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Continuing the debate on Quebec’s economy

An introduction by John Richards

In recent issues we have assessed broad economic issues facing Quebec and compared its economic performance to that of the other provinces. In two previous issues (Winter/Spring 2009 and Winter/Spring 2010), Pierre Fortin made the case that Quebec has achieved a more equal income distribution than the other provinces and done so while maintaining a reasonable record of productivity. John Myles (in Winter/Spring 2010) emphasized that, in Quebec and elsewhere across Canada, “homogamy” is on the rise: that is, men with incomes above average are now more likely to marry above-average-income women, below-average-income men to marry below-average-income women. François Vaillancourt and Mathieu Laberge (also in Winter/Spring 2010) sounded several notes of caution.

Vaillancourt and Laberge agreed that Quebec has a more egalitarian economy but, they concluded, the extent of Quebec government redistributive activity is unsustainable. Why? They made several arguments:

More than the other provinces, Quebec faces a serious problem in terms of a rising dependency ratio (under age 15 plus over age 65 relative to people aged 15–64) in the next two decades.

Per capita GDP in Quebec, which had been about 85 per cent of the per capita average outside Quebec over most of the last three decades, declined to about 82 per cent in recent years.

The Quebec government relies on equalization for more than 10 per cent of its revenues, thereby placing its budget at the mercy of the continued willingness of Ottawa and the other provinces to continue this transfer.

Despite equalization, the Quebec government has, proportionally, accrued significantly larger deficits, resulting in its debt (by a broad definition) amounting to 50 per cent of provincial GDP, by far the largest among the provinces.

In this issue we continue the discussion. Fortin takes issue with several of Vaillancourt and Laberge’s conclusions, while agreeing overall with their recommendations:

The recent decline in Quebec per capita GDP relative to the other provinces is largely attributable to the commodity price spike in oil and gas revenues, and the fact that these resources lie outside Quebec.

Price levels differ considerably among the country’s three major cities: the level in Montreal is well below that in either Toronto or Vancouver. Adjusting for this difference reduces the per capita Quebec gap.

Fortin acknowledges the equalization benefit to Quebec. Quebec’s equalization benefit is the result of once-every-five-years federal-provincial negotiations, and arguably the formula should be further revised. However, its impact on the Quebec/rest of Canada gap in personal disposable income is small.

Fortin agrees with Vaillancourt and Laberge that there should be less taxation of labour income, fewer subsidies to capital investment and higher prices for many publicly provided services (electricity, postsecondary tuition and pharmaceuticals). He also agrees with the need for Quebec to lower its debt/GDP ratio. His disagreements are essentially qualifications of their agenda.

In politically guarded language, Quebec Finance Minister Raymond Bachand has more or less accepted the Vaillancourt/Laberge set of recommendations. The current budget, tabled in late March, introduced a medical user fee, proposed a modest increase in electricity rates and promised to contain program spending growth to roughly the rate of inflation – all this to reduce the relative size of public debt. While far from the intensity of the Greek fiscal drama, Bachand’s budget has sparked controversy. Is it a break with Quebec’s egalitrian tradition? Is it a far too timid response to looming fiscal problems? We hope the ongoing debate in Inroads (represented, in this issue, by Fortin’s side alone) will help cast light on these questions.

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About the Author

John Richards
John Richards is co-publisher of Inroads and an economist at Simon Fraser University in Vancouver.




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