Questions & Answers about Quebec's Debt

1. Why use public sector debt? When analyzing a government’s indebtedness, it is necessary to go beyond what it manages directly and include the health and education networks, municipalities and other entities under the government’s ultimate responsibility, since the government guarantees their debt. Public sector debt is therefore the most exhaustive measure of Quebec’s debt, the one that provides a picture of what the government of Quebec borrows either directly or indirectly.

2. Why not take government assets into account? The only “liquid” assets of the government, those that could be sold quickly to pay off debt, are net financial assets. These assets came to $26 billion as of March 31, 2020. It is hard to assess the market value of government-owned fixed assets and infrastructure (roads, bridges, schools, national parks, etc.) since there are no relevant markets. Moreover, it is highly unlikely that the government would sell schools or bridges at some point to pay off the debt. This is why neither the government nor the auditor general takes these assets into account in attempting to paint a realistic picture of the debt that Quebecers will eventually have to repay. These assets are certainly part of Quebecers’ financial heritage, but they do not reduce the overall bill – or the growing interest – that Quebecers will have to pay. The Quebec government could sell crown corporations such as Hydro-Québec (as proposed already by Claude Garcia in a Research Paper published by the MEI) to restore its finances. However, the same people that insist on including government assets in its debt generally reject that option.

3. How much does debt service cost the government every year? In 2019-2020, debt servicing cost the government and government agencies $7.8 billion, or $920 per Quebecer.

4. Should we worry about the government’s debt? A great risk is hidden in another form of government indebtedness: its commitments to pay benefits under a vast array of social programs. Examples include payments under the Quebec Pension Plan, motor vehicle insurance (SAAQ), parental insurance (RQAP) or even subsidized spaces in childcare centres. Although social programs do not represent debt as such, since the government can always modify their nature, maintaining them is likely to require Quebec to raise employees’ and employers’ contributions or to reduce benefits. Also, certain cyclical and structural factors could, in the coming years, quickly worsen the province’s debt problem. Among other factors, there is the aging of the population (more pronounced in Quebec than elsewhere in Canada), which will put added pressure on our health care system, as well as the likelihood of higher interest rates in the future, which will raise the cost of debt service.

5. How is the growth of the public sector debt estimated for the coming year? The Quebec Department of Finance does not provide an estimate of the growth of the public sector debt for the coming year. It does, however, provide an estimate of the increase in the government’s gross debt in its budget each year, which is the largest component of the public sector debt (the gross debt accounts for 73% of the public sector debt). Here is the method used by the MEI to estimate the increase in the public sector debt as of March 31, 2019: For the “government’s gross debt” component, the MEI simply takes the Quebec Department of Finance’s predictions;

For “Hydro-Québec’s debt,” “municipalities’ debt” and “universities’ debt,” the estimates come from their average annual growth rates over the past three years;

The “other government enterprises’ debt” component is considered stable. Components of the public sector debt (millions of dollars) March 31, 2020 March 31, 2021 Variation -Government’s gross debt 197,685 202,185 + 2.3% -Hydro-Québec’s debt 44,875 45,540 + 1.5% -Municipalities’ debt 26,641 27,515 + 3.3% -Universities’ debt (other than the Université du

Québec and its constituent universities) 1,458 1,410 – 3.3% -Other government enterprises’ debt 374 374 0 % Total (Public sector debt): 271,033 277,024 + 2.2% Source: MEI’s calculations, Quebec Department of Finance, Budget Plan – Budget 2020-2021, March 2020, p. G.16.

6. To whom is the Quebec government’s debt owed? The Quebec government’s debt is owed to holders of the bonds it has issued, most of whom are either Quebec citizens or Quebec institutions (financial institutions, retirement plans, mutual funds, etc.). For example, the advertising campaigns of Épargne Placements Québec encourage individual investors to buy Quebec government bonds. A portion of the government’s debt is held outside of the province of Quebec. However, there are no real data on holders of Quebec debt or on their countries of residence. The Quebec government’s debt is also made up in part of a retirement plan liability, which is to say what the government has promised in retirement benefits to its civil servants without having accumulated sufficient funds to fulfil those promises. This government debt is not negotiated on the bond markets. It is instead a debt calculated by actuaries, but it is very real nonetheless.

7. What is the Quebec government’s credit rating? The Quebec government’s credit rating basically has an effect on the interest rate that it pays on its debt. Various rating agencies assign a credit rating to the Quebec government. These ratings are indicated in the Quebec budget each year. Currently, the two main rating agencies assign Quebec ratings of Aa2 (Moody’s) and of AA- (Standard and Poor’s), both higher than Ontario’s.

8. What effect would an increase in the interest rate applicable to the debt have on the Quebec government’s finances? In fact, there is not one single interest rate applicable to the debt, but rather several rates depending on when the bonds mature and the moment when those bonds were sold to the public. In addition to new loans due to an increase in the debt, each time a part of the government’s debt comes due, the government must borrow again to refinance the debt that it either does not intend to pay down or lacks the means to pay down. An increase in the cost of borrowing would not be felt immediately since it would be applied only to the current financing program. In time, of course, a larger and larger proportion of the Quebec debt would be at a higher rate of interest. In the March 10, 2020 budget, we learn that “In 2019-2020, interest on the direct debt will decrease by 6.6% owing to lower interest rates and accelerated repayment of the debt from the Generations Fund. “In 2020-2021 and 2021-2022, it will increase by 10.0% and 9.2%, respectively, mainly because of the government’s increased borrowing needs related, in particular, to public infrastructure investments, and the anticipated change in long-term interest rates. Interest on the direct debt was very low in 2019-2020 owing to, among other things, very low interest rates.” (Quebec Department of Finance, Budget Plan – Budget 2020-2021, March 2020, p. F.53.) The Quebec government’s refinancing needs were revised upward from $11.8 billion to $19.2 billion in 2019-2020. The financing program will be $13.9 billion in 2020-2021. For the next four years, from 2021-2022 to 2024-2025, it will average $26.9 billion per year.

9. Is it true that the debt was reduced, and if so, why is the Debt Clock still going up? It is true for certain measures of the Quebec government’s indebtedness. For the first time since the late 1950s, the government’s gross debt was reduced during fiscal year 2015-2016. It increased modestly the following year, however, rising from $203.3 billion to $203.5 billion on March 31, 2017, to then fall again in 2018, in 2019, and in 2020. According to the government’s forecasts, it will increase significantly in the coming years, however. These reductions of the gross debt deserve to be pointed out, but Quebec should watch its spending because a substantial increase in the gross debt is projected as of next year. Another measure, the net debt, has followed a similar trend. It was reduced from 2015-2016 to 2019-2020, but will start to grow again as of 2020-2021. As for the debt represented by cumulative deficits, it decreased and will continue to decrease. The public sector debt illustrated by our Debt Clock, for its part, was reduced from 2016-2017 to 2019-2020. Without knowing in advance the payments that will be made to the Generations Fund in the future, we estimate that it will increase by $6 billion in 2020-2021 according to Finance Department projections for the evolution of the gross debt, as well as our own projections for the evolution of the debt of municipalities, of Hydro-Québec, and of other institutions whose finances fall under the province’s responsibility.