Dear Quebec: Get Your Economic Act Together

(A 2017 economic and construction boom in Montreal)

An Economic Warning to Quebec

Canada’s second-largest province and cultural hub, Quebec, is potentially going to face a crisis of economic woes in the coming years. Current policies in the province stand in conflict with the opinions and recommendations of Quebec business leaders and conventional business thinking. Rather than trying to embrace Quebec’s linguistic and industrial advantage, the provincial government seems more interested in letting politics get in the way of flourishing business.

Quebec is home to some of the world’s largest companies in their respective sectors: the infamous video game giant Ubisoft, one of the largest manufacturing companies Bombardier, the gas station retail giant Couche-Tard, and the engineering giant SNC-Lavalin. Quebec has done much to preserve these companies by giving them preferential treatment when awarding public infrastructure contracts and pouring public dollars into Quebec companies to keep them headquartered in the province. 

But just as businesses had once left Quebec due to political instability on sovereignty in the 1980 and 1995 referendums, a true economic downfall of Quebec could lead to a long-term sustained exodus of companies away from Quebec. Such an outcome may sound hyperbolic, but the ramifications of such an event would leave Quebec squandering as it has twice before. 

Quebec's Affordability Advantage

Quebec was and is still known as a more affordable option for living compared to its BC and Ontario counterparts. But that sentiment is changing, inflation has hit every province hard. Relatively affordable provinces like Quebec and Alberta are quickly seeing prices of housing, insurance, utility, and goods increase to levels more similar seen in Ontario and BC. Although Quebec still retains the affordable advantage compared to its peers, Quebec is slowly but surely losing that advantage. Assuming Quebec isn’t able to improve its GDP to at least Ontario’s level, then residents will suffer from a high cost of living combined with limited income levels. 

To illustrate this, Quebec’s GDP per capita sits at approximately $59,000, Ontario sits above the country average at $65,000. A surprise to no one, Alberta takes the top spot with a GDP per capita of $84,000. In terms of household income before taxes, Quebec’s average household income before taxes is $77,306, Ontario’s is $97,856, and British Columbia’s is $90,354.

When looking at all the numbers, the average Quebecer’s income is closer to the average income of a person in Manitoba and New Brunswick than in Ontario; and overall lower compared to other provinces like British Columbia, Alberta, Saskatchewan, and Newfoundland. 

Quebec's Butchered Housing Advantage

The prices of homes in Quebec compared to Ontario and BC are approximately half at just under $500,000. Quebec is also home to the lowest rent prices compared to other provincial peers. Much like Alberta and Saskatchewan, Quebec retains housing and rent affordability with building policies that have resulted in more housing quantity and flexibility for residents. 

However, nationwide economic woes have resulted in even Quebec losing its status as the affordability Charlotte of Canada. A recent study from the Canadian Chamber of Commerce reveals that Quebec would need to build 23,100 homes every year until 2041 for the housing market to return to balance. That number is much higher than the 13,900 homes that are expected to be built annually. By 2031, Quebec needs to build approximately 130,000 more homes in order to restore balance in the housing market. 

As a result of this, Quebec would naturally see their home prices see at unprecedented levels as seen in the provinces of Ontario and BC. Quebec already saw approximately three times fewer housing construction starts compared to Ontario in 2022. Although Ontario is nowhere near its annual required targets to balance the housing market; the especially low level of construction in Quebec is a bigger cause for concern in the medium to long term.  

For renters, Bill 31’s clause to end lease transfers between renters would essentially strip one of the only tools renters in Quebec have to keep rent prices low. If Bill 31 passes, renters should expect an immediate increase in the rent they pay as the power to control rent prices shift from renters to landlords. In the short term, renters will essentially lose all power to negotiate to keep rents low against the interest of landlords and will over time see a steady rise in rent prices every year. Premier Legault's rationale is that he does not want to keep Quebec ‘poor’ by keeping home prices lower than in Toronto or Vancouver. Nevertheless, Quebec will likely continue to see lower housing prices compared to the rest of the country, but at what cost exactly? 

Although the provincial government and federal governments are looking to pass a network of laws to speed up construction to help ease the housing supply crunch. The short-term answer for the housing crisis in Quebec seems more grim than hopeful. Fortunately for Quebec and indeed the rest of Canada, the federal government is looking to pass a national long-term housing infrastructure plan in the Fall. This plan will look to tie housing development funding to the densification of metropolitan areas and transit hubs, the federal government hopes to increase housing supply as much as possible by focusing on densification and pushing municipalities to make their zoning laws more compliant towards a total increase in housing supply. 

Canada’s Primary Labour Resource: Immigration 

With the Quebec government’s goal of matching Ontario’s GDP per capita by 2036 increasingly being harder to attain, the province could be plagued with equivalent unaffordability as seen in Ontario without the economic engine to drive high growth. Although Ontario is more expensive, Ontario also accounts for nearly 40% of the entire country’s GDP. With more immigrants coming to Ontario each year, Ontario’s economy is set to grow further and will far outstrip Quebec by the end of the decade much less by 2036. To support Ontario’s growth, the Federal and Provincial governments are investing 10s of billions in infrastructure projects to support the unprecedented growth and migration Ontario is currently experiencing and will be home to by 2030.

As a reference, Ontario accepted 42.3% of new Canadian permanent residents out of the total record-breaking 437,120 new permanent residents to Canada in 2022. Surprisingly, that’s 7.3% lower than the 199,295 new permanent residents who came to Ontario in 2021. Compared to Quebec, which is home to 22.3% of Canada’s population, the province only welcomed 15.7% of total new permanent residents. Industry and immigration experts largely agree that Ontario is clearly punching above its weight in the number of immigrants it is accepting. Due to this migration pattern, other provinces are scrounging for leftovers as immigrants often choose to go to Ontario. On the other hand, Quebec’s limited migration numbers are largely due to the province’s efforts to preserve the French language by only accepting migrants that are already affluent in the French language. For businesses, such a policy only limits the potential for growth and lowers the standard of living of residents in the long term. 

Other provinces, particularly the ones that are small in their population numbers, are eager to accept more immigrants into their provinces. The maritime provinces and Manitoba are specifically looking at immigration to drive their economies to scale and increase their government revenues to fund public services and reduce debt. If Quebec isn’t willing to take more people, other provinces will have absolutely no problems snatching those people instead. 

In addition, labour shortages in Quebec mark a turning for Quebec businesses. While the government is focused on retaining French, business groups are urging the province to increase immigration targets. A recent statement by the ‘Manufacturiers et Exportateurs du Québec’ (MEQ) showcased that Quebec’s manufacturing sector lost $7 billion in 2022 due to labour shortages slowing the sector’s activity. Even more glaring, the total comes to $18 billion lost due to labour shortages when including both 2021 and 2022

In Quebec’s rural regions, a recent study from the Canadian Federation of Independent Busines revealed that small and medium-sized businesses are short nearly 18,000 immigrant workers each year.  If Quebec doesn’t respond to this, there will be a shortage of nearly 90,000 immigrant workers in five years in rural areas, according to the study.

Quebec is at a crossroads between abandoning its struggling rural towns and metropolitan cities with the olden ways of restricting migration and clinging to regional nationalism or revitalizing and breathing life into its culturally rich cities with immigrants who are eager to produce and consume for Quebecers. 

In other words, businesses and government are on opposite ends when it comes to immigration in Quebec. While immigration has consistently proved to help Canada’s economy stay competitive, Quebec refuses to implement policies to retain and promote its labour competitiveness.

Domestic Politics Clashing with Business 

Canada is known to harbour and accept its immigrants as part of their culture. The Canadian constitution literally recognizes Canada as a multicultural state whose many cultures ought to be protected and celebrated. All provinces repeat this critical idea in their migration policies - except for Quebec. Quebec is the only province that willfully reduces its immigration targets for political means, that is, to preserve French and reduce the dominance of English. Unfortunately for Quebec, economies don’t care about language.

A cornerstone of the province’s effort to domestically retain French is Bill 96. One aspect of the bill specifically targets small businesses, where businesses with 5 to 49 employees will have to declare a “proportion of their workforce that is unable to communicate in French." This information will then be made public in Quebec’s business registry and will provide linguistic information for Quebec's language watchdog, the Office québécois de la langue française. Some advocates argue such a move will only hurt small business growth due to the potential of linguistic refusal of francophone companies wanting to deal with anglophone companies. Furthermore, some proponents argue that putting more administrative burdens on Quebec’s small businesses will only unnecessarily cost them more all while leading to reduced growth. 

Bill 96 is only one out of many bills that the province has passed to preserve the French language in the province. Although French is culturally important to the people of Quebec; Quebec’s internal linguistic and political discourse may well turn out to be its own economic downfall. Rather than playing catchup to Ontario, Quebec may find itself falling behind - becoming comparable to the sparsely populated economies of the Maritimes and Manitoba. 

Improving Productivity and Lowering Business Taxes

A crucial and unique flaw that Quebec has instilled in itself which isn’t seen in any other is the provincial government’s approach to payroll taxes and business subsidies. According to a new report by HEC Montreal’s Centre for Productivity and Prosperity, Quebec spent nearly $2.4 billion on business tax credits in 2021 - nearly twice as much as Ontario in total. In the 2010s, Quebec hashed out a plan to subsidize the province’s businesses by nearly $20 billion through higher payroll taxes. Essentially, Quebec businesses are subsiding themselves with the payroll taxes they pay.

According to the report, tax credits represented 15.2% of all payroll taxes paid by Quebec businesses in 2019, more than double Ontario’s 7.4%. That year, tax credits amounted to 0.74% of the gross domestic product attributable to Quebec companies, about triple compared to Ontario. 

The authors argue that Quebec is subsidizing employment rather than subsidizing its industries. Typically, when a government wishes to improve its economic productivity, diversify its economy, or improve growth; it will invest in promising industries through targeted subsidies that will quicken the growth rate of companies in said industry. For instance, the federal government’s Budget for 2023 put targeted money on the table to the tune of 10s of billions to subsidize EV manufacturing, green technologies, low-emission energy production, and public infrastructure to bolster Canada’s economy for the green transition. Such investments were praised by industry leaders as necessary and sufficient considering the US’ recent hundreds of billions worth of investments (through the Bipartisan Infrastructure Bill and the IRA Bill) for their own green economy transition. 

As a result, business groups point out that Quebec’s approach to subsidize and retax businesses is an inefficient method to host productivity and promote growth. Whilst businesses are being rewarded with government revenue, they’re also being punished with higher payroll taxation. Rather than subsidizing industry, Quebec is subsidizing employment. This comes as Quebec’s businesses are already known to invest less than its out-of-province peers. 

In combination, Quebec businesses are being set up for policy-induced lack of productivity and labour competitiveness. 

Relying on Economies of Scale Rather than Taxes

In addition, one suggestion in the report is to cut the province’s Health Services Fund on payroll taxes. The economists in the report argue that the burden for funding healthcare should not be on individual businesses but rather on the economy as a whole (as it is in other provinces). Suppose Quebec’s economy as a whole becomes more productive with lower taxation. In that case, government revenues to fund healthcare will naturally increase at a scaling rate through higher income and business tax revenues. 

Putting the burden on businesses will only hurt productivity, growth, and long-term government revenue. Ultimately the economists argue, the Health Services Fund will only force the government to cut public services rather than improve them with funding. 

As Canada’s second-largest economy, Quebec has an obligation to meet and exceed its economic woes so that it does not hold back itself or the rest of Canada in improving the country’s standard of living. With the rest of the world looking to take advantage of green economic opportunities, Quebec ought to put its differences aside and inch towards economic prosperity as is the case in efforts seen in other more desperate provinces. 

Unleashing Quebec’s Full Potential 

Needless to say, Quebec’s place within Canada is truly unique. It sits somewhere between the crossroads of North America and Europe in its culture, way of living, city design, and infrastructure. Fortunately, Quebec and Canada as a whole can look at the productivity kings and social democracies of Europe through Sweden, Norway, and Denmark that all hail sparse populations that nonetheless find themselves at the heap of marvel for economists. Likewise, Quebec enjoys similar social programs that other provinces are still working towards like a more accessible pharmacare system, a universal child-care system, a robust metro system, and a more generous welfare state. 

Quebec needs to take advantage of its unique social advantage and combine it with the innovative drive that North America is so particularly known for. In unison, Quebec has the potential to not only outcompete its more wealthy provincial counterparts like Ontario and Alberta but exceed them. As unique as Quebec already is, the province could become even more special with its distinct cultural and economic aspects intermingling to develop the most exceptional jurisdiction in all of North America.

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