The event left its mark in 2019. For the first time in modern history, Quebec became less indebted than Ontario, a sign of our catching up with our long-time competitor(1).
Now, Quebec’s shaky finances, combined with an improvement in the situation in Ontario, are putting Quebec behind our neighbor this year. This step backwards should not please François Legault, whose objective is to catch up with Ontario’s wealth, not the other way around.
In the budget presented on Tuesday, therefore, it is indicated that Quebec’s debt will reach 39% of our gross domestic product (GDP) as of March 31, 2024, one point above Ontario (38%). At this time last year, Quebec was tied with Ontario, at 38.3%, and previously, we were below Ontario(2).
In short, 2024 will go down in history as the year when Quebec once again became more indebted than its neighbor. And according to forecasts, that will not change anytime soon, since Quebec’s debt (as a percentage of GDP) will continue to increase before falling, while Ontario’s will decline further over the coming years.(3).
In absolute value, Quebec’s net debt will reach 226 billion as of March 31, 2024, an increase of 15 billion compared to the previous year. This increase is explained by the deficit and net investments in infrastructure, in particular.
The financial health of a province has very concrete effects. It allows it to finance itself at better rates from lenders.
This year, Quebec still managed to obtain a rate very slightly lower than that of Ontario (1 basis point, or 0.01%), but this gap was 5 basis points in 2022 and it has still been favorable to Quebec since the summer of 2017. At the rate things are going, a reversal favoring Ontario is to be expected.
It must be said that Doug Ford’s province has attracted credit rating agencies for two years.
Certainly, Ontario still has a slightly less favorable credit rating than that of Quebec from Moody’s and Standard & Poor’s. This long-term debt rating from Standard & Poor’s is A+ for Ontario and AA- for Quebec.(4).
But things are changing, slowly. And with its financial recovery, Ontario managed to get a positive outlook attached to its credit rating from both agencies, and the next step would increase it to AA-, like Quebec.
Quebec is experiencing the opposite situation, in a way. On Wednesday, the Moody’s and DBRS Morningstar agencies did not like Quebec’s deficit revealed Tuesday for the year 2024-2025, of 11 billion, as reported by my colleague Martin Vallières(5).
Without attaching a negative outlook to Quebec’s rating, Moody’s analysts write that “the drop in budgetary results is a negative credit finding.”
The Generations Fund to the rescue
The high level of borrowing by Quebec is not without consequences. The budget tells us that the government must draw $9.4 billion over three years from the Generations Fund to reduce its borrowing programs.
The use of the Fund will be particularly high over the next year (4.4 billion in 2024-2025). The drain will be 2.5 billion next year (2025-2026), as much as in 2023-2024. It’s as if Quebec were dipping into its current revenues to directly repay its debt rather than making payments to the Generations Fund.(6).
Such samples are exceptional, although not necessarily contraindicated. Some believe that it is even preferable to repay the debt directly rather than adding to the Fund, which is less risky, especially in this period of high borrowing rates.
The fact remains that Quebec is thus depriving itself of the Fund’s returns for this money. In 2023, the Fund, managed by the Caisse de dépôt et placement, obtained a return of 9.3%, which is significantly higher than the cost of new government borrowing (4.1%). And for 17 years, the average return has been 5.6%, or 2.4 points more than the cost of funds over the period.
What do I think of it ? Less debt is not an end in itself. It is possible to have reasonable debt AND ample and adequate utilities.
In addition, Quebec has an admirable asset in Hydro-Québec that the other provinces do not have. This asset could reduce our net debt if we used the market value of Hydro-Québec rather than its book value.
Another element: our debt is far from being worrying as it was 10 years ago, when our net debt reached a peak of 53.9% of GDP. Finally, the CAQ government says it has the firm intention of reaching its lower debt target of 32.5% of GDP in 15 years.
Still. At 39% of its GDP, Quebec today has the second highest net debt of the provinces, after Newfoundland and Labrador (44.3% of its GDP). Quebec’s rate is 10 points above the weighted average of the 10 provinces (29.9% of their GDP).
This heavier debt requires recovery before the situation worsens and affects our public services.
1. And when I talk about modern history, I’m talking about an era that goes back practically to Maurice Duplessis, in the late 1950s.
2. In fact, after falling under Ontario in 2019, Quebec’s net debt was adjusted for technical accounting issues, so that it was in 2022, with this new definition, that Quebec fell back under Ontario. Ontario.
3. Ontario’s numbers could change depending on the upcoming budget. Text data is based on Ontario Accountability Office’s February 13 analysis of February 2024.
Consult the winter 2024 economic outlook in Ontario
4. It was in 2016 that Ontario saw its rating fall behind that of Quebec under the mandate of former Liberal Prime Minister Kathleen Wynne after years of very large deficits.
Read “A historic Quebec-Ontario financial turnaround”
5. Read “Financial rating firms are concerned about Quebec’s budget deficit”
6. The government even had to empty two thirds of the Territorial Information Fund (land register), drawing 400 million from it to relieve borrowing needs.
Precision
In my column of Thursday March 14, an editing error made it say 2e note at the bottom of the text that the compound annual increase in salary agreements gave 8.8% for the year beginning on 1er April 2024 (6% for 2023 and 2.8% for 2024). It should have instead read 9%, with the compound effect, as specified in the text of the column which referred to the note.