HEC Montréal Centre for Productivity and Prosperity analysis calls on province to bring back Balanced Budget Act.
MONTREAL — Recurring budget deficits are creating a major debt spiral, with a particularly negative impact on Quebec’s public finances, a study analyzing the province’s government debt has found.
“In Quebec, the issue is not so much the size of the government’s debt, although there is cause for concern, but the context in which it has taken on that level of debt,” says Robert Gagné, Director of the HEC Montréal Centre for Productivity and Prosperity, and co-author of the study.
“The real problem is budget deficits. The Quebec government has been accumulating deficits since the early 1970s, and continuing to drive itself further into debt. The end result is that the ‘good debt’ taken on by the government is gradually being converted to finance consumption.”
The situation has become even more problematic since the Balanced Budget Act was weakened in 2008, Gagne adds.
The study shows that the Quebec government’s debt is systematically higher than in the other Canadian provinces. Compared with the 31 OECD member countries, it can be seen that only nine countries have a higher debt.
The sizeable indebtedness of the province’s government is a relatively recent phenomenon. In the early 70s, gross debt represented only 10% of GDP – it is now estimated at over 50%. While part of this increase is explained by accounting reforms, the analysis shows that the debt burden had practically quadrupled before reforms altered the accounting treatment of debt in the late 1990s.
Given its huge debt, the Quebec government devotes a considerable proportion of its annual budget to paying interest, cutting into the amounts it should normally devote to financing its missions.
While the Balanced Budget Act was fully in force, it allowed the Quebec government to maintain a certain level of budgetary rigour. As a result, the debt burden shrank constantly during the 2000s, for the first time in over 30 years.
In 2009 the government suspended those sections of the Act that prevented it from running budgetary deficits. All the debt indicators began rising again as soon as the government set aside this budgetary control mechanism. Since then, the government has run numerous deficits and its debt burden has risen once again. The current circumstances bear some resemblance to the situation that prevailed in the late 90s, which led to the adoption of the first version of the Balanced Budget Act.
“Reaching a balanced budget must remain a priority for the Quebec government,” says Gagné. “Especially since this government plans to invest $90 billion in the province’s infrastructure over the next several years, investments that will be largely financed through debt.”
In addition to accelerating the rate of growth of government debt, these investments will considerably increase the proportion of the budget that will have to go to paying down the debt and servicing it – meaning the interest paid on government debt, adds Gagné.
“The pressure on public finances will continue to grow and it will become even more difficult to attain a balanced budget. So the Quebec government should implement an effective and well-considered strategy for maintaining a balanced budget over many years, and do so starting immediately. It will have to set clear goals and, most importantly, respect them.”
The analysis says the Quebec government needs to bring the Balanced Budget Act back into force to prevent the problem of indebtedness from becoming even more serious.
“The Act should apply more strictly, by prohibiting the government from running budgetary deficits even if they are less than $1 billion. On the other hand, the Act should give the government greater flexibility in absorbing deficits incurred because of economic fluctuations. To make sure that debt-reduction efforts are not sidestepped again in future, the government should never again be able to suspend part or all of the Balanced Budget Act without the support of a broad consensus,” concludes Gagné.