Sunday, August 19, 2012

"C'est faux!"

"C'est faux Monsieur Charest!"

I've stopped trying to understand Quebec politics a long time ago. In fact, that applies to all politics. It's too subjective. It's too irrational. But, most of all, too misinformed.

Of separation, I fear the toxicity of the political issues; don't understand the legal issues; and dismiss them both as either circular or non-relevant. So, I will default to the economic issues which brings me more mental comfort.

The Quebec question has shaped this country beyond all others - affecting the social policies of Canada, our relationships with the rest of the world and the financial flows of the federation.

In many ways, Quebec has defined Canada's fiscal federalism marked by a uniquely decentralized federal government and, yet, with quite large financial flows. Since time immemorial, Quebec has been the main beneficiary of the federation. Focusing on 2009, Quebecers paid $40 billion in federal taxes and received $53 billion in federal spending (either directly on services, or transferred to individuals or the Province). This means that $14 billion was redistributed to Quebec from the rest of Canada (Figure 1).

Figure 1: Federal Financial Flows, 2009

Source: Table 384-0004, Statistics Canada

Fourteen billion dollars. I find that when numbers become larger than what's in my bank account, I lose sight of their significance. So what does this $14 billion mean? To provide a relevant example, it means that had Quebec separated, Quebecers would have paid $40 billion less in taxes in 2009. But they would have received $53 billion less in services and transfers (yes, the numbers don't add, blame rounding). So the difference is the gap, or 
  • the amount of additional taxes that they would have needed to pay to maintain current services, or 
  • the reduction in spending they would have needed to make to maintain current taxes, or 
  • the sustained increase in the deficit that they would have needed to swallow, or
  • some combination.
Well, in addition to planning tax increases in the upcoming years, Quebec already has some of the highest tax rates in Canada (and North America). Also, the competition is becoming meaner. One has to question why so many corporate HQs are leaving Quebec rather than sulking in the fact that they are. Can Quebec increase taxes even more? Yes but at a price.

Figure 2: Quebec's Tax Rates are Already the Most Progressive in Canada

Source: Canada Revenue Agency

Fourteen billion dollars isn't easy to come across on the spending side either. $14 billion is basically what Quebec is spending on education, recreation and sport in 2012-13. It's more than three times what Quebec is spending on debt servicing. And, most interestingly, it's almost half of what Quebec is spending on health and social services.

Source: 2012 Quebec Budget

Now this one is I hope a no brainer for everybody like it was for me. Quebec is projecting a balanced budget in 2013-14, which is better than some select Canadian governments. Swallowing an extra $14 billion will blow that target right out of the water - to the multiple of three. It would turn a deficit that is seemingly cyclical to one that's structural and unsustainable. 

Source: 2012 Quebec Budget

Already the most indebted province in Canada, Quebec's debt-to-GDP would certainly grow (likely grow by around 4 percentage points a year). But, the Province gets hit with a double whammy because it must take up its share of the federal budget. Other people have thrown the number 100 per cent debt-to-GDP out there, which would make Quebec one of the most indebted country in the world and growing increasingly worse.

No doubt that a fully sovereign Quebec government would redirect what was originally spent by the federal government to match Quebercers' local preferences. But a lot of what the federal government spent was just transfers to the provincial government and to people. No savings there. Quebec would likely have a military, a central bank, agricultural offices and foreign assemblies (all of these services would lack the same economies of scale by the way). So, again, little savings there. I would argue that soveriegnty would have cost Quebecers more.

But the financial impact that sovereigntists say would materialize isn't a cost but a benefit. So the real comparator to analyzing sovereigntists' arguments is not the status quo but what sovereigntists argue would be the financial benefit. Now THAT gap, between how much it would cost Quebecers for sovereignty and the financial benefit that sovereigntists suggests, is the magnitude of misinformation. And this is why, with politics in Quebec and elsewhere, I've given up on trying to understand.

Note: Despite the primacy of the economic argument here, I don't think that the political and social reasons for separation are trivial. I just think that when you are making a choice, you have to know what the costs are. Elections are marked by catchy slogans. And politics driven by logic and facts that fit within a 120 letter tweet, a cardboard sign or a 30-second TV commercial always end with regret during the hangover. That's why I focus on economics - because they don't make sense to most people, therefore often overlooked and become unexpected consequences.

Note 2: Ok, so last update here. It seems that I might have given the impression that Quebec is the sick man of Canada. It's actually not. Am I suggesting that the $14 billion dollars that flows to Quebec is not a lot of money? Well... relatively, yes. Remember that Quebec does have 8 million people living in that province and so when you look at the financial flows of the federation no a per person level, Quebec's $14 billion doesn't seem that large at all. In fact, among the provinces, PEI, Nova Scotia and the rest of the Atlantic provinces receives the most in the federation. You don't even know what people in the territories receive (some are $20,000+). Lastly, keep in mind that a lot of this dynamic is not explained by political deals or some type of targeted favours but rather by how government works. Quite simply, the rich subsidizes the poor. And in some provinces, there are more poorer Canadians, which explains these differences in net contributions and net benefits.

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