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Quebec’s post-election challenge: Rejuvenating an economy in decline

Quebec managed to get through an election campaign with only a peripheral discussion on its economic future. Too bad. The province is steadily drifting into a prolonged period of slower real economic growth, due to aging demographics and weak productivity gains.

Without deliberate action by government and business to counteract these forces, Quebeckers face an unappealing combination of deteriorating public services and higher taxes – and a stark future as an increasingly uncompetitive economic jurisdiction.

The short-term outlook for Quebec is a bit brighter, following two consecutive years of economic growth barely above 1 per cent, stagnant private investment and little job growth. The Conference Board of Canada forecasts that Quebec's growth rate will rise to 2 per cent in 2014. Driven by the positive spillover effects of the U.S. private sector recovery, growth is expected to be a bit stronger again in 2015.

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However, this pickup in economic activity won't last. Quebec's long-term growth fundamentals are not strong.

The Conference Board's long-term economic forecast (to 2035) projects Quebec's future economic growth (inflation adjusted) will decline to about 1.5 per cent annually after 2015 – lower than in Western Canada, and, for that matter, Ontario. This projection is largely due to slowing labour force growth, which is determined by Quebec's underlying demographics.

Such a weak rate of long-term growth will make it very hard for the province to sustain its health care and public education systems in their current form. Slower growth quickly translates into less revenue increases for government, which squeezes its capacity to finance these valued public services.

The previous government's decisions added further to the public debt, pushing out the target for balancing the budget by two years, to 2015-16. Quebec's taxes and fees are already higher than in other provinces, and it has the highest net public debt among the provinces, near 50 per cent of gross domestic product (GDP). Restoring a balanced budget is critical to convincing capital markets that the province has a serious fiscal plan.

After paying insufficient attention to long-run economic trends, Quebec is entering a period of sustained challenges – with a shrinking marge de manoeuvre to deal with them.

So what can the new Liberal government do to strengthen Quebec's growth outlook? The labour force, private investment and productivity are the three key factors that determine an economy's potential (or sustainable) growth. Policy action is required on all three fronts.

Starting with the labour force, the Conference Board expects the growth rate to dip below 0.5 per cent annually after 2015, due largely to baby boomer retirements. To change this trend, more immigrants could be welcomed to Quebec, older workers could be encouraged to stay on the job longer, and more aboriginal people and other under-represented groups could be encouraged to enter the work force.

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Financial resources to invest in education and skills could be increased, starting with higher tuition fees that reflect the real costs of a postsecondary education. Artificially low university and college tuition may help young Quebeckers attend college and university, but it deprives educational institutions of financial resources and can distort program choices by individual students. A combination of higher fees and greater access to student loans, and grants for low-income students, would be a better public-policy approach.

Next, Quebec needs to increase the rate of sustained private investment. The question of Quebec's political future appears to be settled for the moment, which should help to reduce short-term uncertainty among investors. Complementary public investment in infrastructure would help to support stronger private investment, particularly in the Montreal region – still the beating heart of the Quebec economy.

The third long-term growth variable is productivity – usually measured as output per worker. The new government's broad platform suggests that it is open to making the Quebec economy operate more efficiently to support productivity growth. That said, the government must move quickly from principles to action, demonstrating that it is ready to implement policies that foster business innovation and support an openness to trade and investment (that are not highly subsidized). Improving the efficiency of government in providing services, notably health care, would support the productivity agenda.

Without a new direction on economic policy, Quebec's economic growth prospects are unlikely to improve. The new Liberal government would benefit from undertaking a fundamental review of core policies aimed at strengthening labour force growth, private investment, productivity and innovation.

Otherwise, Quebeckers should prepare themselves to pay higher taxes to maintain public services, or expect an erosion in service quality.

Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada.

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About the Author

Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline. More

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