From the start of the campaign, we saw politicians and journalists making false links with the Generations Fund (FDG). Its purpose is to take advantage of leverage. If we paid into it, it was because we believed that the performance of the Caisse de depot et placement du Québec (CDPQ) would be better than the debt rate. And it did, on average, so it was a good decision. It is this excess return that will help reduce the burden on future generations.
Since 2007, $12 billion has been invested in it, and its fair value was $16 billion as of December 31, 2021 for a total profit of $4 billion. Over 15 years, it generated, on average, a return of 6.3% and a debt rate of 3.1% on the sums borrowed, for a net return of 3.2%. In dollars, that’s about $2.1 billion.
Thus, the FDG generated 2.1 billion more for future generations. This is a significant sum, but it still needs to be put into perspective. It is not the sums invested (12 billion) or the value (16 billion) that diminish the future burden, but the return net of interest. Reading certain texts from the Liberal Party and the Conservative Party, I am not sure that they make this distinction. The same is true for several texts published by various stakeholders.
There are several ways to establish debt. The most intuitive is gross debt. It considers the debts on the financial markets and the amounts linked to the retirement plans managed by the State, from which the value of the FDG is reduced. Let us never forget that the value of the FDG decreases the gross debt. This nuance is the basis of many fallacies. Here are the figures as of March 31, 2022:
• (+) Debt on the financial markets 219 billion
• (+) Net debt Pension plans 12 billion
• (-) Generations Fund (16 billion)
• (=) Gross debt 215 billion
If we pay 5 billion to the FDG, there is 5 billion more investment, but 5 billion more debt. The gross debt does not change. Assuming debts at 4% and a return at 7%, the advantage will be 150 million (3% of 5 billion) after one year. Future generations have just won 150 million, not 5 billion. In addition, paying nothing does not change the gross debt, and it does not harm future generations for 5 billion. It will hurt them by 150 million over a year if the above figures come true.
What to understand
It is sometimes said that the FDG could instead be used for more useful purposes than debt management. We would like to take 5 billion from the fund for a project. But nothing prevents you from doing what you want to do. Increasing the debt by 5 billion or removing 5 billion from the fund amounts to the same thing. In the table above, whether we remove 5 billion in the FDG or increase the market debt by 5 billion, the gross debt increases by 5 billion. The difference is that, in one case, we increase the interest on 5 billion and, in the other, we deprive ourselves of the return on 5 billion.
What is preferable? We can discuss it, but it has nothing to do with the 5 billion project. In both cases, the same project is carried out and, in both cases, the gross debt increases by 5 billion. You don’t save by dipping into the fund. These sums are not a “cushion” of money for the future that can be dipped into without increasing the debt. What bad reasoning on this subject!
If we judge, with good reason, as Québec solidaire proposes, that the climate issue is crucial and that we want to invest 16 billion in this component, let’s do it. But that has nothing to do with FDG.
It is sometimes said that it is not the role of the state to invest or to speculate on the financial market. Three points could be raised.
First, the word speculate is too strong. We speculate when we take a significant risk in a concentrated portfolio. This is not the case for the CDPQ, which uses a very balanced portfolio.
Then, if one doesn’t like FDG, or if one believes future yield will be lower than debt rates, the option is to pay the debt. And that has nothing to do with the proposed projects. Those are two different things.
Finally, we often fixate on the FDG, whereas there are hundreds of billions managed by the CDPQ to finance the RRQ, the RREGOP and other things. The goal is still leverage. If we must avoid investments, we should take all these sums and pay off the debt. Why limit yourself to 16 billion? Let’s be consistent.
The CAQ has indicated that it will partially fund its promises by paying less to the FDG. This is not logical! Whether we pay 100 billion, 20 billion or nothing at all in the FDG does not change the gross debt as indicated above, and it has nothing to do with the future deficits linked to the promises. At the margin, the promises will always be financed by an increase in debt.
The confusion comes from an “accounting” game. Payments to the FDG increase the deficit when presenting the annual budgets, but this has no substance, because, in fact, it is a plus and a minus. The payment to the FDG increases the debt, but the investments decrease the gross debt thereafter. In fact, most analysts look at the deficit before FDG payments to assess a year’s results. By paying less to the FDG, the “official” deficit presented to the public will “look” smaller, but this is a sham (because there will also be fewer investments). If a pledge costs 2 billion and the FDG payments are reduced by 2 billion, the net effect on the deficit presented to the public will be zero because of the accounting game, but, in fact, this does not change the fact that the promises will increase the gross debt by 2 billion.
What to remember?
The advantage for future generations is not the sums injected into the fund, but the difference between the return on the fund and the cost of the debt. If we stop making payments, the consequence for the future is not the 5 billion that we do not pay, but the lost return on this 5 billion net of the cost of interest.
Second, lowering FDG payouts does not offset the cost of promises made elsewhere. The promises are always financed, at the margin, by an increase in debt, no matter what one does with the FDG.
Third, we don’t save by dipping into the FDG. We don’t have more income if we dig into the FDG. We do not deprive ourselves of anything if we leave the money in the FDG. These sums are not a “cushion” of money for the future from which we can dip without increasing the debt.
Finally, if we want to empty the FDG, why then leave the other sums in management to the CDPQ? It’s the same pocket, and the objective is the same.