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Former Quebec premier Jacques Parizeau. (John Morstad For The Globe and Mail)
Former Quebec premier Jacques Parizeau. (John Morstad For The Globe and Mail)

JACQUES PARIZEAU

Jacques Parizeau: Are Quebec’s public finances a disaster? Add to ...

Jacques Parizeau is a former premier of Quebec and provincial finance minister. This articile was originally published in Le Devoir.

Quebec’s public finances, we are told, are in such a bad state and the debt at such a level that if we don’t correct things, Quebec is threatened with the fate of Greece or Spain. This kind of observation is often expressed in the media. Now it is coming from government sources. Billions may have been promised for tomorrow, but a sort of gloom is spreading through public opinion today: As the expression goes, the coffers are empty.

The following text is designed to show that we are wrong to get excited, that the situation is not at all that which the authorities have presented to us. The data I’ll use are taken from the budgetary plan published each year by the Ministry of Finance to accompany the budget speech. Some of this data is so astonishing, so little like the image generally presented to the Quebec public, that I’ll indicate the exact references in parentheses. So, for example, (BP 12-13, p. C 10) means Page 10, of Section C of the 2012-13 budgetary plan. For 2013-14, the data from the budgetary plan published with the budget speech of November, 2012, were updated in the March, 2013, Economic and Fiscal Update and are designated, for example as (FIscal Update 13-14, p. B 8.)

I apologize for rendering the reading a bit laborious by proceeding this way, but a reader who has difficulty believing some of these statements will be able to check them easily without getting lost in documents which, depending on the year, can be three or four centimetres thick.

One last observation: In the last 15 years, accounting conventions have been modified several times, and this is continuing. These changes often have a significant impact on debt levels as well as on those of expenditures and revenue. Most frequently they come from requests by auditors-general, or have their approval. As justified as they may be for accounting purposes, they render comprehension of reality so arduous that one has to wonder if those who have to make the decisions have a clear picture. We will start with the public debt, then we’ll examine revenues and expenditures.

PUBLIC DEBT

On March 31, 2012, we are told, Quebec government debt approached $200-billion – exactly $183-billion, or 53 per cent of gross domestic product. And it is exploding. It would augment by $10-billion by March 31, 2013 (Update 13-14, p. C 3). But public sector debt also includes that of Hydro-Québec, of other government agencies and of municipalities and universities, totalling $246-billion or 71 per cent of GDP (Update 13-14, p. C 19). If we add to this Quebec’s portion of the federal debt, say 19 per cent, calculated the same way, we add 46 per cent of GDP and arrive at a total debt of 117 per cent! That is extremely high and frightfully worrying, dangerous for any country with its own currency – and thus able to print more – but critical for a country without its own. Such a level of debt justifies radical and swift action to reduce deficits and, if not paying the debt down, at least stabilizing them. As to wanting to make a country out of a province, forget it. Austerity becomes the only choice.

CONFUSION

It is this fiscal framework that dominates the budgetary policy followed by several finance ministers, ever since one of them remarked, a decade ago, that the “bailiffs are at the door.”

Hence the great confusion. All the amounts I’ve mentioned so far are based on the gross debt, that is to say, not taking assets into account. That’s about as smart as someone going to to his bank to establish his balance sheet, and declaring his credit-card debt and his mortgage but not the amount of his bank deposits or the value of his house.

No Canadian government, federal or provincial, apart from Quebec, uses this concept of gross debt. The proof is that several don’t even mention the amounts in their financial reports, and Quebec’s Finance Department had to calculate them for the purposes of comparison. (Update 13-14, p. C 21).

Two concepts of public debt are most commonly used: net debt and accumulated deficits. The first can be defined as gross debt minus the value of government financial assets. Accumulated deficits are net debt less non-financial assets. The federal government uses exclusively accumulated deficits; Ontario and Alberta net debt plus accumulated deficits; other provinces net debt only. Quebec determines its debt according to accumulated deficits (Update 13-14, p. C 15). The Ministry of Finance has agreed until now that “it is a simple concept that well reflects the financial situation of a government since it takes into account the totality of its assets and liabilities.” (BP 11-12, p. D 3). However, in public debates, it is the gross debt that is taken into account.

Let’s follow the advice of the Quebec Ministry of Finance and federal government practice in examining Quebec’s debt on the basis of accumulated deficits. The picture changes completely. On March 31, 2012, Quebec government debt sat at $114-billion, or 33 per cent of GDP, rather than 53 per cent (Update 13-14, p. C 3). As far as public sector debt, if we include Hydro Québec assets, this Crown corporation not only doesn’t add to the debt but reduces it. In fact, its net assets compensate for the largest part of the debt of the rest of the public, non-governmental sector (Hydro Québec financial statements, 2012.) The debt of the whole Quebec public sector is no longer 71 per cent, but 35 per cent of GDP: Less than half.

No doubt Quebec government debt levels are the highest among Canadian provinces, but it must be said that Ontario is catching up to us, as we are still dealing with the effects of 1997 accounting reforms that completely transformed how actuarial deficits in public sector pension funds are taken into account and in one fell swoop raised the debt by 20 per cent. So the debt isn’t exploding but, on the contrary, stabilizing after several years of prudent management.

THE WALTZ OF ACCOUNTING BILLIONS

Looking at the numbers provided by the Department of Finance, this stabilization isn’t obvious. In the 2013-14 budgetary plan, we saw that from March 31, 2012, to March 31, 2014, the debt would increase from $114-billion to $120-billion. In the economic and financial update of last March, this amount was reduced to $117-billion. What happened? Had the government already stared to “reimburse” the debt thanks to its budgetary cuts? Not at all! We are again dealing with a change in accounting conventions. It is worth explaining:

First of all the Société de Financement des Infrastructures locales, the agency financing local infrastructure, and the Société d’Habitation du Québec (Quebec Housing Authority) modified their way of accounting for subsidies as part of the debt. That is a total of $1.2-billion. Second, and above all, Hydro-Québec decided to adopt the International Financial Reporting Standards. It was initially thought that this would add $3.3-billion (BP 13-14, p. D 12), then $6-billion (Update 13-14 p. C 16) to government debt. But the Canadian Institute of Chartered Accountants, the authority on generally accepted practices, came to the aid of the government in three times delaying the date of applying the IFRS to the debt. So 2013-14 won’t be affected. Ouch !

And since Hydro One decided to adopt American accounting standards, less exacting than those of the IFRS, we think it’s fair to split the pear in half and eventually assign $3.3-billion, not $6-billion to Quebec’s debt. (Update 13-14, p. C15-16). Ouch again!

Meanwhile we are cutting $20-million from social assistance and $50-million or so from daycare to avoid, we are told, falling into the kind of chaos facing Greece or Spain.

Finally, we’ll conclude examination of the debt by adding to that of Quebec its portion of the federal debt, evaluated this time based on accumulated deficits. It no longer represents 46 per cent of GDP, but 32 per cent. So that if Quebec were to become a country, its debt would be 65 per cent of GDP. That would be quite manageable.

We would see this even better by using the method the OECD uses to compare the financial situation of its 34 members – the world’s most industrialized countries – that is net financial liabilities. Based on this, the average indebtedness of member countries was 70 per cent of their GDP in 2012. That of Quebec, considered as a country and calculated on the same basis, would drop to 58 per cent. That’s not bad, and it certainly isn’t Greece, which is at 146 per cent. A third ouch!

In fact, Quebec governments have succeeded, in recent years, in maintaining satisfactory budget balances. This would be much clearer if we stopped fiddling with accounting conventions.

EXPENDITURES AND REVENUE, A SIMPLE MODEL

Modifications of accounting rules hinder development of unbroken chronological series of revenue and spending. Significant accounting reforms in 1997 and 2006 (BP 11-12, p. I 13) and annual modifications for the past few years make inter-year comparisons very difficult if not impossible. Nor does it simplify things that two different measures of expenditures and revenue are used, separated from one another by about $20-billion. The lower one includes only program spending and debt service; the higher one consolidates all governmental operations (BP 13-14, p. A 21-22).

Faced by this, I have chosen simply to examine the situation each year, using consolidated expenditures and revenues calculated under that year’s accounting conventions, without worrying about assigning deficits or surplus to the Stabilization Fund or the Generations Fund, a trust fund that aims to reduce Quebec’s public debt.

Let’s put things into perspective. When the Liberals left power at the end of 1994, they left behind for that year a deficit of nearly $6-billion. That represented 3.5 per cent of GDP and 16 per cent of budgetary revenues. That was evidently untenable. In 1995-96, the new Parti Québécois government froze spending and was able to reduce the deficit from $6- to $4-billion. The succeeding government decided to give itself only two years to reach a zero deficit. This was made even more ambitious by the fact Ottawa was reducing transfers to the provinces, amputating in one blow $1.5-billion from Quebec’s revenues. To attain the zero-deficit objective on time, expenditures had to be radically cut – by 5 per cent. That led to early retirement of a great number of doctors and nurses. It would take the health-care system years to recover. But finally the objective was reached. After such efforts, successive governments have maintained budgetary equilibrium quite well. From 1998-99 to 2008-09, zero deficits were reached twice and four deficits were under a billion (except in 2008-09 when the deficit reached $1.3-billion). There were also four years of surplus, of which the highest reached $2-billion. If we add together the deficits and surpluses of the decade, we come up with a surplus of $2.7-billion (BP 11-12, p. I 13). Not bad!

At the end of 2008, the world financial crisis began and a recession came on fast. Canada and Quebec were hit too. Budgetary revenue stagnated, expenses, fed by stimulus programs, increased, which obviously meant deficits. But it’s all relative. Quebec’s maximum deficit was $3.2-billion, or less than one per cent of GDP, while that of the federal government hit 1.8 per cent, Ontario’s 2.5 per cent and that of the U.S. federal government 8.7 per cent (BP 12-13, pp. A 9, 14 and 19).

RETURN TO ZERO DEFICITS

But there was an outcry from everywhere: Avoid the American and European free fall and downgrades by rating agencies. In 2010, we resumed efforts to set a precise deadline to get back to zero deficits, at all costs, and to get there, we limited growth in expenditures. We nearly attained the objective in 2012-13 and we are aiming at zero for 2013-14. The PQ government that came into power in the fall of 2012 had to ascribe the cost of closing the Gentilly II nuclear plant to that budget year, and realized that a rise in doctors’ fees and in debt service costs imperilled the goal of a zero deficit in 2013-14.

New budget cuts were announced: subsidies to universities, government research funds, social assistance, Emploi-Québec, daycare .... The Treasury Board determined the cuts without preoccupying itself with the priorities of its own government, it seems. At the time of the budget speech last November, a booklet was published with the title The Budget at a Glance. It confirmed attainment of a zero deficit for 2013-14, balancing expenditures and revenues at a level of $72.8-billion.

This is correct if we use the lower of the two evaluations of spending and revenue. But if we use the one corresponding to consolidated operations, expenses are $94.2-billion including contingency funds. Since revenues are expected to come in at $95.2-billion, it isn’t equilibrium but rather a surplus of $1-billion that is expected. More precisely, $1-billion $39-million (BP 13-14, p. A 21-22). The March 2013 economic and financial update reduces revenues, but expenditures are reduced even more, so that the expected surplus augments slightly to $1-billion $53-million. (Update 13-14, p. B 29).

In short, because of the methodological fog and the distortions we impose on financial data, we provoked unnecessary crises in public opinion and torpedoed the summit on higher education planned for last March. But, most of all we become aware of how much accounting confusion obscures the efficient functioning of governments and the public debate.

Some years ago, Quebec’s auditor-general asked me to make a presentation at a meeting of Canadian auditors-general. I concluded my talk with roughly these words: Discuss the accounting conventions to be adopted for as long as you wish. But once you’ve decided, leave them in place for a decade. We are making the examination of budget data incomprehensible for most people and dangerous for those who have to make decisions.” I was clearly not heard. The confusion is growing.

CONCLUSION

Despite complicated things like the stabilization reserve or the Generations Fund, we can’t escape the old rule (another truism) that deficits raise debt and surpluses lower it. Some elements are automatic. A recession will, for example, reduce budgetary revenue. A recovery will increase it. But if the recovery is slower than expected, surpluses will take awhile to reappear. Other elements depend on program organization: If during a recession, public investments were increased, they’ll be reduced with the recovery.

All this is common sense. What is important is that accounts be more or less balanced over long periods of time, which is the case in Quebec over the last 15 years.

Far be it from me, however, to claim that there aren’t savings to be made in government operations. Programs ought to be examined periodically to see if they are effective and if they offer value for money. For example, it is scandalous that for a number of years reports showed that public works in Quebec cost 20 to 25 per cent more than elsewhere but that was nothing was done until finally police were brought in.

Is the policy of maintaining budgetary equilibrium synonymous with inaction? After all, governments are elected to get things done, not just to manage finances. The period after 1998 gives us an answer: profiting from economic growth and the accompanying rise in revenue, the Quebec government introduced, among other new programs, two innovations that cost billions – drug insurance and $5-a-day daycare (now $7 a day). We see that refusing to discuss free university tuition in the name of budget equilibrium, on the basis that it would cost $1-billion, is a flawed argument. One can be against the concept, but let’s find some other arguments.

In other words, let’s end these periodic crises of nerves. There is no financial crisis.

We have to stop scaring people and get rid of this accounting obsession which paralyzes things. We have to face Quebec’s real economic problems head-on: its overly-slow economic growth, the serious deterioration in the foreign-trade balance, the weak productivity of too many of its enterprises, and the lack of professional and technical training. Those are the things that must be tackled!

Jacques Parizeau is a former premier of Quebec and provincial finance minister. This articile was originally published in Le Devoir.

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