Quebec "Debt Clock"
Debt per taxpayer
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Dear Minister of Finance,
I am writing to let you know about my deep concern regarding the state of Quebec's public finances. As you know, the public sector debt has now reached over 275 billion dollars. This is the equivalent of more than $133,000 of debt per family of four, or $68,000 per taxpayer.
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Questions & Answers about Quebec's Debt
1. Why use public sector debt?
When analyzing a government’s indebtedness, it is necessary to go beyond what it manages directly and include the health and education networks, municipalities and other entities under the government’s ultimate responsibility, since the government guarantees their debt. Public sector debt is therefore the most exhaustive measure of Quebec’s debt, the one that provides a picture of what the government of Quebec borrows either directly or indirectly.
2. Why not take government assets into account?
The only “liquid” assets of the government, those that could be sold quickly to pay off debt, are net financial assets. These assets came to $18.3 billion as of March 31, 2016. It is hard to assess the market value of government-owned fixed assets and infrastructure (roads, bridges, schools, national parks, etc.) since there are no relevant markets. Moreover, it is highly unlikely that the government would sell schools or bridges at some point to pay off the debt. This is why neither the government nor the auditor general takes these assets into account in attempting to paint a realistic picture of the debt that Quebecers will eventually have to repay. These assets are certainly part of Quebecers’ financial heritage, but they do not reduce the overall bill – or the growing interest – that Quebecers will have to pay. The Quebec government could sell crown corporations such as Hydro-Québec (as proposed by Claude Garcia in a Research Paper published by the MEI) to restore its finances. However, the same people that insist on including government assets in its debt generally reject that option.
3. How much does debt service cost the government every year?
In 2016-2017, $10.0 billion for the government and government agencies.
4. Should we worry about the government’s debt?
A great risk is hidden in another form of government indebtedness: its commitments to pay benefits under a vast array of social programs. Examples include payments under the Quebec Pension Plan, motor vehicle insurance (SAAQ), parental insurance (RQAP) or even subsidized spaces in childcare centres. Although social programs do not represent debt as such, since the government can always modify their nature, maintaining them is likely to require Quebec to raise employees’ and employers’ contributions or to reduce benefits.
Also, certain cyclical factors could, in coming years, quickly worsen the province’s debt problem. Among other factors, there is the aging of the population (more pronounced in Quebec than elsewhere in Canada), which will put added pressure on our health care system, the fact that economic recovery is still quite weak, and the likelihood of higher interest rates in the near future, which will have the effect of raising the cost of debt service.
5. How is the growth of the public sector debt estimated for the coming year?
The Quebec Department of Finance does not provide an estimate of the growth of the public sector debt for the coming year. It does, however, provide an estimate of the increase in the government’s gross debt in its budget each year, which is the largest component of the public sector debt (the gross debt accounts for 75% of the public sector debt).
Here is the method used by the MEI to estimate the increase in the public sector debt as of March 31, 2016:
6. To whom is the Quebec government’s debt owed?
The Quebec government’s debt is owed to holders of the bonds it has issued, most of whom are either Quebec citizens or Quebec institutions (financial institutions, retirement plans, mutual funds, etc.). For example, the advertising campaigns of Épargne Placements Québec encourage individual investors to buy Quebec government bonds.
A portion of the government’s debt is held outside of the province of Quebec. However, there are no real data on holders of Quebec debt or on their countries of residence. Still, in the public accounts (the consolidated financial statements of the Quebec government), we find that of the 204.9 billion dollars of bonds issued, 98.6% are issued in Canadian dollars, with the remainder being issued mainly in American dollars, in yen and in euros. As for the Canadian debt, 73% of it is owed to institutions and individuals in Canada, according to the federal Department of Finance. It is likely that the Quebec situation is fairly similar.
The Quebec government’s debt is also made up in part of a retirement plan liability, which is to say what the government has promised in retirement benefits to its civil servants without having accumulated sufficient funds to fulfil those promises. This government debt is not negotiated on the bond markets. It is instead a debt calculated by actuaries, but it is very real nonetheless. This portion of the debt being owed to public sector retirees, they are the ones who “hold” it, so to speak.
7. If Quebec’s debt is mainly owed to Quebecers, who therefore owe it “to themselves,” couldn’t it simply be cancelled?
Even though the Quebec government’s debt is mainly owed to Quebecers, it creates a public finance problem. We cannot say that it is money that Quebecers owe “to themselves,” as though it could just be cancelled tomorrow morning. In a payment default scenario (if the Quebec government stopped redeeming its bonds), all investors who bought those bonds would lose their money. Of course, Quebec taxpayers as a whole would “benefit,” since they would not have to pay back this money with their taxes, but this operation would constitute a kind of theft of investors’ money (many of whom are retirees). It is as if we cancelled a family’s mortgage: the family would benefit, but the bank would lose its money (which comes from other clients’ accounts) and would be very reluctant to lend again in the future! If we want to reduce the debt, which is growing rapidly, the only fair way to do so is to encourage the government to stop going further and further into debt and to pay down the debt by buying back its bonds.
8. What is the Quebec government’s credit rating?
The Quebec government’s credit rating basically has an effect on the interest rate that it pays on its debt. Various rating agencies assign a credit rating to the Quebec government. These ratings are indicated in the Quebec Finance Minister’s budget each year. Currently, the two main rating agencies assign ratings of Aa2 (Moody’s) and A+ (Standard & Poor’s) to Quebec. In both cases, the Quebec government’s credit rating is comparable to that of Ontario, whose credit rating has fallen in recent years, and to those of the Atlantic provinces.
9. What effect would an increase in the interest rate applicable to the debt have on the Quebec government’s finances?
In fact, there is not one single interest rate applicable to the debt, but rather several rates according to when the bonds mature. It is nonetheless possible to find the average interest rate applicable to the Quebec government’s debt, which was 2.4% in 2015. This rate applies to the $185 billion of direct debt.
In addition to new loans, each time a part of the government’s debt comes due, money must be borrowed again if the government lacks the means to pay down the debt. An increase in the cost of borrowing would not be felt immediately since it would be applied only to the “borrowed again” part of the debt. For example, from January 2014 to December 2018, about one-third of bonds mature. In time, of course, a larger and larger proportion of the Quebec debt would be at a higher rate of interest.
In a Viewpoint addressing this question, Lenka Martinek estimates that a rise of 2 percentage points in interest rates would require $1.3 billion in additional spending on debt service after five years. If this amount is not dramatic in itself, it is still equivalent to the combined budgets of the Environment, Culture and International Relations departments.
10. Is it true that the debt was reduced in 2016, and if so, why is the Debt Clock still going up?
For the first time since the late 1950s, the gross debt was reduced during fiscal year 2015-2016. This reduction of $610 million brought the gross debt down from $203.96 billion, its level on March 31, 2015, to $203.35 billion as of March 31, 2016. This is probably not a lasting reversal of the trend, since according to the Finance Department, the gross debt will reach $208.06 billion by March 31, 2017, and should keep increasing until 2021. It nonetheless represents a first that deserves to be pointed out, and hopefully it will be repeated in the coming years.
Two other possible measures of the Quebec government’s indebtedness, the net debt and cumulative deficits, were also reduced over the same period. However, the public sector debt illustrated by our Debt Clock continued to rise. The reduction of the gross debt was “balanced” by an increase of over $2 billion in Hydro-Québec’s debt, for which the government is ultimately responsible. This is why the Debt Clock continues to increase.
11. Is Quebec’s debt still the highest among all the provinces?
The province of Newfoundland and Labrador is deeper in debt than Quebec in terms of gross debt as a proportion of GDP, but Quebec remains more indebted when comparing net debt or cumulative deficits as a proportion of the size of the economy. The interprovincial comparisons available in the budgets and budget updates are limited to these three conceptions of debt, and do not include the notion of public sector debt. In absolute terms, Ontario’s gross debt amounts to $354 billion, which is much higher than Quebec’s gross debt of $203 billion.
Interviews and reports about Quebec’s Debt
Interview with Youri Chassin, economist and director of research at the MEI, regarding Quebecers' tax burden (April 15, 2015, CTV News).
Debate (in French) with Youri Chassin, Economist and Research Director at the MEI, about the tax burden and disposable income of Quebecers (April 14, 2015, ARGENT business news network).
Debate (in French) with Youri Chassin, Economist and Research Director at the MEI, about the confusion surrounding the figures discussed in the public debate in the context of current negotiations for the renewal of public sector collective agreements (March 12, 2015, ARGENT business news network).
Interview (in French) with Youri Chassin, Economist and Research Director at the MEI, about the confusion surrounding the figures discussed in the public debate in the context of current negotiations for the renewal of public sector collective agreements (March 12, 2015, LCN news network).
Interview (in French) with Germain Belzile, Senior Fellow at the MEI, broadcast during Le retour de Radio X (August 18, 2014, CHOI FM).
Discussion (in French) with Youri Chassin, Economist at the MEI, broadcast during Calcul électoral (April 3, 2014, RDI).
Debate (in French) with Youri Chassin, Economist at the MEI, broadcast during À la une (September 26, 2013, ARGENT business news network).
Interview (in French) with Michel Kelly-Gagnon, President and CEO of the MEI, broadcast during Argent maintenant (March 26, 2013, ARGENT business news network).
Interview with Lenka Martinek, Associate Researcher at the MEI, broadcast during CTV News Montreal (March 6, 2013, CTV).
Interview with Michel Kelly-Gagnon, President and CEO of the MEI, broadcast during The Source (August 21, 2012, Sun TV).
Report (in French) that mentions the Montreal Economic Institute debt clock broadcast during Les Coulisses du pouvoir (August 12, 2012, SRC & RDI).
Interview (in French) with Youri Chassin, Economist at the MEI, broadcast during Dumont Le midi (May 4, 2012, V Télé).
Report with Jasmin Guénette, Vice-President of the MEI, broadcast during CTV News Montreal (March 21, 2012, CTV).
Interview with Vincent Geloso, Economist at the MEI, broadcast during CTV News Montreal (March 21, 2011, CTV).
Mention (in French) of the MEI's debt clock by host Jean-Luc Mongrain broadcast on the LCN netywork (March 17, 2011, LCN).
Comment (in French) by Jasmin Guénette, Vice President of the MEI, broadcast during RDI en direct (March 14, 2011, RDI).
Report (in French) with Claude Garcia, former president of Standard Life's operations and Associate Researcher at the MEI, broadcast on the TVA network (January 31, 2011, TVA).
Interview (in French) with Jasmin Guénette, Vice President of the MEI, broadcast during RDI Économie (August 4, 2010, RDI).
Selection of publications on the issue of Quebec's public finances
We recommend a special selection of publications that closely examine the issue of Quebec's public finances. These publications explore ideas for improving the organization and the management of the resources within the Quebec government apparatus in order to modernize it and reform its financing methods.
Dette du Québec - Le Québec, province la plus endettée du Canada
De dangereuses illusions à propos de la dette
Viewpoint – The Tax Burden and Disposable Income of Quebecers
Viewpoint – Public Sector Pay Grades
A Few Points About Quebec's Debt
Quelques réponses sur la dette
Un chroniqueur en terrain glissant
Viewpoint: The $15-Billion Quebec Surplus That Might Have Been
Viewpoint - Quebec government debt in 2014
Who Spends More: Left or Right?
Viewpoint - How would higher interest rates affect Quebec's debt service costs?
Viewpoint - The debt of the Quebec government
Equalization: Towards a Formula that Promotes Further Resource Development
Viewpoint - The debt of the Quebec government
Can We Pay Down the Deficit by Further Taxing the "Rich"?
Canada Post: Opening Up to Competition
Viewpoint on the debt of the Quebec government
Viewpoint on the debt of the Quebec government
Viewpoint on measures for raising productivity in the public service
Are public sector pension plans too generous?
Is government control of the liquor trade still justified?
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