The Fraser Institute

The Fraser Institute

November 15, 2011 06:32 ET

The Fraser Institute: Faced With Growing Debt, Quebec Must Reduce Program Spending and Reclaim Fiscal Austerity of the 1990s

MONTREAL, QUEBEC--(Marketwire - Nov. 15, 2011) - Quebec's government is making the same mistakes as governments of the 1980s and now faces ongoing deficits, mounting debt, and interest costs crowding out program spending. If Quebec wants to return to prosperity, it needs to follow the fiscal formula of the mid-1990s by cutting spending and balancing its budget, recommends a new book from the Fraser Institute, Canada's leading public policy think-tank.

"Quebec's long-term fiscal position is the worst in the country," said Filip Palda, Fraser Institute senior fellow and professeur titulaire at École nationale d'administration publique.

"The province's debt represents more than 50 per cent of GDP, far and away the largest burden of provincial debt in Canada. The Quebec government needs to move more swiftly to balance its budget and, more importantly, begin to reduce the burden of the province's debt as a share of the provincial economy."

Learning from the Past: How Canadian Fiscal Policies of the 1990s Can Be Applied Today examines the current fiscal problems facing the country and finds parallels to the situation experienced in the 1980s and early 1990s when provincial governments faced large deficits, mounting debt, and rising interest rates.

The book notes that Quebec's provincial debt is expected to reach $166.1 billion, a 10.7 per cent increase since 2009/10, and that the province currently faces a deficit of nearly $3.8 billion, totaling 1.2 per cent of provincial GDP. If the province doesn't contain its debt quickly by balancing the provincial budget and ceasing to borrow for capital spending, it will inevitably impose large and sustained economic costs on the province, particularly in the form of slower economic growth.

Quebec expects to balance its budget in 2013/14 but is relying on strong revenue growth (average of 4.9 per cent) coupled with slower growth in spending (1.9 per cent) to do so.

"Quebec's current plan to balance the budget is fraught with risk. Any deviation in revenues or spending will result in larger immediate deficits and greater accumulation of debt," said Niels Veldhuis, Fraser Institute vice-president of Canadian policy research and co-author of the new book Learning from the Past: How Canadian Fiscal Policies of the 1990s Can Be Applied Today.

"The only solution is for Quebec to re-embrace the fiscal austerity that helped put the province back on track nearly 20 years ago."

The book points out that Quebec enacted two periods of spending reductions over the course of the 1990s, once in 1993/94 when spending was slightly reduced and again from 1995/96 to 1996/97 when it reduced program spending by 4.6 per cent. Quebec also reduced provincial public-sector employment by 10.7 per cent during the period of reform and program spending reductions.

The reductions in spending and the accordant cuts in public-sector employment were not ends in themselves; they were a means by which to bring government spending in line with anticipated revenues in order to balance the province's financial affairs in a purposeful and timely manner.

The book concludes that Quebec politicians, policy makers, and taxpayers need to learn from the successful lessons of the 1990s when governments across the country of all political parties and ideologies enacted spending reductions that brought expenditures in line with revenues and balanced provincial budgets. These actions, while difficult in the short term, lead to better results in the medium and long terms, including declining debt, lower interest costs, and a more prosperous economy.

"The failed policy of trying to slow the growth in spending and hoping that revenues would rebound sufficiently to balance provincial finances has unfortunately resurfaced in many provinces," Palda said.

"In order to attain balanced or surplus budgets, reduce debt, and decrease interest costs, Quebec must embrace the fiscal austerity of the 1990s. Specifically, it needs swift reductions in program spending and provincial public-sector employment."

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 85 think-tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.

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