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Seeking the truth about Quebec’s economy

An introduction by John Richards

To oversimplify – but only slightly – there are two wildly divergent theses concerning Quebec’s economy and provincial social policy currently in play among policy wonks across Canada. The first is that Quebec has successfully generated the most egalitarian society in North America, and deserves credit for doing so. Any sacrifice in average per capita provincial GDP has been worth it. The most persistent proponents of this case are leaders of the Parti Québécois such as former Premier Bernard Landry and journalists such as Jean-François Lisée, whose numerous contributions to Inroads include a vigorous defence of the “Quebec model” in 2003.1

The second thesis is that francophone Quebec society has, for the last half-century, threatened secession and been consistently reluctant to embrace efficiency-enhancing policy. To avoid division of the country, Ottawa has subsidized this inefficiency by diverting large sums of money to Quebecers from Canadians living elsewhere. The most recent statement of this thesis is by economist Brian Crowley in his book Fearful Symmetry.2

Where is the truth in all this? As usual, the truth is complicated.

We bring together here three assessments of the Quebec economy and related social policy. Pierre Fortin’s is a sequel to an article he contributed to Inroads a year ago, in which he used several measures to document that Quebec’s economic performance has converged over the decades with Ontario’s.3 For example, starting from 1960, the gap between Ontario and Quebec per capita income has diminished from about 20 per cent to under 10 per cent. Similarly, Quebec’s employment rate (the percentage employed among those ages 15 and over) has risen faster than Ontario’s. The employment gap between the two provinces has declined from a peak above 4 percentage points in the 1980s; according to the latest data (September 2009), it was 1.7 percentage points. And Quebec’s unemployment rate is currently below Ontario’s (8.8 per cent compared to 9.4 per cent). In this sequel article, Fortin extends, with qualifications, his case for the first thesis:

Quebecers enjoy more free time, much of it by free choice: they work fewer hours per week, fewer weeks per year and fewer years in their careers. Incorporating the value of the increased leisure time together with cash income into an overall estimate of “true” standard of living leads to one basic conclusion: the average standard of living is now about the same in Quebec as in Ontario. This result comes with a second surprise: among regions of Canada, Quebec is a leader in the fight against poverty and inequality.

John Myles emphasizes two disturbing trends, whose combined impact has increased after-tax income inequality across Canada over the last three decades: increasing inequality among market earnings and an increasing probability that “like marry like” – that women with above-average earnings have husbands with above-average earnings, and women with below-average earnings have below-average-earnings partners. When federal and provincial governments balanced their accounts in the mid-1990s, they reined in the generosity of many redistributive programs and lost the ability to offset these underlying trends, with the inevitable consequence of rising inequality.

Quebec social policy has attempted, more successfully than elsewhere, to act as offset. Myles refers favourably to the impact of the province’s introduction of a liberalized child care policy in the late 1990s on Quebec’s lone-parent employment – with a resultant decline in poverty. On the whole, he is pessimistic about trends in income inequality across Canada. Over the last two decades, income inequality may have increased less in Quebec than elsewhere in Canada, but it increased nonetheless (see Figure 2 in Fortin’s article).

Although it would be unfair to label François Vaillancourt and Mathieu Laberge as supporters of the second thesis, they subscribe to many of the arguments of its proponents. They acknowledge that Quebec is currently more egalitarian than other Canadian provinces, but the status quo is not, they conclude, politically sustainable. Why not?

First, they insist on the distinction between two measures of well-being: per capita disposable income, an after-tax measure that includes government transfer income to individuals, and per capita GDP, a measure of the value of what the working population of a jurisdiction produces.

From 1980 to the early 1990s, per capita disposable income in Quebec declined relative to the rest of Canada. By the early 1990s, the Quebec/rest of Canada disposable income ratio was close to the GDP ratio. Subsequently, the disposable income ratio has risen and, as of 2008, Quebec’s disposable income was 93 per cent of that elsewhere (see Figure 2 in Vaillancourt and Laberge’s article). Vaillancourt and Laberge here confirm Fortin’s results.

However, there has been no comparable increase in the productivity of Quebec’s economy to justify the rise in the disposable income ratio. From 1980 until the early 2000s, Quebec per capita GDP remained stable at roughly 85 per cent of the per capita average prevailing elsewhere. In the last half dozen years that ratio has declined somewhat. As of 2008, per capita Quebec GDP was about 82 per cent of that elsewhere in Canada.

The gap between the two ratios arises from the relative generosity of the tax/transfer system facing Quebecers. Transfers may be paid directly by Ottawa (for example, higher per capita Employment Insurance benefits in Quebec than in most other provinces), or they may be paid by Quebec (for example, Quebec social assistance policy that enables an above-average share of the population to claim benefits). The Quebec government can afford to be more generous in transfer payments, Vaillancourt and Laberge argue, because it receives an above-average share of provincial revenues from federal transfers (Figure 3 in their article). Quebec’s share of revenue derived from federal transfers is exceeded only by that of the Maritime provinces.

For Vaillancourt and Laberge, Quebec politicians have constructed a house of cards that ultimately will collapse. Despite generous transfers from Ottawa, they have permitted the provincial debt as a proportion of GDP (however measured) to reach dangerous levels. In the next two decades, the pressure to increase provincial spending, primarily on health care, will be dramatically aggravated by retirement of the baby boom generation. Quebec’s ability to raise the necessary tax revenue will be severely constrained by the high debt and by the low birth rate of subsequent generations. All of this has the effect of increasing the dependency ratio (Figure 5 in their article).

Vaillancourt and Laberge’s political agenda calls for reforms similar to those advocated by the signatories of the “Lucide” manifesto, For a Clear-Eyed Vision of Quebec, in 2005. (See the discussion of this manifesto by two signatories, André Pratte and Joseph Facal, in the Summer/Fall 2006 issue of Inroads.4 Pierre Fortin was also a signatory.) Vaillancourt and Laberge call for major price increases in a range of publicly supplied services – from hydropower to postsecondary education.

An important subsidiary argument – which Vaillancourt and Laberge do not raise – is the strong incentive implicit in the present design of equalization to avoid doing as he suggests with respect to electricity rates. The province would keep only 50 cents of every dollar in extra revenue raised. Let me explain.

Equalization is a highly desirable program that enables Canadians to enjoy roughly comparable generosity of social programs while preserving provincial autonomy in their design. Calculating equalization transfers requires estimating the per capita revenue that a province could raise if it applied the average “taxing effort” among all provinces on its accessible tax bases. Provinces with an estimated fiscal capacity below the per capita ten-province average receive equalization payments from Ottawa sufficient to bring them up to the benchmark.

The elephant in the room in undertaking equalization calculations is the unequal distribution of potential provincial resource revenues across Canada and the debate over how to treat them. Oil and gas revenues are the most substantial, but potential provincial revenues from hydropower are significant to three provinces: British Columbia, Manitoba and Quebec. These provinces have chosen to forgo potential income from their water resources. By charging low water royalties, they can sell electricity at low prices to local consumers and industrial users. Currently, 50 per cent of actual – not potential – resource revenues are included in estimation of provincial fiscal capacity. Hence, if Quebec does as Vaillancourt and Laberge advise, it would net only 50 cents from every dollar in extra water royalties (or profits from Hydro-Quebec).

I want to add a dimension that none of the three contributors raise in their articles: Quebec’s disappointing education performance. However frequently others have said it, it is worth repeating: technological change and the rise of industrial prowess in many developing countries means that continued prosperity in OECD countries requires an education system that performs well from early childhood, to kindergarten, to primary school, to secondary school, to trades training, to university.

A year ago, Jacques Parizeau wrote a cri d’alarme in Le Journal de Montréal, describing present Quebec francophone education outcomes as “scandalous, a massive waste of human talent that is compromising Quebec’s future.” He went too far in his broadside against education authorities, but he drew attention to a problem that has not received the policy attention it deserves. This past spring, Jacques Ménard, a prominent figure in Montreal, gathered 27 people from government, education, academia and business. This Groupe d’action, one of whose members is Pierre Fortin, published a worthy report on what to do about décrochage – the school dropout problem. (In the last issue of Inroads we translated and published Parizeau’s cri d’alarme, and I contributed an article discussing, among other matters, the report of Ménard’s Groupe d’action.5)

Figure 1 illustrates two of the most disturbing comparisons between Quebec francophones and other Canadians (including non-francophone Quebecers). According to the 2006 census, nearly two of ten young francophone Quebec men aged 20–24 lacked high school certification. This is a rate four percentage points higher than that among comparably aged men elsewhere in Canada. Note, furthermore, that high school certification in Quebec is at Grade 11, not Grade 12 as in all other provinces. Among women, there is no gap.

The youngest tabulated cohort for which it is reasonable to expect completed postsecondary training is ages 25–34. Here, there is a gap of nearly four percentage points among women, and over six points among men, among those with university degrees. The male/female gap among francophone Quebecers exceeds ten points. Admittedly, proportionally more francophone Quebecers than other Canadians in this age cohort have trades certification, and there is nothing necessarily optimal about university completion rates elsewhere in Canada. But these data are sobering evidence that Parizeau and Ménard are right: Quebec’s education system is underperforming.

We hope readers find this collection of articles a useful, nonpolemical assessment of an important policy dossier.

 

Notes

1 Jean-François Lisée, “The Odd Couple: Mario Dumont’s ADQ and the ‘Quebec Model,’” Inroads, Summer/Fall 2003, pp. 76–84.

2 Toronto: Key Porter, 2009.

3 Pierre Fortin, “Quebec’s Surprising Economic Performance: The Myth of a Lagging Quebec Doesn’t Stand up to the Facts,” Inroads, Winter/Spring 2009, pp. 108–15.

4 André Pratte, “Arriving at a Clear-Eyed Vision of Quebec,” Inroads, Summer/Fall 2006, pp. 96–99; Joseph Facal, “A Society in Search of Itself: Reactions to Quebec’s ‘Lucide’ Manifesto,” Inroads, Summer/Fall 2006, pp. 100–105.

5 Jacques Parizeau, “The School Mess,” Inroads, Summer/Fall 2009, pp. 74–77; John Richards, “School Dropouts: A Canadian – not Just Quebec – Scandal,” Inroads, Summer/Fall 2009, pp. 90–99.

 

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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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