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The Progressive Economics Forum

Quebec Tuition: Between a Rock and Hard Place?

In the context of student protests over Quebec tuition fees, my friend Luan Ngo has just written a very informative blog post on Quebec’s fiscal situation.

While I encourage readers to read his full post, I do want to use the present space to make mention of three important points he makes:

-On a per capita basis, Quebec spends more on government programs than most other Canadian provinces.

-Residents of Quebec pay more personal incomes taxes than any other province.

-Quebec’s debt-to-GDP ratio is significantly higher than that any other Canadian province.

He argues that, in light of the above, “Quebec is in a bind, stuck between a rock and a hard place.”

While I believe Luan makes an extremely important contribution to the debate, I think it’s crucial to make mention of the role of the federal government.?? I would argue that successive federal governments have in fact brought on this so-called crisis.

When Paul Martin was federal finance minister, he brought in several tax reductions.?? One was the $100-billion tax-cut package he brought in with the 2000 federal budget; he also brought in important reductions to capital gains taxes.?? By the time Chretien/Martin left office, the federal government’s fiscal capacity (annually, and assuming a balanced budget over the business cycle) had been reduced by approximately $30 billion.?? After the Harper government came to power in 2006, this trend continued, as the Harper government continued what Chretien/Martin had started (including a reduction in the GST).

It therefore won’t surprise many readers to learn that, while the federal government at one time covered 80% of a typical Canadian university’s operating budget, today the federal government covers just 50% of a typical university’s operating budget. If you’re a federal government, it seems you can’t have your cake and eat it too!

Thus, I would argue that the current “crisis” in Quebec over tuition fees has been largely created by successive federal governments that have defunded Canadian universities, indeed putting provincial governments “between a rock and a hard place.”

And if successive federal governments have taken us in one direction on taxation levels, they also (if they so choose) have the option of reversing course. What goes up can also go down, and vice versa.

Finally, I feel it would be irresponsible for me not to point out that there are schools of thought (ones that are becoming somewhat more prominent in light of the financial crisis) that do not accept a lot of the limits and boundaries of neoclassical economics. Some economists have argued, for example, that if a central bank keeps real interest rates low (but positive) over the long term and allows for moderate inflation, a country with its own currency can increase spending very substantially over the long term without increasing taxes.?? PEF Blogger, Arun Dubois, has blogged extensively about some of these other perspectives.

Enjoy and share:

Comments

Comment from Keith Newman
Time: April 29, 2012, 2:12 pm

Modern Monetary Theory (in fact a rediscovery and updating of Functional Finance) holds that our limits are real resources and inflation not lack of money, for the issuer of a free-floating fiat currency. How can something that can be created at will in any quantity by the currency issuer, in our case the government of Canada (with the Bank of Canada) be a barrier to anything?

However Canadian provinces are not currency issuers so they face much the same limits the rest of us do, although they do have the ability to tax. So all the provinces are indeed potentially in a bind. The solution is for the federal government to take over more spending in health, education, the environment, etc.

Comment from M. J. Coldwell
Time: April 30, 2012, 12:16 pm

Great discussion. I think Keith and Nick have much of the argument. Obviously, as they say, as Canadian provinces are not currency issuers, they can only pay for their program spending through federal transfers and revenues they accumulate through taxation. Obviously, the federal government could diminish the educational financing problem were they to “take over more spending in health, education, the environment, etc.” For instance, a buffer stock employment policy, such as that promoted by Arun, would free up a lot of provincial dough, for a while.

However, another key issue is what is meant by “take over”. If this means that the Government of Canada is just to transfer money without conditions to provinces, that does not help matters much at all, because for any given level of federal spending there will still be debilitating tax competition between the provinces. For instance, Quebec is tax uncompetitive compared to many other provinces, and has, for instance, made a choice to fund childcare and certain other social services at the cost of privatized health-care and, now, increased tuition fees. In relative terms, this will not change even if the federal government increases its social spending.

I think this tells us several things: first, the left has to argue for robust use of the national spending power to enforce national standards without provincial opt-outs, such as those Thomas Mulroney — *ahem Mulcair — promotes for Quebec and other provinces. Second, there needs to be some mechanism, such as the cost-shared financing programs established by Tom Kent and Lester Pearson with the support of Tommy Douglas, to guarantee on-going federal investment conditional on provincial obedience to national principles around minimum standards. Third, the left must plainly declare that Quebec nationalist arguments that Ottawa should get out of putative “provincial areas of jurisdiction” are really just fronts for neo-liberal austerity measures, aimed to defend the power of a small monied provincial elite, which controls all the main parties in Quebec. Fourth, the NDP should declare that the best way to strengthen the absolute power of the Government of Quebec to serve its citizenry is to rebuild and increase the relative central power of the Government of Canada to enforce national standards.

Now, which federal party is the only one defending the spending power, now? Hint: it’s not the NDP.

Comment from Francis Fuller
Time: April 30, 2012, 2:24 pm

However Canadian provinces are not currency issuers . . . So all the provinces are indeed potentially in a bind. The solution is for . . .
Provinces to create the situation in which they can issue currency and can tax. This then permits the province to achieve that barrier-less position of being an issuer of fiat.

Follow this arguement to its ultimate conclusion and the end result is an independent Quebec.

Comment from Francis Fuller
Time: April 30, 2012, 2:36 pm

Just read Luan Ngo’s post. One possible solution would be to provide better job market information to young people. This would entail creation of a mechanism by which employers might signal thier needs to future employees (the student body). The state then operates a sliding tuition fee mechanism through which lower costs are assesed against those persons in obtaining skills with clear market demand and high costs are assessed against those persons obtaining skills which are less in demand.

Comment from M. J. Coldwell
Time: April 30, 2012, 2:59 pm

Francis Fuller wrote: “Follow this argument to its ultimate conclusion and the end result is an independent Quebec.”

Yes, I see that as one possible conclusion to draw, and not an unlikely one. But another one is that federalism, if it is to work, must oppose “soft-nationalism” and provincial decentralization. It makes no sense to support the mushy neo-liberal middle ground, the community of communities stick that has infected Canadian politics for 30 years. If Quebec ever leaves Canada it will be because the federal presence has not been sufficient to ensure the economic and social conditions which justify Canada’s existence. Ask not what you can do for your country, but rather what your country can do for you!

And then there is the other side of the argument: provinces could perhaps “benefit” in some instances from becoming sovereign currency issuers, but by the same token, a province which separates loses access to the real resources that the broader Canadian economy and federation currently provide. Quebec would lose access to many of Canada’s real resources, and Canada to many of Quebec’s, albeit NOT to most of the resources involved in the Plan Nord, as provincial partition would be very likely.

In all cases, defence of the spending power, equalization, and cost-shared programming along minimum national standards, seems the option likely to provide the greatest combination of social- and economic justice and provincial freedom.

Comment from livescoreทีเด็ด Darwin O’Connor
Time: April 30, 2012, 3:15 pm

Asking businesses could be a problem. They always say they are short on skilled workers because it is thier interrest to encourage oversupply to drive down wages.

Comment from M. J. Coldwell
Time: April 30, 2012, 6:42 pm

A point I meant to make, but forgot to, is that Quebec can afford to reduce tuition if it wishes to, even if one sets aside MMT, and looks at the question from a purely provincial standpoint, taking a traditional left-Keynesian perspective, such as that of Harold Chorney — see his recent blog post: http://haroldchorneyeconomist.com/2012/04/14/vive-le-quebec-social-et-progressif-the-conflict-over-higher-university-tuition-fees-in-quebec/

It is interesting to contrast current debates in QC with Bob Rae’s policies in Ontario twenty years ago. I suspect that Chorney would say to Charest, as he recommended to Ontario under Rae, that a better option is to increase the deficit and grow Quebec to an acceptable debt-to-GDP ratio over the cycle. It is worth reading his piece “Revisiting Deficit Hysteria” at
http://www.historycooperative.org/journals/llt/54/chorney.html

Here is an excerpt:
“The NDP in 1991 was not in a good position given the depth of the recession underway, the implacable anti-inflationary obsession of the central bank then still under the leadership of the zealous zero inflation policies of John Crow and the implacable opposition of the financial press. I recall Mike McCracken telling Premier Rae “if you are going to get hung, better to be hung for a pound rather than a penny” as he supported my call for a full-throttle Keynesian budget.
But in the end the Rae government opted for a moderate one billion dollar stimulative addition to the deficit that would have occurred anyway. This still took considerable courage, but it was not enough to do much good. They got assaulted by the media and because their heart was not completely in the Keynesian strategy to begin with they did not do a good job of defending themselves.”

Of course, federal spending would be even better, and three cheers for MMT, but QC is not without options, even if the Parti Qu??b??cois and Coalition Avenir Qu??bec are just as or even more hawkish on deficits than the PLQ.

Comment from William Hayes
Time: April 30, 2012, 7:41 pm

Keith Newman comments above: “Canadian provinces . . . do have the ability to tax.”

Ontario and BC could increase their flexibility in the current situation by completely separating the determination of provincial income tax liability from the determination of federal income tax liability, as Quebec did years ago.

Comment from Nik Barry-Shaw
Time: April 30, 2012, 11:17 pm

The article is garbage. No account taken of the concrete proposals for financing higher education by Qu??bec solidaire or the CLASSE, and no questioning of the ideology of “competitiveness.” This is exactly what we are fighting against. Wake up.

Comment from Francis Fuller
Time: May 1, 2012, 5:27 am

Nik Barry-Shaw –
Can you provide more information on either of those two points? I have seen nothing in English language reporting describing alternate proposals for financing education. I am familiar with critiques of the “ideology of competitiveness” but have little knowledge of the questions currently being raised by CLASSE or others.

Comment from Francis Fuller
Time: May 1, 2012, 6:01 am

Nik
I found this –
http://rebelyouth-magazine.blogspot.ca/search/label/quebec%20student%20strike%202012

But still incomplete coverage. Any better sources. Coverage in the English language press has been very poor as can be expected from corporate media. The above suggests that the students are being joined by organized labour in a larger scope of protest against neo-liberal policies in general. Is this correct?

Comment from Keith Newman
Time: May 1, 2012, 4:39 pm

Re Francis Fuller, April 30, 2:24pm:

Setting aside problems for Canada and various substantial political and territorial issues, Quebec would face serious economic challenges if it became independent but kept the Canadian dollar. In fact we can observe what happens when politically independent countries cede control of their currency to someone else: the European catastrophe. Quebec bonds would be payable in another country’s currency and the newly independent Quebec could potentially face insolvency since it could not create Canadian dollars if it needed to. It would be obliged to keep a very tight rein on its borrowing or lenders, fearing insolvency, would demand higher, possibly much higher, interest rates, as has happened in Europe.
Apparently Jacques Parizeau was well aware that an independent Quebec required its own currency but could not say so for political reasons.

Comment from Keith Newman
Time: May 1, 2012, 4:49 pm

Re Francis Fuller and provinces issuing their own currency:
Under current rules the only issuer of Canadian currency is the government of Canada (with its Bank). Provinces cannot do that, nor can you or I or we go to jail for counterfeiting.
A province could issue a bond that is used to extinguish Canadian dollar tax liabilities to the province. Maybe that could operate as a provincial currency.

Comment from Keith Newman
Time: May 1, 2012, 5:01 pm

Re Nik Barry-Shaw:
A province can raise taxes to pay keep student fees low, or do other things no doubt – no problem there. I believe Quebec has a much lower level of student debt than other provinces as a result of its low fees. I live in Quebec and in addition to somewhat higher tax rates I also pay a solidarity tax to help low income people, and a special health tax as well. I believe Quebec has the lowest inequality in after-tax incomes in Canada. I have no problem with that. In fact it’s one of the reasons I would never leave Quebec. There is a strong sense of social solidarity and it’s a remarkably vibrant place. Nonetheless the constraints of a monetary system the province does not control are real.

Comment from Keith Newman
Time: May 1, 2012, 5:16 pm

Re RJ Coldwell:
Certainly the best solution to provincial budgetary problems is to have a strongly growing economy. In the early 1990s this happened in Canada thanks to an increase in exports to the US despite the federal government cuts. It is not clear now with a Canadian dollar at par and the US in its worst recession since the end of WWII this is likely to happen again.

The answer for us is much larger federal government spending, on the train line Chorney suggests perhaps, as well as other things. Unfortunately a fiscally conservative federal government can maintain most of the country in a permanent semi-recession putting an increasing squeeze on provincial finances. It’s a clever and cynical way to reduce our provincial social programs but have the provinces bear the blame.

Comment from M.J. Coldwell
Time: May 1, 2012, 8:09 pm

Keith Newman:

Mostly we agree. Just a note on the early 1990s. Ever hear of the Great Canadian Slump? Check out the output gap for the 1990s.

Comment from M.J. Coldwell
Time: May 2, 2012, 9:53 am

So, Marois, Lucien Bouchard, and Jean Charest are all against a tuition freeze, and you know the CAQ wants to raise tuitions even more.

See the CBC: http://www.cbc.ca/news/canada/montreal/story/2012/05/02/student-protest-lucien-bouchard-letter-pq.html

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