IN­SIDE QUE­BEC’S ECO­NOMIC COME­BACK

HOW THE PEREN­NIAL HAVE-NOT PROV­INCE TURNED THINGS AROUND. WILL IT LAST?

National Post (National Edition) - - FRONT PAGE - GRAEME HAMIL­TON in Mon­treal ghamil­ton@na­tion­al­post.com Twit­ter.com/gray­hamil­ton

What kind of per­son, groggy af­ter a long transat­lantic flight, takes plea­sure in the an­nounce­ment that his con­nect­ing flight home will be stuck on the tar­mac for a while?

Some­one like Que­bec Fi­nance Min­is­ter Car­los Leitão.

Leitão was re­cently pass­ing through Toronto on his way home from a Euro­pean trip com­bin­ing meet­ings with bankers and in­vestors and a va­ca­tion in his na­tive Por­tu­gal.

“We taxi out of the gate, we start to go, and then the plane stops. Why did it stop? They were put aside be­cause there was traf­fic con­ges­tion around Mon­treal — air traf­fic!” Leitão re­counted in an in­ter­view.

“We’d never heard of this in Mon­treal. Too many planes in Mon­treal?”

He was an hour late get­ting off the ground, but he took com­fort in hav­ing ex­pe­ri­enced first-hand one small in­di­ca­tor of what economists are call­ing a re­mark­able turn­around in Que­bec’s eco­nomic prospects.

For decades, Que­bec was seen as a lag­gard, trail­ing the rest of the coun­try in eco­nomic growth and job cre­ation while amass­ing sub­stan­tial pub­lic debt. The prov­ince was a cham­pion when it came to sub­si­dies to busi­ness and lay­ers of bu­reau­cracy, but Que­be­cers’ stan­dard of liv­ing was slid­ing. In 2012, a re­port by Mon­treal’s HEC busi­ness school warned that Que­bec was en route to be­com­ing the poor­est prov­ince in Con­fed­er­a­tion. (The economist who wrote the re­port, Martin Coi­teux, ran for the Lib­er­als in 2014 and as pres­i­dent of the Trea­sury Board for the govern­ment’s first two years played a cen­tral role in con­trol­ling govern­ment spend­ing.)

It is true that traf­fic at Mon­treal-Pierre El­liott Trudeau In­ter­na­tional Air­port is at record lev­els, but the prov­ince has wel­comed much more sig­nif­i­cant news re­cently. In May, the un­em­ploy­ment rate fell to six per cent, lower than On­tario’s and the low­est in Que­bec since Statis­tics Canada be­gan keep­ing track in 1976. In June, the rate was un­changed.

Last month, Stan­dard & Poor’s an­nounced that it was rais­ing Que­bec’s credit rat­ing from A-plus, to AA-mi­nus, the high­est rat­ing the prov­ince has en­joyed since 1993, and again, bet­ter than On­tario’s.

The prov­ince’s eco­nomic growth ex­ceeded pro­jec­tions in the first quar­ter of 2017, with gross do­mes­tic prod­uct in­creas­ing 1.1 per cent over the first three months, out­pac­ing Canada as a whole. That growth meant higher tax rev­enues for the pro­vin­cial govern­ment, and last month Leitão an­nounced that Que­bec had ended the 2016-17 fis­cal year with a $4.5 bil­lion sur­plus — nearly twice what had been fore­cast in his March 28 bud­get.

A grim face and a brief­case full of bad news have long been job re­quire­ments for Que­bec fi­nance min­is­ters, but these days Leitão can’t help smil­ing.

“We have car­ried this rep­u­ta­tion — which is not de­served, but any­way — of be­ing al­ways in the dog­house of Cana­dian pub­lic fi­nances,” said Leitão, who has held the fi­nance port­fo­lio for the Lib­eral govern­ment since its 2014 elec­tion. “We turned it around, so that gives con­fi­dence to busi­nesses, to in­di­vid­u­als, to con­sumers. Peo­ple spend, peo­ple in­vest, jobs get cre­ated, and we get into this vir­tu­ous cir­cle.”

Not long ago, pro­test­ers up­set over pro­gram cuts were car­ry­ing plac­ards of Leitão’s face with a thick red line through it. Now he is de­scribed in glow­ing terms in the Que­bec me­dia. “It’s rain­ing money in Que­bec City,” Ra­dio-Canada an­a­lyst Gérald Fil­lion wrote last month. Le Soleil’s Gil­bert Lavoie called Leitão “the bearer of good news,” and La Presse colum­nist Fran­cis Vailles spoke of a “his­toric re­ver­sal” in Que­bec’s stand­ing com­pared with On­tario.

It took 50 years, Vailles wrote, but Que­bec, “fol­low­ing its twist­ing politico-eco­nomic path, (has) reached a fi­nan­cial sit­u­a­tion con­sid­ered health­ier than that of its il­lus­tri­ous neigh­bour.”

Leitão says a key part of the turn­around has been a dis­ci­plined ap­proach to pub­lic fi­nances.

“It’s not a big rev­o­lu­tion what we did,” he said. “We re­al­ized that spend­ing was grow­ing at a much faster pace than rev­enues. If you do that on a con­sis­tent ba­sis, you’re go­ing to end up with a bal­loon­ing deficit. We said we would re­strain the rate of growth in pro­gram spend­ing and al­low rev­enues to keep grow­ing at three per cent a year.”

Im­prove­ment ap­pears more im­pres­sive when you’re start­ing from a po­si­tion of weak­ness. Even with the steady GDP growth ex­pected this year and next, the most re­cent Con­fer­ence Board of Canada pro­jec­tion puts Que­bec in the mid­dle of the pack, be­hind Al­berta, Saskatchewan and Bri­tish Columbia and roughly even with On­tario. And the “his­toric” turn­ing of the ta­bles be­tween Que­bec and On­tario was as much a prod­uct of an On­tario slump as a Que­bec surge.

Que­bec’s emer­gence from the dog­house is nonethe­less cap­tur­ing at­ten­tion out­side the prov­ince. In a June pro­vin­cial out­look for the Royal Bank of Canada, se­nior economist Robert Hogue de­clared, “bet­ter times are back,” pro­ject­ing steady growth for Que­bec. The Con­fer­ence Board’s spring fore­cast talked of a “vast im­prove­ment” in Que­bec’s econ­omy, and said the mo­men­tum should be sus­tained over the near term. And Leitão said he got a warmer than usual re­cep­tion on his re­cent tour of Europe’s fi­nan­cial cap­i­tals, where in­sti­tu­tional in­vestors were pleased with the prov­ince’s im­proved credit rat­ing.

Marie-Chris­tine Bernard, as­so­ciate di­rec­tor of the pro­vin­cial fore­cast ser­vice at the Con­fer­ence Board, said the govern­ment de­serves credit for bring­ing the prov­ince out of the red and for elim­i­nat­ing a health tax in its last bud­get. “Peo­ple feel more con­fi­dent,” she said. “It could come from the fact that the fis­cal sit­u­a­tion has im­proved a lot. The govern­ment said they would tackle the deficit, and they did it.”

The Que­bec Fed­er­a­tion of Real Es­tate Boards re­ports that 2017 is on track to be the third con­sec­u­tive year of steadily in­creas­ing res­i­den­tial sales in the prov­ince fol­low­ing a stag­nant pe­riod be­tween 2011-14. Prices re­main well be­low those seen in Van­cou­ver and Toronto: the av­er­age price of a home in greater Mon­treal was $373,780 in June, com­pared with $793,915 in Toronto and $1,053,655 in Van­cou­ver.

But the Que­bec Fed­er­a­tion of Real Es­tate Boards says the com­bi­na­tion of a strong labour mar­ket, a jump in net mi­gra­tion and a surge in con­sumer con­fi­dence is fu­elling op­ti­mism among home­buy­ers in the prov­ince. Mon­treal’s more ex­pen­sive neigh­bour­hoods are lead­ing the way in in­creased sales, with sales of prop­er­ties for more than $1 mil­lion up 23 per cent.

It cer­tainly does not hurt that Que­bec’s volatile po­lit­i­cal cli­mate has calmed. When the prospect of an in­de­pen­dence ref­er­en­dum was al­ways just an elec­tion away, in­vestors and prop­erty-buy­ers were wary.

Que­bec’s po­lit­i­cal sit­u­a­tion has “prob­a­bly been a fac­tor in the long run, from the mid-1970s to rather re­cently,” said Ger­main Belzile, se­nior as­so­ciate re­searcher at the Mon­treal Eco­nomic In­sti­tute, a right-of-cen­tre think-tank.

“But a lot of peo­ple in Que­bec think that the sep­a­ratist op­tion is dy­ing right now. If that’s the case, as peo­ple re­al­ize that, I think our in­vest­ment will prob­a­bly rise again.”

Pierre Bois­seau, se­nior di­rec­tor of com­mu­ni­ca­tions and mar­ket­ing for Mon­tre­al­based En­erkem, said these are heady times for tech com­pa­nies in Que­bec. “See­ing the econ­omy go­ing in the right di­rec­tion, we’re cer­tainly see­ing a lot of ex­cite­ment, a lot of en­thu­si­asm, and we’ll be con­tribut­ing to that in the com­ing months as well,” Bois­seau said.

His firm is mar­ket­ing a made-in-Que­bec tech­nol­ogy to con­vert trash into bio­fuel, with its first plant in Ed­mon­ton set to be­gin pro­duc­tion of ethanol in the com­ing weeks and a sec­ond planned for Varennes, Que., north­east of Mon­treal. “The new clean­tech sec­tor is get­ting stronger and stronger in Que­bec,” Bois­seau said.

The Con­seil du Pa­tronat, Que­bec’s largest em­ploy­ers group, is non-par­ti­san and there­fore cau­tious when it comes to as­sess­ing the role pol­i­tics have played in the im­proved eco­nomic for­tunes. But when asked, Con­seil pres­i­dent Yves-Thomas Dor­val al­lowed that “the (busi­ness) com­mu­nity feels more sta­bil­ity.” He said both the pro­vin­cial and fed­eral gov­ern­ments de­serve credit for pro­grams that have en­cour­aged in­no­va­tion and di­ver­si­fi­ca­tion.

But like all ob­servers of the Que­bec sit­u­a­tion, Dor­val iden­ti­fies a cloud on the hori­zon. Low un­em­ploy­ment is good for those seek­ing work, but it fore­shad­ows trou­ble as Que­bec’s pop­u­la­tion ages more rapidly than other prov­inces and peo­ple leave the work­force.

“Em­ploy­ers are more con­fi­dent. What they would be wor­ried about is a lack of qual­i­fied, avail­able man­power,” he said. The loom­ing short­age will likely push em­ploy­ers to in­vest in au­to­ma­tion, which he said would im­prove pro­duc­tiv­ity.

For Luc Mau­rice, pres­i­dent of Le Groupe Mau­rice, the ag­ing pop­u­la­tion presents an op­por­tu­nity. The com­pany he founded in 1998 has 26 se­niors’ res­i­dences in Que­bec and an­other five un­der con­struc­tion, bring­ing its new worth to about $2 bil­lion, he said. He projects that Que­bec will need to build more than 6,000 units of se­niors hous­ing a year for the next 30 years to meet grow­ing de­mand. “That means $1.5 bil­lion in cap­i­tal ex­pen­di­ture in Que­bec and about 1,150 new jobs per year for the next 30 years,” he said.

Mau­rice said the eco­nomic up­turn is help­ing re­vive an en­tre­pre­neur­ial spirit, some­thing that was lack­ing in Que­bec as re­cently as five years ago. “The eco­nomic cli­mate in Que­bec is very sound,” he said. “It’s not ex­plo­sive like in Toronto or Van­cou­ver, but some­times to be just sound is bet­ter in the long term.

“The en­trepreneurs I meet are suc­ceed­ing, and they have con­fi­dence in the fu­ture.”

The flurry of good news raises the ques­tion of whether Que­bec, a peren­nial have-not prov­ince when it comes to dis­tribut­ing fed­eral equal­iza­tion pay­ments, could soon switch to be­ing a net con­trib­u­tor. (In 201617, Ot­tawa sent Que­bec $10 bil­lion in equal­iza­tion pay­ments, al­most 10 per cent of the prov­ince’s to­tal rev­enue. It re­ceived the most money among the six re­ceiv­ing prov­inces, though only the sec­ond-high­est when mea­sured per capita.)

“As we do bet­ter, we’ll get less trans­fers, and that’s fine,” Leitão said. Not re­quir­ing any equal­iza­tion would be ideal, but he would not spec­u­late when that might hap­pen. “I don’t fore­cast that far in ad­vance,” he said.

Belzile at the Mon­treal Eco­nomic In­sti­tute said it would take a sus­tained pe­riod of high eco­nomic growth for Que­bec to kick its equal­iza­tion habit. “It’s like wel­fare,” he said. “Ideally wel­fare should be for a cer­tain pe­riod of time when you’re hav­ing prob­lems, but it should not be for life.”

WE TURNED IT AROUND, SO THAT GIVES CON­FI­DENCE TO BUSI­NESSES, TO IN­DI­VID­U­ALS, TO CON­SUMERS. PEO­PLE SPEND, PEO­PLE IN­VEST, JOBS GET CRE­ATED, AND WE GET INTO THIS VIR­TU­OUS CIR­CLE. — QUE­BEC FI­NANCE MIN­IS­TER CAR­LOS LEITÃO

JAC­QUES BOISSINOT / THE CANA­DIAN PRESS

Que­bec Fi­nance Min­is­ter Car­los Leitão, cen­tre, is ap­plauded as he de­liv­ers the bud­get speech in March in Que­bec City. Leitão says a key part of his prov­ince’s eco­nomic turn­around has been a dis­ci­plined ap­proach to pub­lic fi­nances.

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