As the Federation Turns: Quetarian Public Finances

Quebec and Ontario, the twin pillars of the Canadian federation, have much in common given that they share the economic space of the Windsor-Quebec axis – an economic region nestled around the Great Lakes-St. Lawrence waterway.   Once upon a time, they were even one province but that fiery marriage had its ups and downs and was broken up by Confederation which created a new family living arrangement.

What these life long partners have in common right now along with their traditional manufacturing sectors under siege and high public debt is a degree of political uncertainty.  Quebec’s majority government is having an election.  Ontario has a minority government and about to have by-elections.   Come September, both provinces may or may not have majority governments.  This is occurring against a backdrop of public sector restraint driven by the debt/deficit situation facing the two provinces.  Moreover, the zeal with which restraint has been pursued has differed across the two provinces.

While Quebec has historically always had the weaker economy relative to Ontario and been more transfer dependent for its provincial revenues, what is quite interesting is how quickly Ontario’s public finances have deteriorated relative to Quebec’s. The accompanying figures are based on the Federal Fiscal Reference Tables and show data up to the 2010-11 fiscal year.  While Ontario’s per capita net debt and its net debt to GDP ratio are still below Quebec’s, it has been running up much larger deficits as a share of GDP.  At the peak of the downturn in 2009, Ontario’s deficit to GDP ratio was more than twice that of Quebec’s.  One might argue that Quebec had more stable revenues given its larger federal transfer revenue share of provincial revenue as well as the fact its income tax rates are higher than Ontario.  However, Ontario’s federal cash transfers as a share of provincial revenue rose much quicker than Quebec’s.  Between 2001 and 2010, federal transfers as a share of provincial revenue in Quebec rose from 20 to 25 percent.  In Ontario, they went from 11 to 22 percent.

 

So, can Jean Charest market himself and his government as better economic managers than nearby Ontario? Well, certainly not in terms of the debt picture which is still worse than Ontario’s.  However, when it comes to recent fiscal restraint, Quebec has likely been doing a better job than Ontario.  The primary piece of evidence is the lower deficit to GDP ratio in Quebec.  Indeed, Quebec’s government is planning to balance its budget by 2014 while Ontario is apparently on track to do it by 2017.  This would suggest that Quebec has been more focused on public sector restraint.  More evidence?  It is Quebec that has seen its streets full of demonstrators rather than Ontario.   Despite a pronounced marketing campaign built around the Drummond Report, fiscal restraint in Ontario has been more muted in both its implementation and its effects. Ontario’s minority government with its political balancing has been a factor in this though it must be remembered that even with a majority, the Ontario Liberals still did not tackle the public finances.  Come September, the political landscape may change in both provinces and then it may not.  The fiscal situation and political soap opera it generates will go on.

Comments

[Nick Rowe]

I'm trying to remember which Quebec politician, some years back, said he wanted (something like) "fiscal equality" with Ontario. I bet he didn't imagine how much Ontario would help him deliver!

[Simon van Norden]

I'm surprised to read a comparison of two provinces fiscal performance during a recession without any reference to their unemployment rates, real growth, or anything like a "structural" deficit estimate.

I would not have the courage to conclude "when it comes to recent fiscal restraint, XXXX has likely been doing a better job than YYYY" without looking at some or all of those things.

[Livio Di Matteo]

Nick:
I recall a similar statement but cannot remember who it was.
Simon:
I'm surprised you are surprised! I simply assumed that performance indicators like that (aside from provincial structural deficit estimates)were common knowledge. Quebec has generally had a lower per capita GDP than Ontario and higher tax rates. Over the 2006 to 2011 period, the unemployment rate has averaged about 7.8 percent in Quebec and 7.5 percent in Ontario. Ontario's unemployment rate was a bit higher in 2009 and 2010. Real GDP growth however has been somewhat better in Quebec. Over the 2006 to 2011 period it averaged about 1 percent in Quebec and about one half a percent in Ontario. I still think Quebec has done better than Ontario when it comes to the pursuit of fiscal restraint over the last couple of years as these differences are not overwhelming advantages.

[Determinant]

Just to do my usual history shtick, Ontario and Quebec held a joint cabinet meeting in Quebec City in June. Its purpose was to discuss common issues (and to plot strategy to gang up on the Feds, of course). It was billed as the first joint cabinet meeting held between Ontario and Quebec.

They conveniently left off part of that sentence "...the first joint cabinet meeting held between Ontario and Quebec since June 30th, 1867."

Nobody likes to remember the late, unlamented Province of Canada.

[Simon van Norden]

Hi Livio. The point of my remark about about unemployment rates, growth, etc. (which I guess seemed cryptic) was to suggest that the economic shocks that the two provinces experienced as a result of the 2008 crises may not have been of similar magnitude. Given dissimilar cyclic shocks, I was thinking that it would be hard to compare fiscal policy performance without some kind of cyclic adjustment.

So I went back to check my hunch that the two provinces didn't face the same kind of initial shock. There's lots of different ways to try to measure a "shock": I looked at the drop from the 2008 to the 2009 low for five main provincial indicators (real GDP, employment, personal income, retail sales and housing starts.) In every case, the drop was bigger in Ontario than in Quebec. For personal income and retail sales, the differences looked small. For the three others, the drops in Ontario were ~2x the drops in Quebec.

Do you think it is likely that Ontario was hit by a bigger economic shock than Quebec?

If so, do you think it could affect your conclusion?

[Livio Di Matteo]

Simon:
Ontario manufacturing was very hard hit as was its forest sector by the 2008-2009 downturn and you can make the case that it was hit harder than Quebec. Accepting that they were hit twice as hard, the deficit to GDP ratio in 2009 was three times that of Quebec. Ontario was hit harder but has also taken longer to come to grips with its deficit.

[Mark]

Look at revenue and spending growth in the two provinces to see where the difference is. Not simply debt to GDP.

As Simon points out, the real shock is what matters here and, going forward, what the rebound will look like.

Ontario got disproportionately hit when it's largest trading partner entered the Great Recession. The US downturn greatly involved less spending on houses and cars, two key items which Ontario exports. As well, the global financial crisis undermined Toronto's much more substantial financial hub.

[Livio Di Matteo]

Mark:
Good point about the dependency on the US market but Quebec is also quite export dependent. Ontario's export to GDP ratio is about 50% while Quebec's is about 45 percent. In terms of revenues and expenditures, over the period 2005/06 to 2010/11, total government revenues in Quebec rose 19 percent and total expenditures rose 24 percent. Ontario's provincial government over the same period saw revenues rise 18 percent and expenditures rise 34 percent. Not sure how the global financial crisis undermined Toronto's role as a financial hub given that we are continually being told how solid our banking sector was during the crisis.

[Simon van Norden]

"Ontario was hit harder but has also taken longer to come to grips with its deficit."

Livio, do you have a view on how Ontario's structural deficit compares to that of Québec? If so, I (and perhaps other readers) would be interested to know more about how they are estimated and how they compare.

[Livio Di Matteo]

Sorry Simon, I do not have an estimate of Ontario's structural deficit or Quebec's for that matter.

[Simon van Norden]

"Accepting that they were hit twice as hard, the deficit to GDP ratio in 2009 was three times that of Quebec. "

Sorry, but could you please explain? Just to be clear, let's suppose (a) Ontario was hit twice as hard as Québec and (b) they grappled with their deficits with equal speed. What should we observe in their deficit to GDP ratios in 2009?

[Livio Di Matteo]

Well, if Ontario was hit twice as hard, all things given I would expect that their deficit to GDP ratio should be twice as bad rather than three times as bad. Ontario ramped up its spending during the high GDP growth period prior to 2005 and continued to spend at that higher rate even once GDP growth slowed. Between 2005 and 2011, Ontario's spending grew twice as fast as its revenues. Over the same period, Quebec's spending grew about 1.25 times more than its revenues. Ontario has a larger structural deficit problem.

[Luan Ngo]

Hi Livio, I quickly looked at Quebec a few months back in light of their tuition crisis. The interprovincial comparison becomes even more interesting once you take into account other fiscal and demographic variables.

In short, their already generous but costly social programs are going to be under increasing pressure as their population ages faster than the Canadian average. However, federal transfers are anticipated to decline with tax increasing offsetting some of this. However, they're approaching the limits in terms of debt-to-GDP and also taxation (they're already the most progressively taxed province in Canada). The fiscal and economic soap opera will likely intensify in the near future.

The data is provided (very roughly) here if you want to look at it.

http://luan-ngo.blogspot.ca/2012/04/this-was-supposed-to-be-comment-on.html

[Livio Di Matteo]

Thanks Luan. Appreciate the link.

[Simon van Norden]

"Well, if Ontario was hit twice as hard, all things given I would expect that their deficit to GDP ratio should be twice as bad rather than three times as bad."

Livio, what do you think of countercyclical fiscal policy?

Remember that you're talking about the 2009 deficit. The US financial crisis wasn't on the radar when fiscal planning was done for 2008. Fiscal policy in 2009 was decided in the teeth of that crisis. I think a bigger Ontario deficit-to-GDP ratio ratio in 2009 reflects a bigger shock. It might also reflect a more aggressive counter-cyclical policy rather than "a failure to come to grips" with deficits.

Put another way, Ontario's shock may have been more than 2x the size of Québec's, but was partly offset by fiscal stimulus, which helped reduce the size of the drops in GDP and employment.

[Livio Di Matteo]

That is an interesting point Simon. That could indeed be the case. However, when it comes to the revenue shock, over the entire 2005 to 2011 period, provincial government revenues overall in Ontario grow at almost the same rate as Quebec. Even if Ontario was hit harder, provincial revenue growth over the entire period does not seem out of whack with Quebec. Expenditures, however grow faster. You could make the case that this might reflect a more aggressive counter-cyclical policy or you could make the case that Ontario's spending was a run away locomotive.