Institut du Québec’s first report on demographic time bomb and its public finances
May 27, 2014
Quebec is suffering from a combination of budgetary deficits and an aging population, but it can still preserve the province’s underlying social contract if it introduces tightly focused reforms. That is the conclusion of the Institut du Québec’s (IDQ) first report published on May 26, Demographic Time Bomb and Public Finances: Toward a Sustainable Social Contract (in French only).
“Quebec can reach and maintain a balanced budget,” says IdQ president Raymond Bachand. “This can be achieved if, in the short term, the government eliminates its budget deficit, and, in the medium and long terms, adopts reforms aimed at limiting growth in health spending. The good news is that we can ensure the sustainability of Quebec’s social contract, which is unique in North America, by focusing our efforts on these measures and applying strict discipline.”
According to Robert Gagné, the HEC Montréal and Institute’s Research Director, and Center for Productivity and Prosperity Director: “We anticipate average annual economic growth in Quebec of 1.6 per cent over the next 20 years, compared with 2.1 per cent over the past 20. Given the slower growth and the fact that Quebec already has the highest taxes and most progressive tax system in Canada, the government will have to cut spending growth.”
In the study, IdQ suggests three things Quebec can do to achieve a sustainable balanced budget:
- In the short term, the government should eliminate its current $3-billion deficit. How and when to do so is up to the government to decide. But given that Quebec offers its citizens $11 billion more in services than the Canadian average, it has the room to cut spending while still maintaining a higher level of service than other provinces.
- In the longer term, the government should limit growth in health care spending. The Conference Board of Canada calculates that health care spending in Quebec has risen at an average annual pace of 5.2 per cent over the past 10 years. Quebec can improve its budget prospects substantially by lowering that growth rate 1 percentage point to 4.2 per cent.
- Once its short-term targets are achieved, the government should impose a cap on public programs. A cap that allows spending to rise only enough to offset inflation and demographic changes would keep services at constant levels. Any expansion of existing services or the creation of additional ones should be funded either through corresponding spending cuts elsewhere or new fees to cover the additional costs.
Based on its latest analysis of Quebec’s public finances and historical trends, as well as on its own forecast models, the IdQ projects that if Quebec maintains the status quo, the growth in its structural deficit and resulting indebtedness will become unsustainable by 2035. The situation is caused mainly by the “two for one” effect of an aging population—over the long term, economic growth and government revenues fall, whereas health care spending rises sharply.
“Like many other Western societies,” Mr. Bachand says, “Quebec is entering a phase in its history where an aging population and more modest economic growth will be the norm, and it will have to adapt accordingly.”
“The time has come,” says IdQ director Mia Homsy, “to apply sustainability standards to the management of public finances and make sure Quebec is able to control its destiny for a long time to come. Fortunately, the right solutions are available, and IdQ intends to develop them.”