The day following his election as Premier of Quebec, Philippe Couillard ordered a report on the state of the province’s public finances from Luc Godbout and Claude Montmarquette, two economists who have advocated for tax cuts and fee hikes in recent years. This unusual procedure led to the usual conclusion, which has recurred every time power has changed hands over the last 15 years: there is a gaping hole in public finances left by the previous administration. This entire masquerade is obviously put on to prepare Quebecers for the budget that the government will table in June. Let’s see how a Finance Minister creates the political space needed to act however he pleases.
Minister Carlos Leitão received the report two weeks after the elections. It contains a glaring bias in favour of austerity measures. Leitão, Godbout and Montmarquette stubbornly keep going down the same harmful pathway that stifles the economy, as did the previous Finance Minister, the Parti Québécois’s Nicolas Marceau.
It’s interesting to note that the report published last month quotes the International Monetary Fund (IMF) as a reference. However, for months, the IMF has been urging various countries throughout the world to refrain from introducing any more austerity measures.
Furthermore, Godbout and Montmarquette’s analysis exaggerates the expected spending growth. For 2014-2015, they anticipate a troubling $3.2G hole solely pertaining to the costs of extending programs. However, they admit right off the bat that for the last three years, actual spending has remained below extension costs. By throwing around such scary numbers, they are feeding an alarmism detrimental to the proper understanding of Quebec’s budgetary situation.
Governments don’t automatically extends programs when they come to a term. It’s common practice for governments to accept only part of the demands coming from the ministries. Based on what was done in the previous years in terms of expense reduction, the Liberal government would have to find only $898M, not $3.2G.
The solutions are as commonplace as the problems identified. Godbout and Montmarquette come up with the same proposals that we keep hearing about since 2010: cutbacks, fee increases, tax cuts. They even open the door to partially privatizing Hydro-Québec or the Société des alcools du Québec (SAQ).
All these options perpetuate the economic slump, which decreases government revenues and keeps us trapped in the logic of austerity breeding stagnation. In contrast, public policy tackling Quebec’s real problems would ensure that it fights climate change by investing massively in the transition towards a greener society, which would stimulate the economy and balance the state’s budget.
Looking into the specifics
Let’s look closer into certain aspects of the report which are highly problematic. These issues are rather specialized, but taken together, they raise many doubts in my own mind about the two economists’ bottom-line.
The report quotes unpublished data received from the Conseil du trésor and the ministry of Finance. We must thus take the economists’ word for it, but since we do not entertain any doubts regarding their sincerity, we will consider as exact the data they provide for 2013-2014.
According to these numbers, Quebec’s revenues have gone down $480M, mainly because of the decrease in corporate taxes ($373M + $41M in contributions to the Health Services Fund, also called the payroll tax) to which are added a series of small decreases in revenue (the provincial sales tax, natural resources, etc.). Sums transferred from Loto-Québec are reduced by $120M, but this drop is offset by the $300M in increased revenues coming from Hydro-Québec. All in all, there will be $300M less in state coffers (see pages 16-17 in the report).
I’m puzzled by the fact that the two economists predict a similar situation in 2014-2015. They maintain the $480M decrease in revenues and the $120M decrease in transfers from Loto-Québec, but they remove the revenue growth from Hydro-Québec whilst adding $115M in new revenues stemming from an agreement with the federal government (see table 4 on p. 20). There is no explanation on why these decreased revenues remain unchanged, yet these —shall we say “editorial”— choices are entirely debatable.
<li>Whilst Godbout and Montmarquette fail to explain what led to the decrease in corporate tax revenue, <a href="http://www.iris-recherche.qc.ca/publications/reprise-financiarisee">IRIS has its own idea</a>. Last June, we had warned the then PQ government that its austerity strategies aimed at controlling spending would maintaining Quebec in the current economic slump. Mixing growing household debt—caused by wage stagnation— with economic stagnation is toxic for Quebec. We think that austerity measures have actually bred the current stagnation as well as the decrease in businesses’ investments and operations in Quebec.Moreover, it comes as a surprise that they should believe that GDP growth will jump from 1.2% in 2013 to 1.9% in 2014 and 2.1% in 2015 (p. 28) without impacting corporations’ economic activity and taxes. This puts into question the $414M in predicted losses coming from corporate taxes.</li> <li>There is also no explanation regarding why Loto-Québec would see its revenues fall once more next year. Indeed, the Finance Minister planned for a $24M increase, and the crown corporation was granted last year the right to sell <a href="http://www.newsactivist.com/en/articles/alcohol-and-gambling">alcohol at casino gaming tables and slot machines</a> in the very hopes of seeing its profits increase.</li> <li>On the flip side, why not grant additional revenue to Hydro-Québec in 2014-2015? Firstly, it seems that the government had greatly underestimated Hydro-Québec’s revenues in 2013-2014. In its last budget, it increased them by $142M in comparison with its November projections, and they were just increased once more by $300M. Godbout and Montmarquette’s current predictions peg Hydro revenues next year at $342M below this year, even though Hydro was just granted a <a href="http://www.cbc.ca/news/canada/montreal/hydro-qu%C3%A9bec-rates-to-rise-by-4-3-per-cent-as-of-april-1-1.2563138">4.3% rate increase</a> and has announced $2.9G in <a href="http://www.lesaffaires.com/secteurs-d-activite/ressources-naturelles/hydro-quebec-un-benefice-ajuste-de-29-g-pour-l-exercice-2013/568780">benefits this year</a> (up from $860M last year).</li>
I’m not claiming that the authors’ previsions are flawed, but I claim that they are questionable. Since they come with no commentary or argument to support them, the two economists are not giving us any information which would allow us to verify the soundness of their evaluation.
As mentioned earlier, the $3.2G in additional spending for 2014-2015 —the figure featured in the media— seems rather exaggerated. The report is obviously much more nuanced than what ended up in the newspapers. However, during a press conference (see 36min30), Montmarquette didn’t shy away from alarmism by hammering home that the situation was terrifying.
More moderate in tone as always, Godbout recognized during an interview (see 28min00) that these were requests from the ministries, and that the Conseil du trésor was not in the habit of okaying them all. Their report also indicates that the Conseil du trésor has already identified $1.8G in cuts out of the $3.2G allegedly required: only $1.4G left, then. Well won’t you look at that, the scarecrow has already shrunk in half!
At IRIS, we’ll keep on thinking that reducing public spending is a bad idea, but can a government achieve that goal? From what we saw in 2012-2013, it is possible. Whilst ministries asked for an average 5.5% increase over the last 9 years (graph 1, p. 21), the government only allowed for 1.2%. (Incidentally, why use an average over 9 years rather than for the years since the crisis? The figures would have been quite different.)
Hence, dropping from a 6.1% increase in 2014-2015 to just 2.0%, while half of the cuts have already been identified by the previous government, suddenly seems like a much easier task. Once more, I still do not consider this to be a good idea.
All in all, I don’t understand why Godbout and Montmarquette, if they hope for a reasoned debate regarding public finances, would let this $3.2G figure circulate regarding additional spending for 2014-15. In my opinion, its presence in the public sphere is counterproductive rather than helpful.
As you can see, we could paint an entirely different picture of the state of public finances based on arguments just as warranted as those used by Montmarquette and Godbout, regarding both revenues and spending. Will we still need to find more money to balance the budget? Maybe, especially if the state keeps on intervening only moderately in the economy. The worst idea in such a context would be to deprive ourselves of a portion of important sources of income —Hydro-Québec and the SAQ— simply to please rating agencies. In contrast, that’s a very good way of ensuring that other budgetary problems emerge because of further drops in revenue.
Nevertheless, the idea of removing inefficient tax credits for businesses, also put forth by the two economists, is not a bad one. A study published by my colleagues Francis Fortier and Bertrand Schepper last January showed that the state could also put its hands on $900M more by looking into tax credits for individuals.
All in all, I’m not sure we have a better idea of the state of the province’s public finances with the publication of this report. We’ve rather been graced with a bit of collective hysteria that will then serve to justify the government, whatever it chooses to do.
If Couillard chooses to go for major cuts and backtracks on his campaign promises, he’ll be able to say that he had no other choice. I’ll call that the catastrophe strategy: we must be responsible collectively and face it head on. The government then appears courageous even in the midst of grave difficulties. If he cuts only a little, he’ll have all the luxury of saying that it could have been much worse. That’s the “great sigh of relief” strategy: after having lived through the current threat, we’re under the impression that it’s actually not that bad. This has the effect of sweetening the pill regarding the very real cuts.
The report thus helps Leitão prepare his budget, not by giving him a clearer picture of the state of public finances (all the information was already available at his ministry and at the Conseil du Trésor), but simply because he now has more political wiggle room.
This article was written by Simon Tremblay-Pepin, a researcher with IRIS—a Montreal-based progressive think tank.