| || ||Glen Hodgson |
Senior Vice-President and Chief Economist
Forecasting and Analysis
Quebec faces a hard economic road ahead—much harder than the economic prospects for the Western provinces, and even for Ontario. Despite its large fiscal deficit at present, Ontario’s economic growth prospects will continue to outshine those of Quebec. With some of Quebec’s political leadership in apparent denial about the coming economic reality and the limited policy options available to them, it will be difficult to foster the stronger economic growth that will be needed to pay for its treasured public services and to sustain rising living standards.
Quebecers have again spoken in a general election and have narrowly elected a Parti Quebecois minority government, with Pauline Marois as the first female premier. The Liberals slipped out of office but still placed a strong second, with almost the same popular vote as the Pequistes, and the Coalition Avenir Quebec (CAQ) finished a strong third. A PQ minority government will make for fascinating political theatre in the National Assembly in the coming months.
The election saw limited substantive discussion of Quebec’s likely economic future—so many Quebecers appear to have no idea what is about to hit them. For example, the fact that Quebec is a net recipient of fiscal transfers from the rest of Canada is understood by only a small fraction of the population. In the near term, The Conference Board of Canada forecasts that the Quebec economy will grow by only 1.4 per cent in 2012, improving marginally to 1.8 per cent in 2013—well below the national average. Unemployment will remain around 8 per cent over this period, although job creation will pick up in 2013.
Fiscal adjustment is a major contributor to the weak growth outlook. Quebec is relying on higher taxes and fees, and slower growth in public investment, in order to restore a balanced budget in 2013-14. (The federal government is also committed to restoring fiscal balance by 2015 and has few additional resources available to transfer to the provinces.) Quebec has by far the highest net public debt among the provinces, at 50 per cent of GDP, and restoring a balanced budget is critical to convincing capital markets that Quebec has a serious fiscal plan. Since the new premier has said she too intends to balance the budget as planned in 2013-14, there is little prospect for any more near-term growth coming from the government sector. Private consumption and investment will have to provide most of the expected modest growth.
Arguably the more important perspective for Quebec’s economic outlook is over the longer term. The Conference Board produces a long-term economic forecast (to 2035) for each province and for the country as a whole that is guided by the economy’s underlying supply capacity. Growth in the labour force, investment and productivity are the key factors that determine an economy’s potential (or sustainable) growth. For Quebec, future economic growth is expected to decline to around 1.5 per cent annually after 2015, largely due to slowing labour force growth, with little prospect for stronger growth down the road without deep and fundamental changes that could unlock some new growth potential. Real annual economic growth of 1.5 per cent or less will make it very hard for Quebec to sustain its health care and public education systems in their current form.
What could strengthen Quebec’s growth outlook? Policy action would be required in all three growth areas—the labour force, investment and productivity. But based on its proposed economic agenda, the new PQ government will be challenged to deliver innovative and positive change in these three areas.
Let’s start with the labour force, where we expect the growth rate to slow to below 0.5 per cent annually after 2015, due to fundamental demographic forces and specifically, population aging. Active labour market policies could be used to try and change that negative trajectory. More immigrants could be welcomed to Quebec and integrated quickly into the economy through streamlined recognition of credentials and focused training programs. Older workers could be encouraged to stay engaged longer in the workforce. More targeted investments could be made in the innovation and workplace skills that the Quebec economy needs. Aboriginal people and other under-represented groups could be encouraged to enter the workforce more fully. But the new government has instead proposed policies that could discourage immigration. Moreover, freezing university and college tuition has discouraged wise long-term educational and human capital investment decisions by young Quebecers. So there is little reason to expect stronger labour force and human capital growth down the road.
What about investment? Should we expect the rate of private investment in Quebec to accelerate in future? Not likely. If anything, private investment growth would be impaired if there is any increase in political uncertainty created by a lack of clarity on the prospects for a future referendum on separation. The PQ has also proposed tax increases for corporations and upper-income earners, which would not improve the investment climate. Public investment may have to take up the slack if the overall expected rate in investment growth is to be maintained as projected in our long-term forecast. But the strain on public finances could dampen the capacity for more public investment.
A useful short-term leading indicator of how private investors will respond to the new government will be the risk spread on Quebec government bonds. In recent months, Quebec’s debt has been trading at roughly the same risk spread as Ontario’s debt—a sign of fiscal confidence. But as recent events in Europe have demonstrated, bond risk spreads can adjust quickly to perceived increases in risk. If Quebec’s bond risk spread were to widen, that would indicate that private investors are having second thoughts about investing in the Quebec economy.
The third long-term growth variable is productivity—usually measured as output per worker—which can be influenced by pro-productivity government policies like reducing barriers, streamlining regulations and investing in public infrastructure, and by fostering an innovation culture within organizations. The new government’s platform does not suggest that it intends to make the Quebec economy operate more efficiently to support productivity growth. To the contrary, there is a risk that efforts will be made to increase protectionist barriers to serve short-term political interests, such as through inward-looking procurement practices and higher barriers to commerce within Canada and internationally. Higher protectionist barriers can create the short-term illusion of increasing local business activity, but ultimately would negatively affect Quebec’s competitiveness and the living standards of Quebecers.
In short, there is little reason to expect that Quebec’s underlying economic growth potential or prospects will improve. Declining sustainable economic growth will affect real incomes, will slow future government revenue growth and will place growing pressure on its fiscal position. In turn, a tighter fiscal position will constrain the Quebec government’s ability to invest in public services like health, social services, education, and infrastructure. The new government could decide to undertake a fundamental review of core policies aimed at strengthening labour force growth, productivity and innovation, as well as clarifying its position on a sovereignty referendum. If not, Quebecers should prepare themselves to pay higher taxes in future to maintain these services, or expect an erosion in service quality—the result of a hard economic road ahead.