Between 2010 and 2015, no less than $20.2 billion in budgetary restrictions were imposed by the provincial government in the hopes of attaining zero deficit. During this period, it increased its revenue by $6.2 billion and cut back its spending by $14 billion. Ironically, we learned in the last CAQ budget that the government was planning to generate a surplus of $21.1 billion over six years.
Governments are not only trying to strike a fiscal balance, they are going way beyond it. This choice, nevertheless, borders on the obscene as media outlets regularly reveal the adverse effects that this lack of means has on public services. In this context, to say that austerity policies were ill-advised would be a complete understatement.
Yet, austerity measures are still common currency. Last February’s Monthly Report on Financial Transactions published by Quebec’s Department of Finance stated that the 2018–2019 surplus now exceeds $9.1 billion—all that in a single year! A massive feat for the budget of a single Canadian province.
Quebec’s government is using this surplus to reduce the province’s debt. Apart from the CAQ’s obsession to do “better than Ontario,” one of the arguments behind this initiative concerns borrowing costs. As stated on page I.10 of the last budget, “Due to the decreased burden of debt, Quebec benefits from advantageous borrowing costs.”
Last fall, the Institute of Fiscal Studies and Democracy (IFSD) of the University of Ottawa published the results of a study on the impact of fiscal discipline. The authors compared the provinces’ debt with that of the federal government in an attempt, among other things, to measure the impact of a province’s public debt decrease on its borrowing costs. The conclusions we can take away from the study are extremely interesting, albeit not the ones the authors wanted us to focus on.
The study demonstrates that a decrease of one percentage point of the public debt calculated in GDT percentage will result in a 0.0005% reduction of a province’s borrowing rate. In Quebec’s case, this means that for every billion dollars reimbursed by the government by cutting in public services, the borrowing rate drops by 0.0005%. In other words, even though a debt decrease reduces borrowing costs, this reduction is so small that it can only be deemed negligible.
Let’s take things a step further. Based on the IFSD results, we could determine how much the province could save in borrowing costs if it eliminated its public debt entirely.
Suppose the government decided to close every department and body only to pay back its debt, it would then need 1.9 years to reimburse its net debt, which is presently standing at $179 billion. All other factors being equal, how would it affect borrowing costs? Bond certificate revenues would drop by 0.21 percentage points from 2.39% to 2.1%, which translates into a decrease of only 8.9%! In other words, dismantling the whole state (and destroying Quebec’s economy by doing so) would have a paltry impact on the borrowing rate, according to IFSD parameters.
These numbers demonstrate how meagre the benefits are when it comes to depriving ourselves of resources that would be a lot better allocated elsewhere.
Again, drawing on IFSD parameters, we realize that a rise of the employment rate has twice the impact on borrowing rates than a contraction of the public debt calculated in GDP percentage. In other words, it would be wiser for the government, if it’s looking to have an impact on the size of the province’s debt in relation to the economy, to stimulate job creation rather than to curtail spending.
Essentially, the data published by the IFSD reveal another aspect of counterproductive fiscal discipline, which pushes governments to stifle public services and reduce program expenditures. By boosting spending and public investments and reinforcing public services, the government would also indirectly diminish its borrowing costs.
Yet another argument against fiscal conservatism’s creed.
Guillaume Hébert is a researcher with L’Institut de recherche et d’informations socioéconomiques (IRIS). Follow him on Twitter at @Guillaume__H
This blog was originally published in french on the IRID website: https://iris-recherche.qc.ca/blogue/il-y-a-un-lien-entre-la-dette-du-quebec-et-le-taux-d-emprunt-mais-pas-celui-que-vous-pensez