Quebec and Ontario Not Likely no Balance Their Respective Budgets by Fiscal Year 1999-2000

Release Date: 25 September 1996

Vancouver, B.C. >>> Canadian money managers responsible for approximately $150 billion in total assets under management hold the view that Quebec and Ontario are not likely to balance their respective budgets by fiscal year 1999-2000, according to The Fraser Institute's latest Survey of Senior Investment Managers in Canada.

An overwhelming 96 percent of Canadian pension fund managers surveyed believe that Quebec is unlikely or very unlikely to balance its budget by the year 1999-2000, given that province's spending cuts announced in the 1996 budget. According to the Fraser Institute's 1996 Budget Performance Index (released 21 August 1996), Quebec's fiscal performance was relatively poor compared to Alberta, Saskatchewan and Nova Scotia. Indeed, Quebec was placed 7th out of 11 jurisdictions in the Index. If the budget is not balanced by the year 1999-2000, fund managers expect 10-year Quebec bonds to widen by an average of 39 basis points (bp) against the benchmark Canada bonds. "This consensus opinion amongst fund managers, and Quebec's poor performance on the Budget Performance Index, suggests that Quebec's Minister of Finance would have to announce further spending cuts above the cuts disclosed in the last budget," said Fazil Mihlar, policy analyst at the Fraser Institute.

In the case of Ontario, 72 percent of the fund managers believe that Ontario is unlikely or very unlikely to balance its budget by the year 1999-2000, with the fiscal measures announced to date. Ten-year Ontario bonds are expected to widen against benchmark Canada bonds by an average of 26 bp if Ontario fails to balance its budget by the year 1999-2000. This prognosis by the fund managers comes despite $8 billion dollars (18 percent) in spending cuts announced by the Ontario government over a three year period. In addition, according to the first quarter update (1996-97), the province is expected to better the target set out in the 1996 budget. "Clearly, this view by the fund managers suggests that the Ontario government needs to embark on further spending cuts above what has been announced in the mini-budget and the Spring budget," said Mr. Mihlar.

Many studies indicate that rapid spending cuts can actually be expansionary under certain circumstances. "A 'regime change' signalled by a move toward fiscal balance can change the expectation of economic agents in such a way that fiscal austerity can stimulate the economy," Mihlar added. Alberta's and New Zealand's economic expansion is indicative of the positive impact of spending cuts and lower taxes. Practical experience from home and abroad suggests that deficit reduction may bring about short-run and long-run gains if economic actors believe that governments' fiscal retrenchment signals a permanent decrease in government spending and taxation. If investors perceive that spending cuts will reduce interest rates and lower taxes, they will invest, thus increasing economic activity and job creation.

Provinces Should Embark on Income and Payroll Tax Cuts and Start Paying Down the Debt to Create More Jobs

Given the improved position of many provinces, the fund managers were asked what policy direction the provinces should embark upon to help stimulate their respective economies. Sixty percent of the respondents preferred a combination of tax cuts and debt reduction, while 17 percent viewed a combination of tax and spending cuts as the better policy option (see graph).

Fund managers were also asked what kind of tax cuts were needed to stimulate job growth. On a scale of 1 to 4 (1 = most preferred, and 4 = the least preferred), an across-the-board 30 percent personal income tax reduction over three years was the most preferred choice, with a rating of 1.4. A cut in payroll taxes was the second most preferred option, with a rating of 2.

Empirical studies suggest that decreasing tax rates would increase economic growth. The international evidence illustrates that economies with lower taxes experience faster economic growth, productivity, and job growth. Lower marginal tax rates encourage innovation, more work effort, and higher savings rates. Since these activities are instrumental in the growth process, economies that encourage them are likely to create more jobs.

Other Provinces Should Adopt Alberta's Legislated Debt Reduction Plan

Respondents were asked if other provincial governments should adopt a legislated debt reduction plan similar to Alberta's. Ninety-two percent said yes. An Alberta-style debt reduction plan would help shift the emphasis from deficit elimination to debt reduction. "It is important that all provinces consider a debt reduction plan in their next budgets, since interest on the public debt diverts money from much needed programs during economic downturns," added Mr. Mihlar.

Alberta's legislated debt reduction plan requires a minimum payment of $350 million per year towards debt reduction. The government has been able to reduce the net debt load from $8.3 billion in 1993-94 to $6.2 billion in 1995-96. The Alberta government could pay off the net debt in 13 years rather than in the initially planned horizon of 25 years.

Overwhelming Support for Larger Provincial Role in Determining Health Care Financing and Delivery

The Federal Health Minister recently reaffirmed the Liberal government's intention to enforce the Canada Health Act. In short, the federal government continues to restrict the way provinces are allowed to manage their health care budgets. Eighty-two percent of the respondents, however, believe that the Canada Health Act should be repealed to provide the provinces more flexibility in managing health care resources.

Support for Devolution of Federal Powers to the Provinces

There have been repeated calls from the provinces, particularly Ontario and Alberta, to devolve power in the area of social policy. These demands have intensified since the Premiers' Conference in Jasper, Alberta. Eighty-four percent of the fund managers are either strongly supportive or supportive of devolution of power to the provinces. The federal government, however, does not appear open to the idea of re-balancing federal responsibilities to allow provinces the flexibility to deliver social services.

Separation of Quebec a Likely Prospect

When asked whether the province of Quebec will separate within the next five years, 61 percent of the respondents said it was either likely or somewhat likely. In the last survey, 66 percent of the survey participants answered in the affirmative.

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.

For further information contact:

Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca

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Last Modified: Wednesday, October 20, 1999.