Last month, Quebec's debt reached new record heights. Now standing at over $280 billion, our collective debt (incurred by the government of Quebec) is, as you might have guessed, an ever-increasing burden on our economy and our futures.
The debt is increasing, that’s a fact. But is it increasing too rapidly? Well, first, we need to remember that debt in and of itself is not as important as what it enables us to acquire. In the province of Quebec, public debt has made it possible to invest in infrastructure (roads, hospitals, schools, etc.). So yes, of course, debt is increasing, but so are the assets for which it pays. It’s therefore not a burden, but a tool used to ensure Quebec has what it needs to secure its prosperity and its well-being.
That’s all good and fine, you may say, but it doesn’t change the fact that Quebec’s debt is increasing mighty quickly! Isn’t it justified to be just a little worried? The short answer is no.
The way I see it, there are at least three reasons to be optimistic. Setting aside how the debt-to-GDP ratio has changed over time, which reminds us that the debt of Quebec is far from catastrophic, I will concentrate on considerations directly related to the budget.
First, ever since the late 1990s, the cost of servicing the debt (the interests that Quebec pays annually on its debt) has consistently been going down. In 1997-1998, it represented 16.5% of total consolidated government expenditure. In other words, for every $100 that the government of Quebec spent on education or health, $16.50 was set aside to pay interest on the debt.
Since then, the debt service as percentage of consolidated government expenditure has decreased. It now stands at 10.4% according to the Finance ministry’s projections. In short, debt is rising, but not in relation to government expenditure. It is therefore plainly false to claim that it’s an increasing burden.
Chart 1: Debt service as percentage of consolidated government expenditure in Quebec, 1997-1998 to 2016-2017
Source: “Historical Data”, Budget 2013-2014, Government of Quebec, Section I, and Budgets 2012-2013 to 2016-2017.
Secondly, we need to check if debt service as percentage of consolidated government expenditure is only decreasing because other expenditures are rising more rapidly. Let’s take a look.
Once more, the picture is not that bleak when we examine the data from 1997-1998 to 2016-2017. Of course, in current dollars (that do not take inflation into account), the annual cost of servicing the debt is on the rise. However, current dollars are not very useful in analyzing variations over a long period of time. We need to convert them into constant dollars (that factor in inflation) to see the actual trends.
The blue line on Chart 2 shows how the data evolved in current dollars. From 1997-1998 to 2016-2017, the increasing cost of servicing the debt may seem important: it went from $7.3 to $10.4 billion (a 42% increase). Yet once the figures are converted to 2016 constant dollars ―to factor out the influence of inflation and show how the cost of servicing the debt actually changed over time―, we realize that it has been stable. In 1997-1998, it cost the government $10,430 million and, by 2016-2017, it will cost $10,418 million, a 0.1% decrease. Once more, it’s hard to see how Quebec’s public debt is a heavier burden today than it was yesterday.
Chart 2: Annual cost of servicing the debt, 1997-1998 to 2016-2017, in $ million
Source: “Historical Data”, Budget 2013-2014, Government of Quebec, Section I, and Budgets 2012-2013 to 2016-2017.
Thirdly, it’s important to look to the future and to plan for debt. Indeed, the best possible move to set up massive investment programs is to borrow when the cost is at its lowest. Incidentally, the weighted average interest rate on government borrowing has never been this low (see Chart 3). In 1998, the average interest rate on Quebec debt was 7.4%. In 2015, it was 3.7%, and indications are that it will remain low throughout 2016. In short, not only has debt service as percentage of consolidated government expenditure been decreasing and its actual cost been stable for nearly two decades, but a compelling argument could even be made to borrow as much as possible right now to take advantage of the low interest rates.
Chart 3: Weighted average interest rate on government borrowing, 1998 to 2015, in %
Source: Public Accounts, Government of Quebec, 1999-2000 to 2014-2015, vol. 1.
All in all, debt is not what we need to be worrying about. What we do need to worry about is the government’s missed opportunity to invest when interest rates are so low. The debt represents a shrinking proportion of the budget, the cost of servicing it is stable, and the cost of refinancing debt is currently at historic lows.
Quebec is faced with a perfect storm that should urge it to do the exact opposite of what the Couillard government is currently doing. Instead of putting all the eggs in the Generations Fund basket ―a counterproductive program in which the government of Quebec will have spent close to $24 billion by 2020―, why not take advantage of the situation and invest massively in infrastructure?
Why not be pragmatic for once and exploit low borrowing rates to implement a recovery strategy built around ambitious goals? Why not get into debt now, but not just to create short-term jobs? We need to take advantage of the situation to seriously begin transitioning to a green economy. We’ll have to eventually, whether we want to or not, so why not get a head start?
Quebec is held back by the alarmist posturing about the debt “crisis.” At the moment, it is in dire need of an energy policy that will enable it to tackle the challenges of the 21st century, of a transportation policy that can offer a credible alternative to cars, and of an industrial policy that is concerned with fostering local production and consumption (also called short supply circuits). All these steps require political will, but also investments. Public debt is a tool at our disposal. What we’re lacking is a government that wants to use it.
Philippe Hurteau is a researcher with IRIS, a Montreal-based progressive think tank.
