Quebec’s 2014 Budget is aimed at the ROC

By Robert Presser on June 9, 2014

Put aside all the noise generated by the political chattering classes over the figures released in Quebec’s budget last Thursday, since this year’s figures don’t matter.  The only message you need to retain is that this is just the beginning – the re-imagining of the role of the state in Quebecker’s lives will wait until next year.  When we have a total provincial debt approaching $200 billion, having the deficit for 2013-14 come in $600 million higher than previously estimated is not that important since no one believed the figures that the former PQ government had tabled in any case, both for their first budget and the one that died when they were defeated.  What is most important is that our bondholders, the international business community and the Rest of Canada (ROC) believe that Quebec is finally going to get its fiscal house in order.  If nothing is done now, the deficits become a runaway train; without an intervention the deficit for 2014-15 would have been $5.9 billion and in 2015-16, $7.6 billion.  Quebec is not at the end of its rope, but rather at the end of its lender’s ropes.

Ontario’s inability to deal with its own fiscal mess is the best thing that ever happened to Quebec politicians.  The Ontario election, regardless of the result, is not going to change their trajectory any time soon and unless they engage in an exercise similar to Quebec’s they will soon hit the wall along with us.  If you are a provincial bond investor with many billions to place in the market, the Quebec and Ontario bond markets are the biggest ones available.  We have to thank the lack of credibility of the Hudak, Horwath and Wynne election promises for the continued patience being extended to Quebec, since Premier Couillard has the most credible economic team in central Canada at the moment, as elected officials (us) or as candidates (Ontario).  The National Post issued an endorsement of Hudak’s Progressive Conservatives with the caveat that he had better address Ontario’s ballooning deficits since Quebec has announced a commitment to get its house in order.

Why do we care what the ROC thinks?  Well, they give us gobs of money in the form of equalization transfer payments to the government and individuals, and direct federal spending.  In round figures, Ottawa spends $60 billion in Quebec and collects $45 billion in revenues in return.  That gap is filled in by taxpayers in the ROC and federal levies on natural resources largely extracted in the West.  If an Albertan is told by his or her government that they cannot afford subsidized day care for all families then it is reasonable to ask why Quebec should benefit from such a program based, in part, on Alberta funds heading indirectly to Quebec.  Canadians and other provincial governments are waking up to Quebec’s largesse at their expense.  Back in the days of the Meech Lake constitutional accord debate, intellectuals rallied against the concept of asymmetrical federalism, where some provinces would have more rights than others.  The ROC is coming to regard the current equalization formula as institutionalized asymmetrical fiscal federalism and the provinces are making that point to their electoral bases.

The federal Tories have already levelled off the increase in health care funding in the new round of transfers beginning in 2017.  They made few changes in equalization, having avoided a major skirmish with the provinces as they have focused on restraining increases in the $90 billion of federal government spending that is considered discretionary, meaning not part of a program like health care or pensions.  Lessons from the federal government experience for spending reduction will be key for Quebec in order for the Couillard government to meet its objective of a balanced budget within 2 years; Quebec’s top civil servants have to buy into the reforms proposed by the government and present ministers in affected departments with policy initiatives and spending plans that reflect the policies that Couillard ran on.  At the federal level, the civil service got with the program – the proof is that unspent funds from departmental budgets were being returned to the Treasury Board at the end of the fourth fiscal quarter, rather than being blown out the door as quickly as possible as in previous years.  “Use it or lose it” is no longer considered acceptable in Ottawa, and that is the attitude that is required in Quebec City.  From my own exposure to Ottawa’s behavior as the chair of a federal crown corporation I can tell you that it took three years for the Tories’ commitment to real change in the way Ottawa operates to permeate the civil service.  Quebec does not have the luxury of three years; if Couillard wants to succeed, he should send his Treasury Board President, Martin Coiteux off to Ottawa to learn as much as he can from his federal counterpart, Tony Clement. We have been down this road before.  In 2003, Jean Charest came to power making the same promises.  At that time, the provincial debt was less than a third of what it is today, the Liberal caucus was uncommitted to the cause and the provincial civil service did not want to dismember the fiefdoms and programs that reflected their power and prestige.  This time really is different; the polls show that two thirds of Quebeckers understand and support the need for serious reform of the role of the state, at least until they are personally affected.  The economic team Couillard assembled is competent and committed, and our financiers in the ROC are watching intently.  Quebec must not only be “open for business” but be prepared to do business differently as well.  Next year’s budget will tell us how different it will really be.

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