Quebec budget: Swimming in cash but still wrestling the debt dragon

QUEBEC — It would be easy for a Quebec government basking in the glow of financial surpluses to conclude the province has arrived on easy street after years of austerity and a reputation as one of Canada’s poorest cousins.

Think again.

There’s no doubt Quebec’s financial picture has improved over the last few years, helped along the way by record-breaking economic growth and the prudent management of spending initiated by the previous Liberal government. Those acts produced a string of balanced budgets starting in the 2015-2016 fiscal year.

While austerity was politically unpopular and played a role in the Liberal defeat in the 2018 election, the Coalition Avenir Québec today finds itself benefiting from that fiscal bounce. Austerity has again turned up in the most recent government fiscal report card released by Finance Minister Eric Girard Feb. 21.

The data shows the province is swimming in cash. With the first eight months of the 2019-2020 fiscal year behind it, the total surplus is about $4.5 billion.

That surplus number is expected to shrink before Girard tables the 2020-2021 provincial budget Tuesday — governments do most of their spending at the end of the year — but Girard has more leeway than many other ministers who have stood in traditional budget day new shoes.

Premier Francois Legault receives a copy of the 2019 budget speech from Quebec Finance Minister Eric Girard on March 21, 2019.

Jacques Boissinot /


In his second budget as minister, Girard is expected to announce new money for infrastructure, transit and the CAQ government’s plan to fight climate change.

Premier François Legault has already warned Quebecers the government does not have enough financial leeway to make more tax reductions and Quebec’s 500,000 public sector workers will have to wait if they are expecting a bigger slice of the pie.

“The surpluses belong to Quebecers,” Legault said at a September caucus meeting in Rivière-du-Loup. “They don’t belong to unions, they don’t belong to pressure groups.”

But behind the rosy numbers lurks something ominous, a monster called the provincial debt, and any finance minister will tell you this is a creature that is much harder to slay.

“Regardless of the debt concept used, Quebec remains one of the most indebted provinces in Canada,” the government said in November in an economic update.

For Girard, an economist and former treasurer of the National Bank, the debt is more than theoretical. It’s a reality he has to contend with daily. In 2018-2019, interest payments on the debt alone totalled $8.7 billion — the third-largest government expenditure category after health and education.

And as finance ministers have repeated for decades, every dollar paid in interest is one dollar less for funding public services.

Can Quebec and Finance Minister Eric Girard win the budget battle?

Jacques Boissinot /


So where does Quebec’s debt stand today? According to the Finance Department, Quebec’s gross debt on March 31, 2019, was $199.1 billion. That number represents the sum of debt issued on financial markets and the net liabilities including retirement plans and other future benefits of government employees.

Governments argue what is important when it comes to the debt is not the size of the debt but the ability of the government to cope with the burden. That’s why the debt is often calculated as a percentage of the gross domestic product, or GDP, which is the total value of goods and services produced in an economy in a given year.

In Quebec’s case, the gross debt of $199.1 billion represents 45.8 per cent of GDP. The CAQ has set a target of reducing the gross debt to 45 per cent of GDP and says it will get there by the end of the 2019-2020 fiscal year.

The gross debt does not take into account government assets such as buildings and infrastructure. That is why governments also use the concept of net debt.

As of March 31, 2019, Quebec’s net debt burden was 39.7 per cent of GDP, compared with the Canadian provincial average of 30.3 per cent. That’s a far cry from the bad old days — 2012-2013 — where the percentage topped out at a substantial 51 per cent.

But it’s still high. Today, only Newfoundland has a worse net debt than Quebec (44.7 per cent of GDP). And even though Alberta’s finances have hit hard times — on Feb. 26 the province presented a budget with a $6.8-billion deficit — the province’s net debt is still lower than many provinces’. Alberta’s net debt GDP ratio is a mere 9.9 per cent.

The CAQ government now projects its net debt burden will decrease to 38 per cent of GDP as of March, 31, 2020, and to 34 per cent as of March 31, 2024.

This is not to say no progress has been made in taking the numbers down a notch. Successive finance ministers — Liberal, Parti Québécois and CAQ — have included battling the debt on their political agendas and followed through with concrete actions.

The key weapon Quebec has used to battle its debt is the Generations Fund. Created by the Liberals in June 2006, the fund is exclusively dedicated to repaying Quebec’s debt. It receives funds from a variety of sources, including Quebec’s own “blue gold,” water-power royalties from Hydro-Québec.

After siphoning $10 billion out of the fund to pay down debt in his last budget, Girard is expected to dip into the fund again for the 2020-2021 budget he will table this week. Officials won’t say now how much he will devote to the debt. Untouched, the current book value of the fund will reach $9 billion as of March 31, 2020.

At the time it was created, critics said the Generations Fund amounted to window dressing but, today, it has become a pillar in the province’s plan. And experts say when it comes to fighting debt, the road travelled is as significant in the minds of credit rating analysts as the final destination.

“What matters when it comes to debt reduction is not where we stand now but the trajectory ahead,” said Daniel Béland, the director of the McGill Institute for the Study of Canada who has written extensively about fiscal policy.

Béland said budgets are “all about trade-offs,” meaning too much effort on the debt means less money for the services Quebecers consistently say they want and value.

“What matters is evolution over time,” he said. “We are doing much better than in the past.”

Others concur. In July 2019, TD economist Rishi Sandhi wrote a glowing account of Quebec’s efforts.

“All told, the province has not yet slayed the deficit dragon,” Sandhi wrote. “However, the government should be lauded for its steadfast commitment to continue to bring its debt burden lower and its effort could pay dividends for years to come.”

Reached recently, Sandhi said he has not changed his mind.

“A lot of the heavy lifting has been done,” Sandhi said. “Quebec has done a really good job.”

It seems to have paid off. The previous Liberal government’s efforts earned glowing praise from other analysts, too — even from the fiscal hawks at the right-wing Fraser Institute.

In June 2017, Ben Eisen, a senior fellow of the Fraser Institute, wrote Quebec is now more creditworthy than Ontario, which has gone from riches to rags when it comes to its net debt.

“The simple reality is that while Ontario and Quebec are both currently highly indebted provinces, there is a crucial difference,” Eisen wrote. “Quebec has stopped adding new debt and Ontario is still piling it up, with more debt expected in the years ahead.”

Reducing debt pays off in the form of lower borrowing costs as well. On June 16, 2017, Standard & Poor’s upgraded Quebec’s credit rating from A+ to AA- for the first time since 1993. Moody’s Aa2 rating for Quebec has been the same for a number of years.

So can Quebec win the battle? The jury is out.

Released in February, a study produced by the Institut du Québec, a think tank that tries to steer public policy, says if the Quebec government sticks with the status quo system of collecting revenues and spending them, the province will sink back into a deficit position by 2024-2025.

The first deficit would hit $945 million and then creep back up to $6.2 billion by 2029-2030. The study points to two factors for the slip: economic growth will slow and the population will continue to age, which will spark more state spending. Where would that lead the anti-debt agenda?

And Sandhi said with various new issues on the horizon, from the effects of the rail blockades to the coronavirus, now is probably not the time for the government to deviate from its spending plans to step up the battle with the debt because they might need the money for immediate use.

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