This text is taken from the Courrier de l’économie of October 3, 2022. To subscribe, click here.
Quebec has set up the Generations Fund to ensure intergenerational equity. Recent figures indicate that there would be something like 17 billion dollars in this fund, reminds us Alain M. Gaulin. But how do these sums ensure intergenerational equity? he wonders. Wouldn’t it be simpler to apply these sums directly to the debt accumulated each year?
Created in 2006 at the time of the adoption of the Act to reduce the debt and establish the Generations Fund, the latter is supposed to be used “exclusively to repay the debt of Quebec” and was thought of as a way for taxpayers to leave a financial cushion for the younger generations when the aging of the population will curb economic growth at the same time as it will inflate public spending, particularly in health.
Each year, among other things, it pays Hydro-Quebec water royalties, mining revenues collected by the government and part of the taxes on alcoholic beverages. These payments are gradually increasing: they were 1.45 billion in 2015-2016 and 3.4 billion this year, and should rise to 5.2 billion in 2026-2027.
As of March 31, the fair value of the Generations Fund stood very precisely at $17.59 billion, whereas it was still only $3.6 billion in 2011. In its most recent estimate included in its Pre-election report, the Quebec Ministry of Finance predicted that at this rate and with the returns, its book value would reach 37.7 billion in less than five years. In an analysis in 2020, the Chair in Taxation and Public Finance at the University of Sherbrooke even projected that it would flirt with 59 billion in eight years and exceed 100 billion by 2035-2036.
All these sums could, of course, have been paid directly to repay the debt rather than going to land in a Generations Fund, as Mr. Gaulin suggests. It is not certain, however, that governments would have displayed the same zeal over the years in paying their due to future generations, observed the Chair of the University of Sherbrooke in another report in 2017.
In addition, entrusted to the firepower and expert hands of the Caisse de dépôt et placement du Québec, the annual returns generated by the Generations Fund should be between a historic rate of 4.6% and an expected rate of long-term rate of 5.9%, says the Department of Finance, while last winter the government was still financing its debt at annual rates of 0.6% on three-month borrowings and 2.4% on 10-year bonds.
However, it is not the role of the Generations Fund to try to play speculative funds by taking advantage of these favorable rate spreads, note the experts. And then, the more it grows, the more the Generations Fund will arouse political greed. In any case, the debt reduction objectives set by law for 2025-2026 are on the way to being achieved (a debt representing accumulated deficits of less than 17% of GDP) or have already been achieved (a gross debt of less than 45% of GDP). The law will have to be revised sooner or later.
We could then decide to use the entire balance of the Generations Fund to repay the debt, said the Chair of the University of Sherbrooke in its 2020 study. Or, maintain it and set new, more ambitious objectives for reducing the debt. Or, do a little of both, while devoting part of these billions to investments aimed at greater intergenerational equity, such as the current green transition of the economy or the future explosion in health costs.
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