Quebec is living proof how fiscal discipline can yield a big economic return, writes Sean Speer.
By Sean Speer, August 11, 2017
Recent reports of Quebec’s growing economic and fiscal strength are another real-life rebuttal to the presumption that greater spending control and deficit reduction will necessarily harm the economy. Spendthrift governments in Ottawa and Ontario ought to take heed.
Quebec’s transformation from economic and fiscal laggard to a national leader may not be complete. But its progress is incontrovertible. What accounts for it? A combination of spending discipline, fiscal reform and targeted tax relief. It’s producing a “virtuous cycle,” as Quebec’s finance minister has observed.
Of course, it hasn’t been virtuous according to everyone. There are predictable voices who’ve accused the government of being “unkind,”“not Quebecer friendly” and “damaging” to the provincial economy.
The last critique is worth addressing because it’s such a common refrain in response to any efforts to better control spending and reduce budgetary deficits. We hear it everywhere including in Ottawa and at Queen’s Park.
Quebec’s transformation from economic and fiscal laggard to a national leader may not be complete. But its progress is incontrovertible.
Remember Quebec’s current government inherited seven consecutive budgetary deficits and a debt-to-GDP ratio exceeding 50 per cent. The trend was ominous. One study projected that it could reach 57 per cent by 2022–23.
No single party was responsible for the province’s deteriorating public finances. It was a joint effort that reflected a prevailing view in favour of more spending and against cutbacks.
The incoming government in 2014 challenged this conventional wisdom. The new finance minister argued that Quebec’s debt and deficits imposed a burdensome weight on investor and consumer confidence and overall economic activity. Lifting this burden would provide a boost to the province’s economy.
Thus the minister and his government set about balancing the budget, reforming spending and lowering taxes. It wasn’t easy and not every choice was right. But the results increasingly speak for themselves. It’s been quite a remarkable turnaround.
Quebec eliminated its deficit in 2015–16 and has since recorded successive budgetary surpluses, including $4.5 billion last year. It has added virtually no debt since 2014–15 and net provincial debt is soon expected to fall. Its debt-to-GDP ratio is now projected to drop to 40 per cent (its pre-recession levels) by 2021–22 and to continue falling thereafter. And just last month Standard and Poor’s raised Quebec’s credit rating to its highest level in nearly a quarter-century.
What has been the economic results of this fiscal progress? RBC economics describes it as “lift-off.”
Economic growth outpaced Canada as a whole in the first quarter of 2017 and is projected to remain strong the rest of the year and into 2018. The unemployment rate is now below Ontario’s and represents the province’s lowest levels since Statistics Canada began keeping track in 1976. During the six months ending in January 2017, in fact, Quebec was responsible for almost four of 10 new jobs created across the country.
Detractors who warn about so-called “austerity” failed to account for the extent to which the province’s poor finances were undermining confidence or how the government’s efforts would bring market stability.
Ottawa and Ontario are presently making the same mistake. Just check their respective budgets.
It’s another practical example of how lifting the heavy weight of deficits and debt off the economy can produce lift-off with regards to jobs and growth.
The federal government’s budgetary deficit may be small in relative terms and its overall fiscal position remains generally positive. But its failure to articulate a plan to control spending or return to budgetary balance will eventually catch up to it. Short-termism invariably has long-term consequences in the form of higher debt-servicing costs, higher taxes and ultimately weakened economic confidence.
Ontario’s rapid rise in public debt in recent years has been associated with a relatively poor economic performance including with regards to investment, jobs and household incomes. The government now purports to have balanced its budget, but its debt levels keep rising and the province’s debt-to-GDP ratio is projected to remain above pre-recession levels until 2040. Quebec’s experience shows that greater fiscal ambition could be a boost to Ontario’s economy.
Of course, there’s more work to be done to keep Quebec’s debt burden falling and to improve its tax competitiveness. But progress to date is positive. A focus on controlling spending and balancing the budget is paying off just as it did at the federal level in the late 1990s, in the United Kingdom in recent years, and elsewhere.
It’s another practical example of how lifting the heavy weight of deficits and debt off the economy can produce lift-off with regards to jobs and growth.
Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute.
