by François Vaillancourt and Mathieu Laberge
Elsewhere in this issue, and in the Winter/Spring 2009 issue of Inroads, Pierre Fortin has set out his view that Quebec is doing well economically.1 We challenge this view. We agree that Quebec has a more equal distribution of income than other Canadian provinces; we disagree that the standard of living in Quebec is adequate. It has not achieved the level it could if better economic policies were pursued.
Quebec’s dependence on federal transfers
Two different measures of income can be used to assess a jurisdiction’s absolute and relative economic success: disposable income per capita and real GDP per capita. Disposable income per capita – that is, income after deduction of personal and payroll taxes – measures the standard of living accessible to the residents of a territory through private consumption, and includes both market income (wages and salaries, investment income and private remittances) and public transfers to individuals.
Hence, disposable income per capita in Quebec includes transfers received from federal Employment Insurance and Old Age Security. Quebec’s disposable income per capita is higher than it would be if Quebec were to finance its present social spending without equalization payments and other transfers received from the federal government. Without equalization, Quebec would need to impose higher personal income and payroll taxes, among other measures needed to raise revenues. While a good indicator of the average standard of living, Quebec’s disposable income is a poor indicator of its economic performance because, in part, it is at the mercy of the generosity of the federal government; its capacity to pay will depend in part on economic activity in other provinces.
This is illustrated in Figure 1, showing federal transfers as a share of personal income. In 2006, these transfers amounted to $2,240 per capita in Quebec and $1,870 in Ontario. Summing over all Quebecers, this difference amounted to $2.8 billion. Furthermore, in 2006 Ottawa derived only 19 per cent of its revenues from individuals and firms in Quebec, as opposed to 41.5 per cent in Ontario.2 So Quebec gains more in transfers and pays less in taxes.
Real GDP per capita measures value added during the production process in an economy. Hence, it reflects the average economic market output for every resident of a jurisdiction. This is not a perfect indicator of economic activity, since it omits nonmarket activities and is not directly linked to income availability or distribution. Despite these drawbacks, however, it remains the conventional way to evaluate the economic productivity of different jurisdictions, either national or subnational. Figure 2 presents per capita Quebec GDP and disposable income between 1981 and 2008, expressed as percentages of per capita GDP and disposable income in the rest of Canada.