Here’s a quick fiscal quiz. Which Canadian province is set to outstrip its peers for economic growth in 2021? Which one is seeing unprecedented levels of migration from other provinces? And which province has a diversified economy that positions it to not just weather the pandemic, but also to avoid the negative effects of decarbonization?
The answers are: Quebec, Quebec and Quebec. After decades of economic malaise, it might seem jarring for Quebec to emerge from the pandemic as a powerhouse. But its diverse economy, relatively low housing prices and relatively light pandemic lockdowns have combined to give it a decisive edge over its provincial peers.
A new report from Bank of Nova Scotia senior economist Marc Desormeaux – ahead of Thursday’s fiscal update from Quebec – points out that the province is headed for record growth in real GDP this year of 6.8 per cent, well ahead of the 4.9 per cent forecast for Canada as a whole.
Some of that edge comes from factors that could prove fleeting. Quebec’s household consumption has rebounded more quickly than that of Ontario, a result at least in part of the province ending pandemic restrictions earlier than its western neighbour. If Ontario’s household spending has simply been deferred, that gap could close.
“It’s still early in the pandemic,” Mr. Desormeaux said in an interview.
But he also flags some trends that are potentially long-lasting. One is intraprovincial migration from Ontario to Quebec, which reached its highest level on record in the second quarter of this year. Mr. Desormeaux said (relatively) affordable real estate in Quebec, and the acceptance of teleworking, are behind that trend. If it continues, it would be a historic reversal of the population drain that once flowed westward from Montreal to Toronto.
Quebec’s diversified economy is another draw for potential intraprovincial migrants. Even more importantly, it increasingly looks as if that will allow Quebec to keep up economic growth even as decarbonization efforts pick up speed. Mr. Desormeaux’s report notes that the province has decoupled growth in its economy from growth in greenhouse gas emissions over the past decade.
The province is still the largest beneficiary of the federal equalization program. But its renaissance could be the first tentative steps toward fulfilling Premier François Legault’s ambition of creating a economy vibrant enough that the province does not need such support.
In response to a recent Tax and Spend on rising payroll taxes, one reader commented that Employment Insurance premiums are just another tax that end up as part of general revenues.
It’s true that Employment Insurance revenues aren’t segregated in the way that Canada Pension Plan contributions are.
But it’s not quite correct to say they are simply part of general revenues. For years, the excess EI contributions did flow through to Ottawa’s bottom line, with both the Chrétien Liberals (and later, the Harper Conservatives) choosing to keep premium rates higher than they needed to be.
Changes introduced by the Harper government in 2013 were aimed at putting a stop to that practice. Under those rules, the EI fund needs to balance over a seven-year period. If the economy is expanding, that means rates generally fall, as contributions increase and costs fall. The reverse is true when a recession hits: unemployment rises, reducing contributions and increasing costs, eventually.
That’s what has happened during the pandemic, with the resulting deficit amplified by the Liberal government’s decision to freeze EI rates for two years. Until rates rise, general revenues will be subsidizing EI payments, not the other way around.
One footnote to the introduction of the seven-year rule: It didn’t take effect until fiscal 2017-18. That delay meant that EI rates were frozen at higher levels than they otherwise would have been under the seven-year rule – allowing the Harper government to balance the budget more quickly (or at least more easily).
Sales stabilizer: One of the major economic benefits of the Employment Insurance program is its role as an automatic fiscal stabilizer. If the economy starts to tank, out-of-work Canadians get EI payments without much delay, and without need for any specific government intervention.
A research paper from the C.D. Howe Institute is proposing a new kind of fiscal stabilizer: automatic cuts to the GST in the event of a sustained economic output gap. The rate would then rise once the economy had rebounded, so those forgone revenues would be recovered over time. One caveat, the authors note: The GST rate would need to increase from its current level for the plan to work. My colleague David Parkinson takes a detailed look at the proposal here.
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