| || ||Glen Hodgson |
Senior Vice-President and Chief Economist
Forecasting and Analysis
The minority Parti Québécois government’s budget reflected the hard reality of governing in Quebec today. Not only is government in a minority situation, thereby requiring it to seek a compromise on some of its election promises, but more importantly, negative structural forces are already affecting Quebec's future economic potential.
The single most striking element of the Quebec budget (often skipped over by commentators) is the weakened outlook for economic growth. Consistent with the Conference Board’s economic outlook, real GDP growth is expected to come in below 1 per cent in 2012, and the budget forecasts growth of 1.5 per cent in 2013, improving slightly to 2 per cent in 2014. And this muted real GDP growth depends heavily on a sound growth recovery in the United States.
From 2015 forward, Quebec's growth potential will be constrained by aging demographics and much slower labour force growth. The Conference Board forecasts sustainable real economic growth for Quebec of 1.5 per cent from 2015 onward—a very challenging new reality when Quebecers have been used to a world of 2.5 per cent growth or higher over the past decade.
It is nominal economic growth, including the impact of inflation, which drives the government's capacity to generate tax revenues to pay for public services. Here, nominal growth is expected in the budget to be 3.7 per cent in 2013 and 4 per cent in 2014—again, well below the nominal growth rates in years and decades past.
Mindful of weaker growth ahead, the government did the right thing by reconfirming Quebec's commitment to balance the books in 2013-14—just as the previous Liberal government had committed to do. Fiscal balance and strong public debt management are musts for Quebec to maintain its credit rating. Quebec needs the ongoing support of capital markets in order to finance its large stock of public debt (50 per cent of provincial GDP in net terms, by far the highest among Canadian provinces) at a reasonable price. Risk spreads for Quebec public debt have widened slightly since the Pequistes' election, but capital markets appear to remain reasonably confident that Quebec will continue to meet its debt obligations on time.
The budget generally avoided or deferred hard decisions in reforms to public health care, education and social services. With slower growth ahead it will become increasingly difficult for the government to maintain such generous programs in their current form—transformative policy thinking, design and implementation is going to be required.
Health care’s share of spending will continue to rise, to 45 per cent and beyond, as health care spending is still growing faster than nominal income. As in other provinces, health care spending in Quebec is now crowding out many other government programs, which will inevitably have economic and social consequences. The Parti Quebecois’s election-time promise to roll back student tuition increases was delivered. While popular with many students, and perhaps helpful in maintaining access to post-secondary education for some, this decision will do little to improve the quality of that education. As well, daycare fees are still fixed at $7 per day, rather than rising with inflation.
And what was missing? In a September commentary (“Quebec’s Economic Future: A Hard Road Ahead”) the Conference Board wrote about the need for a comprehensive economic growth strategy. Greater innovation, improvements to labour market conditions, reduced regulatory barriers and priority public investment are the pillars of such a strategy, but the budget seems to have offered few measures in this direction.
Indeed, in some areas, the Quebec budget appears to have taken a step backwards in terms of underpinning economic growth. Infrastructure spending, for example, was cut by $1.5 billion annually—which may help to meet the fiscal imperative of balancing the budget next year, but will do little to support the flow of goods and services to the customers of Quebec businesses, or help Montrealers in particular to get to work faster. Corruption in Quebec infrastructure spending is attracting significant public and media attention, but that does not obviate the need for better physical infrastructure.
Reality eventually—and inevitably—bites. The minority Pequiste government is now having to cope with the reality of governing in a world of weakened economic growth and heavy public debt. Health care spending pressures will still have to be addressed; a comprehensive policy framework to enhance Quebec’s growth potential is still badly required. These complex issues will not go away; they will confront whomever governs Quebec in the years ahead.