I am a history teacher in 4e and 5e secondary. I have a question for you that I have often received from my students and which I have always had difficulty answering. When a country, province or city has a deficit, we must borrow to balance the budget. Who is owed this money and how does repayment and borrowing work?
— Pascal Turcotte, social studies teacher at Durocher Saint-Lambert college
The question from Mr. Turcotte – and from his students – is a bit like three questions in fact: one on the nature of the deficits, the other on their consequences on the public debt, then a last one on the borrowings of the State.
First, Mr. Turcotte mentions “a city” in his question. In fact, in Quebec, the law prohibits municipalities from running deficits, unlike higher governments.
But what exactly is a deficit? In public finances, we usually refer to the state’s “budget deficit”. Its definition is quite simple: it occurs when expenses exceed income. In other words, the government had to pay more money (for its current expenditures, its investments, its debt payments) than it collected (thanks to taxes and intergovernmental transfers).
This gap with the budget balance forces the government to borrow more than planned. “The deficit automatically goes to the debt,” explains Luc Godbout, professor of public finance at the University of Sherbrooke.
Who lends the funds?
Difficult to say: concretely, the State goes into debt mainly by issuing bonds on the public markets, such as shares of companies listed on the stock exchange. Debt securities from Canada, Quebec or other provinces can go to major banks around the world, but also to ordinary people.
The currencies used to borrow, however, provide clues. According to the last budget, more than three-quarters of the debt was negotiated in Canadian dollars. The US currency and the Euro both account for 10%. However, financial instruments convert all these loans into Canadian currency to neutralize exchange rate fluctuations.
How do we reimburse?
By paying the holders of these bonds, quite simply. In 2023-2024, the average term of new debt securities that Quebec issued was 14 years.
The State must then refinance itself with other loans. Unless it is on the verge of bankruptcy, like Greece in 2008. To avoid seeing the country sink and convince the banks to finance it, the countries of the European Union had to get involved and deploy a safety plan.
Is it serious, Doctor?
Of course, the answer to this question varies depending on where one sits on the ideological spectrum. In general, the right is allergic to deficits and the left is better suited to them, provided that they are used to combat inequalities and finance public services and investments.
One thing is certain, they are not without consequences.
A deficit forces the government to finance a larger amount and there is interest attached to that. It could cost us more if interest rates rise, or if rating agencies lose some confidence in our borrowing capacity.
Luc Godbout, professor of public finance at the University of Sherbrooke
These agencies, the Moody’s and DBRS of this world, evaluate debt securities. They have a direct impact on the interest rates that a government pays: if they judge that its debt is less secure, it will automatically pay higher rates.
Circumstantial or structural, the deficit?
In fact, the impact of the deficit depends above all on its causes, says Luc Godbout.
If it is “cyclical”, it arises because of specific events in the economic, social or political life of the country. It should then disappear or diminish on its own when things get better.
Best recent example: the colossal jump in the federal deficit, to 328 billion, recorded in the midst of a pandemic in 2020-2021.
“It would have been stupid to want to balance the budget, because we would have amplified the economic cycle,” says Luc Godbout. Instead of helping Canadians get through the crisis, the Trudeau government would have caused a terrible slump if it had wanted to avoid a deficit at all costs.
Once the pandemic is behind us, the deficit has fallen to “only” 35 billion, in 2022-2023.
On the other hand, if the deficit is “structural”, we consider that even if the economy is running at full capacity, the hole will remain in the public accounts. If the state wishes to rebalance the budget, it must then reduce spending or increase revenue.
PHOTO EDOUARD PLANTE-FRÉCHETTE, LA PRESSE ARCHIVES
Quebec Finance Minister Eric Girard
On March 12, Quebec announced a deficit of 11 billion. In his speech, the Minister of Finance, Eric Girard, recognized that a large part of this gap with the budgetary balance is precisely due to a “structural” problem: he cannot count on economic growth to fill it.
He estimates that in 2026-2027, this structural deficit will be 4 billion.
The Legault government says it wants to wipe it out by 2029-2030… if it is still in power.
Consult our section “Demystifying the economy”