada would end up being the equivalent of the 2011 Japanese 9.5 earthquake and tsunami. Cé-tu ben magané? Hé, c't'pas au boutte!

  2. Thanks for your insight WQB. I lived in Quebec for a short time in the late 1970s. I was in a remote area and I was rather surprised that the issue of sovereignty never came up with my Quebecois counterparts. That always made me wonder just how widespread the notion was and whether it was an urban vs. rural split.

  3. Sadly, I think the average Quebec citizen is unaware of the insights provided by WQB. As an anglo living in Quebec City, attending U of Laval, I have come to realize that language and culture still govern the supposed rationality of decision making. In fact economics should have a much greater influence for Quebec to remain commercially viable!

  4. Moving Vans: start your engines!

  5. You're reading too much into that $17.4 billion dollar transfer I think, given the way that money flows. All provinces, including those paying towards equalization receive federal transfers to cover certain services. Alberta, for example, on that same page is shown to receive $3.7 billion in federal transfers. The relevant row is equalization - with Quebec receiving $7,815 million of a total $14,659 million in equalization payments (2011-2012 figures).

  6. Could you provide the statistics for how much Quebecois pay in federal taxes?

    Isn't the tricky part whether they could use that money to:
    - replace the $7.8B in transfers
    - provide Armed Forces
    - pay down the 'stranded debt'
    - ... (what else does a federal gov't do?)

  7. You're forgetting that fiscal federalism means that the risk premia (perceived risk of default by individual provinces) are influenced by the fact that they are in a federation, and by their relative size. A province that is so big that its default would terribly hurt the rest of the federation can incur more debt, because the rest-of-the-federation would rather bail them out than let them fall. Because the market knows this, the risky province (in Canada this applies to both Ontario and Quebec) pays less than it would as a free-standing unit, and the others pay a bit more. It's a moral hazard problem akin to the too-big-to-fail banks. This is well established in the fiscal federalism/public finance literature. Also applies to Castilla y Leon in Spain and North Rhine-Westphalia in Germany. This is another way Quebec benefits from being part of Canada.
    Different federations have solved the problem in different ways -- in the US for example states cannot sell bonds. In the EU, the idea is to have a "debt brake" that limits deficits by individual eurozone members, but we don't know yet how credible it would be.