Good evening, I don’t understand the mechanics of the Generations Fund. In your analysis of the last budget, you mention that an amount is paid to the Generations Fund. With current interest rates, wouldn’t it be more effective not to contribute to the Fund and just run a smaller deficit? THANKS.
– Frédéric Boulanger
Your question requires us to review the objective of the Generations Fund and the reasons that led to its creation.
The ultimate goal of the Generations Fund is to reduce Quebec’s debt, as stated in a law adopted in 2006 (Act to reduce the debt and establish the Generations Fund).
This legislative framework, combined with the Balanced Budget Act, is in a way a forced savings plan that forces us to take into account the repayment of our debt in our budgetary management. The measure resembles, in part, the mortgage payment of a family budget.
Heavy debt
Why reduce debt? Because at the time, the Quebec government had the largest debt of the provinces – or the 2e in importance – according to the measurement of indebtedness at the time. We were much more in debt than Ontario, among others, and the government of the time did not want to bequeath this debt to future generations, hence the name Generations Fund.
Quebec’s situation has improved significantly since then, its net debt now reaches the equivalent of 39% of its economic activity (measured by gross domestic product or GDP), compared to a peak of 53.9% of GDP. 10 years ago.
Despite everything, Quebec remains significantly more indebted than the provincial average (29.9% of GDP) and its debt still places it in 2e rank among the provinces, although a hair behind Ontario (38%).
In total, Quebec’s net debt amounts to 221 billion, once the value of the Generations Fund is subtracted (16.7 billion as of March 31, 2024). And payments devoted to the Generations Fund will reach 2.2 billion over the next year.
Good strategy?
The money from the Generations Fund is managed by the Caisse de dépôt et placement du Québec and the objective is to obtain higher returns than the cost of government borrowing.
The strategy has worked quite well, since the government has obtained better returns than the cost of its funds 15 years out of 17. Since 2007, the average return has been 5.6%, compared to an average cost of new borrowing of 3.2%, a gain of 2.4 percentage points.
In 2023, the return was 9.3%, a difference of 5.2 percentage points with the cost of borrowing (4.1%).
The fact remains that when the government runs a deficit, it increases its debt. And that to pay the agreed share to the Generations Fund, it must increase its borrowings, and therefore its debt. Hence the great importance of having a better return than the cost of funds, which is not without risk.
Why pay off debt?
This year, precisely, the Minister of Finance, Eric Girard, chose to use the payments planned for the Generations Fund – and even a little more – to directly repay the debt rather than adding to the Fund.
The current high interest rates justify such a practice, but the minister mainly did this this year – like last year and next year – because of Quebec’s high volume of borrowing, explainable by a record deficit.
Each year, the budget also presents the budget balance before payments to the Fund, which gives us a better idea of the current activities deficit. This dual presentation also allows us to compare ourselves to other provinces, which do not have a budget item comparable to the Generations Fund.
The 2024-2025 deficit in Quebec (11 billion) therefore increases to 7.3 billion dollars if we do not subtract the annual payments to the Generations Fund and the provision for contingencies.
This sum represents 1.2% of our GDP. In comparison, Ontario has just announced a deficit for the same year – after reserves – of 8.8 billion, or some 0.7% of its GDP. And recently, British Columbia announced that its own deficit reached almost 1% of its GDP for the same period, after reserves.
In short, even without taking into account payments to the Generations Fund, Quebec’s relative deficit is now higher than that of the two other large comparable provinces.
Parliamentarians could ultimately decide to no longer pay any more money into the Generations Fund or to present the deficit without these payments. In doing so, reaching a zero deficit would be made easier, so to speak. This decision, however, would require that the law be amended and, therefore, that parliamentarians push back our debt reduction objectives.
Consult our section “Demystifying the economy”