Quebec in Deep Economic Trouble

Quebec in Deep Economic Trouble

To those living outside QUEBEC's borders, the film L'Illusion Tranquille might seem as compelling as watching poutine congeal. In an attack on Quebec's cherished model of state intervention and separatist obsession, the hour-long documentary relies on interviews with a decidedly unsexy array of academics, journalists and a panel of student government types talking about fiscal models and job seniority. Feel-good entertainment, it is not.

But the self-produced documentary, released only in a handful of Quebec cinemas, has provoked a veritable crise de conscience in the province's media and cultural circles, simply by pointing out what is becoming increasingly obvious: Quebec is broken. Burdened with the highest taxes, the largest provincial debt and one of the oldest populations in North America, Quebec is on the road to economic ruin.

L'Illusion Tranquille suggests the PARTI QUÉBÉCOIS' eternal pursuit of separation has served only to further distract and imperil Quebec's lot. The reaction amongst separatists was quick and predictable. "These supposedly lucid people preach our ear off, trading in shallow clichés and simplistic truisms," wrote Louis Cornellier in the nationalist Le Devoir. More surprising, however, was how quickly and earnestly many of Cornellier's colleagues took up L'Illusion's cause. "This film is to Quebec's finances as Al Gore's An Inconvenient Truth is to climate change," wrote Richard Martineau in the (much bigger) Journal de Montréal. Joanne Marcotte and Denis Julien, the film's husband-and-wife production team, did a positively fawning media tour. For Julien, the film's success is simple: "Our system has reached its limit," he said. "We are overly burdened, and Quebecers are starting to realize it."

Not a moment too soon. Even a cursory glance at decades of data shows Quebec is in deep, deep trouble. For years now, productivity has lagged while debt soared. It is expected to hit $127 billion by the end of next year, or almost $17,000 for every Quebecer. Provincial budgets rely heavily on federal transfer payments, and efforts to reform the economy have been shackled by powerful unions and an unwavering dedication to the province's cherished but expensive social system, wreaking havoc on public finances. As a group of academics and business leaders led by former premier Lucien Bouchard wrote in a 2005 manifesto, "in financial terms, the Quebec government is like a bulky albatross that is unable to take flight."

Things are so bad that Quebec's GDP ranks 54th out of 60 provinces and states in North America - behind many with a fraction of its population and resources. It trails Montana and Arkansas, for example, and is only slightly ahead of Mississipi. GDP is routinely 20 per cent below that of Ontario, its closest geographical and economic cousin. "In Quebec, the wealth of a family of four is $21,028 less than that of a similar family in the state of Maine," wrote Alain Dubuc in his pro-business tome, Éloge de la Richesse (In Praise of Wealth). "How is it that an economy such as Quebec's, which is fully capable, doesn't transform into wealth?"

Canadians will be wondering the same thing soon, as Quebec's economic crisis is about to be thrust onto the national agenda. Prime Minister Stephen HARPER has hinted that the March 19 federal budget will take steps to correct the so-called "fiscal imbalance." Translation: a hefty transfer payment to Quebec, which already gets $2.2 billion a year more from the federal government than it contributes. The federal money has already become a hot political issue in advance of the Quebec provincial election, scheduled for just one week after the federal budget. When Premier Jean CHAREST hinted that a Parti Québécois win on March 26 would end the federal gravy train, PQ leader André Boisclair accused him of trying to blackmail Quebecers into voting Liberal.

The trouble now is that Canada is subsidizing a province that is not only in financial trouble, but not all that interested in fixing itself, says Claude Montmarquette, an economics professor at Université de Montréal and one of the signatories of the Bouchard manifesto. "We have a large amount of money coming from the rest of Canada and also a pass to spend a lot of money on social programs that others pay in large part for us," he says. "So why do we have to change until we hit the wall? And that's coming."

While all Canadian provinces devote increasingly large chunks of their budgets to things like health care, Quebec's social programs are far and away the comfiest. Quebec has the luxury of two very expensive programs unavailable in the rest of the country. The first is the province's $5-a-day daycare program. Enacted by the Péquiste government in 1997, and bumped up to $7 a day by Charest, it is as popular as it is wildly expensive: there are some 195,000 daycare spaces, costing roughly $1.4 billion a year. The province now claims 43 per cent of Canada's regulated child care spaces, though it only has 23 per cent of the country's children under the age of 13. The daycare system is credited with helping drive Quebec's eight per cent jump in the birth rate in 2006, the first sizable increase in decades. Nevertheless, this increase comes at a price. According to La Conseil du Patronat, Quebec's main employers' federation, a child care spot in Quebec costs roughly $11,600, nearly double the Canadian average. In five years, the total cost of the daycare system has increased by 140 per cent.

Since 1994, the Quebec government has frozen university tuition at $1,668. Today, a Quebec student entering university pays on average 65 per cent less than his equivalent in Ontario. It might be a sweet deal for students; for universities, not so much. "Quebec universities are underfunded in comparison to other Canadian universities and our peers in the U.S.," McGill President Heather Munroe-Blum says. Recently, the Charest government announced a tuition increase of $100 per student per year, a move Munroe-Blum calls "extremely important." Low tuition certainly hasn't translated to more graduates. Quebec has both the lowest university attendance and the lowest degree-completion rate, according to an Organisation for Economic Co-operation and Development study.

Since the QUIET REVOLUTION, a mammoth civil service has become ingrained in Quebec's political culture. The number of civil servants in Quebec per capita is roughly twice that of Ontario, says Pierre-Pascal Gendron, a professor of economics at the Humber College Institute of Technology and Advanced Learning in Toronto. "The public sector is quite large and it's a problem that's not going away." Polls suggest Quebecers are loath to give up the sprawling social safety net and the well-paid government jobs that have become such an integral part of the provincial system. In January, the polling firm CROP asked 1,000 people across the province about cutbacks to government services. The results showed 60 per cent of those polled want the government to continue to be a big player in Quebec society. But the system is becomming increasingly unsustainable - 12 cents of each dollar raised by the Quebec government now goes to servicing the province's debt, even as spending continues to outpace revenue, according to a report last month by TD Bank.

What these gold-plated social programs all add up to is a hefty bill for other Canadians. "If you're in another province it means you're paying more to support Quebec," says Jason Clemens, director of fiscal studies at the Fraser Institute, about federal transfers. "If you go to a citizen in Saskatchewan, where they're just entering a growth phase and correcting some of their problems, they're asking, 'why should we subsidize poor policy in another province?' "

Experts say Quebec's sluggish economy and reliance on federal handouts has created a deeply dysfunctional business climate, openly hostile to competition and entrepreneurship. Consider an incident on a frigid Saturday morning in late February, when dozens of protesters clashed with police in Montreal's north end. The placard-wavers weren't there to fight homelessness and poverty, or even to oppose the war on terror. No, the activists punching the air with their fists were car salesman. One of their own, the Pie IX Dodge-Chrysler dealership, had dared to sell cars on the weekend. The move was a direct slap in the face to a 35-year-old agreement barring any new car dealer from doing business on Saturdays and Sundays in the city. A week earlier, one rival salesman had hurled a chunk of ice at Sam Hajjar, the offending dealership's manager. This time he was prepared, with police, private security personnel and muzzled guard dogs at the ready. A few customers managed to dodge the seething mob, but not before someone scratched the paint off two of Hajjar's demonstration models.

If it seems strange that car dealers, the most red-blooded capitalists of them all, would fight to not sell cars, consider the wealth of statistics and polls that reinforce Quebecers' aversion to the typical North American workload. When Bouchard claimed that people in the province were lazy, he was pilloried for it, and widely portrayed as a traitor, but he was simply giving voice to data from Statistics Canada that show Quebecers do work less than everyone else in the country. In a report last year, researchers found workers in Quebec put in, on average, 1,750 hours a year, or 130 less than top-ranked Alberta. And the trend is toward less work, not more. Quebec's labour productivity declined between 1997 and 2005, according to another StatsCan study.

Part of the problem is that just 44 per cent of Quebecers hold a steady, full-time, year-round job, compared to 57 per cent in Ontario. But there's more to it than that. Quebec bosses have grown used to the fact that on any given day, a disproportionate number of their employees are going to call in sick, compared to other provinces. Full-time employees in Quebec missed an average of 11.2 days of work in 2005, according to Statistics Canada, compared with Ontario's apparently healthier workers who averaged 8.6 days off. Still, Quebecers employed in the private sector look like they're working themselves to death compared to their civil servant colleagues. A Treasury Board document that was leaked to the Journal de Montréal revealed the province's civil servants called in sick an average of 14.14 times in 2005, double the national average. The report stated that the Quebec government lost nearly $170 million to absenteeism. It's only getting worse. The report noted sick days have been on the rise for half a decade.

Quebecers seem to relish their downtime more than other Canadians. They watch more TV than residents in every province save New Brunswick, says Statistics Canada. And they sleep more (a poll by Léger Marketing in 2004 found Quebecers snore away for 7.3 hours a night, while Ontario alarm clocks go off after just 6.8 hours). A Journal de Montréal poll commissioned after Bouchard made his comments found 43 per cent disagreed with his assessment of their work habits. About the same number said they'd like to keep on working at the same pace and earning the same rate. Less than one-third had any aspiration to toil harder for better pay. In fact, if anything, eight per cent wouldn't mind working and earning even less, thank you very much.

Low worker productivity, economists note, is tied in part to labour regulations and punishing tax rates. Along with having the highest taxes, Quebec is the most unionized province in Canada - a one-two punch that has knocked the Quebec economy back on its heels. While recent budgets have aimed to reduce the tax burden and debt problems, the union grip appears unshakable. After André Boisclair became leader of the Parti Québécois, he quipped that he wouldn't cozy up to union leaders as his predecessors, like Bernard Landry, did. But this week, with his popularity plummeting in the polls, he reached out to the union vote, accepting the endorsement of the Quebec Federation of Labour, the province's most powerful trade union. In 2003, just months after a landslide election victory, Jean Charest tried to push through some aggressive reforms, aimed in part at trimming the size of government, and limiting the power of unions. He was forced to abandon those plans following mass strikes by thousands of workers who blocked highways, disrupted transit, and closed down daycare centres. "When the public in Quebec got wind of those plans," says Gendron, the economist, "people were opposed to tax cuts, because tax cuts would mean a reduction in the size of the public sector."

Foreign investors are taking notice. As it is, Quebec's share of the foreign and domestic investment flowing into Canada is below 18 per cent, according to economists, a surprisingly low figure given the province's large population and strong reputation for research and development. Last fall, CAI Global Group, a consulting firm in Montreal, surveyed the perceptions of multinational companies operating in Quebec, duplicating a study it carried out in 1994. Back then, when asked whether the province was becoming more globally competitive, 70 per cent said yes. In 2006, that figure has plummeted to just 33 per cent.

Perhaps most worrisome for Quebec is the steady stream of young people leaving the province to work elsewhere. "Quebecers are voting with their feet," says the Fraser Institute's Clemens. Between 1981 and 2005, the province was the only one to be on the losing end of net interprovincial migration every single year. Even Newfoundland, famous for exporting its young men and women to the latest economic hot spots, saw some gains in the 1980s. Quebec isn't alone in the current flood of workers fleeing the East for the booming West. But over the long run, Quebec's share of the national population has withered to 24.1 per cent in 2001 from 27.9 per cent three decades earlier.

It's not just Quebecers who have grown complacent and comfortable with the province's deep malaise. The rest of Canada has, too. All the talk of yet another big transfer has largely failed to spark the type of outrage among western Canadians that marked the past. "The concern is that as Quebec asserts its national status, we'll see further demands that the rest of the country finance its aspirations," says Roger Gibbins, head of the Canada West Foundation, a Calgary-based think tank. "But I don't think there will be a great backlash in the West because of the tremendous prosperity of the region. The animosity doesn't reach as deeply into our pocketbooks." Gibbins also notes that western Canadians take a pragmatic view of the Conservative government's actions in Quebec. Yes, it may take a dollop of federal dollars for Harper to cement his support in Quebec, but it's better than the alternative - a return to Liberal profligacy. A lot, of course, will depend on how western provinces themselves fare when Ottawa unveils its plans to rejig the federal equalization system. Greater spending autonomy in Alberta could go a long way to soothe the pain of another handout to Quebec.

While a surging economy may allay concerns for the time being, sooner or later Quebec will have to confront its spending largesse. There are some early signs that Quebecers, led by people like Bouchard and Dubuc, are beginning to take notice. Witness the recent rise of the conservative ADQ party, which is attracting the middle-class suburban vote more inclined to care about the quality of its hospitals and schools than another referendum. "The population believes [the PQ] less and less," says Julien, the film producer. "We know more and more that Quebec is doing badly economically. And if we are receiving transfer payments, it certainly isn't us that is enriching the rest of Canada." Nevertheless, few expect whoever wins the upcoming election to try to re-engineer the Quebec economy, especially considering the federal government's willingness to pour money into the province. Quebec's problems are likely to remain Canada's problems for a long time to come.

Maclean's March 19, 2007