Preface

Michael A. Walker,
Executive Director, The Fraser Institute

THE LIKELIHOOD OF THE PROVINCE OF QUEBEC separating from Canada has been increasing ever since the first election of a separatist provincial government in 1976. Separation remains the major political objective of the Parti Québécois. With Quebeckers having recently elected separatist Bloc Québécois federal Members of Parliament to form the Official Opposition in Ottawa in October 1993 and on the eve of another provincial election, it is both appropriate and timely to consider the difficult issues involved should Canadians be faced with negotiating the breakup of their country in the next few years.

The Fraser Institute has recently published a book dealing with the debt and other impacts on the Rest of Canada should Quebec separate. Gordon Gibson, Plan B: The Future of the Rest of Canada, Vancouver, BC: The Fraser Institute, 1994.Note This study, The Public Debt of An Independent Quebec, examines the impact on Quebec. It focuses on three important aspects of a "breakup of Confederation": how to divide up the federal debt, how Quebec can repay its Separation Obligation to Canada, and the fiscal implications of separation for an independent Quebec.

The study contains information, procedures, recommendations, and conclusions that deserve thorough discussion and debate by Canadians inside and outside of Quebec. The resolution of the issues this study raises could determine the shape of the financial future we face together in the years ahead.

This Fraser Institute study is the second work of the recently formed International Centre for the Study of Public Debt. The Centre's mission is to inform the public in Canada and abroad about the severity of its all-government debt problem and to propose responsible and efficient ways to reduce it.

The Centre's Director and author of this study, Mr. Robin M. Richardson, is both an economist and a Chartered Financial Analyst. Since the mid 1970s, Mr. Richardson has been concerned about the connection between excessive growth in government spending, rising taxes and debt, and the pressures being put on the Canadian Confederation leading to separatism. He was an early advocate of disentanglement of federal and provincial spending within the existing Canadian constitutional framework, not only to control the size and cost of government, but also to reduce regional tensions and to foster national unity.

The Fraser Institute does not want Quebec to leave Canada. Neither does Mr. Richardson. We do, however, believe that this is an issue that will not just fade away. There will be a continuous and intensified debate on the subject of Quebec separation in the months and years ahead.

Following the methodology of the Centre's first study, Inside Canada's Government Debt Problem and the Way Out, this study considers how an independent Quebec would compare with other countries of the world in terms of its all-government indebtedness. The conclusions will not be very encouraging to the people of Quebec. Quebec's government debt burden as an independent nation would be more severe than any OECD country, including Belgium, Ireland, and Italy, and more severe than that of Canada and all of its remaining provinces except Newfoundland. Significantly higher debt charges will pose a difficult financing challenge for an independent Quebec.

The finding of this study is that Quebec taxpayers in an independent Quebec will be faced with a difficult choice: either to accept a substantially lower level of government services from their new national government in Quebec City, or to see their taxes rise sharply to finance the programs they had previously received from Ottawa as a member of the Canadian Confederation.

This study should be read by all Canadians who are concerned about the rising probability of Quebec separating from Canada, the financial obligation of Quebeckers to the Rest of Canada for their decision to leave the Canadian Confederation, and the size and shape of the public debt and difficult fiscal policy choices facing the citizens of an independent Quebec.

Executive Summary

(1)     The author of this study and the Fraser Institute are not predicting that Quebec will separate from Canada. We hope that such an undesirable outcome can be avoided. Nevertheless, the realities of Canadian public life are such that the chance of an unfortunate break-up of the Canadian Confederation is possible.

(2)     This study provides much-needed information for the public policy debate both within and outside Quebec so that rational decisions may be made on the future of Canada and Quebec.

(3)     Should Quebeckers decide to separate from Canada, Quebec's Separation Obligation to Canada would be $150.6 billion as of March 31, 1994. This amounts to $20,888 for every man, woman, and child in Quebec, or $83,552 per family of four. The study contains a seven step methodology for measuring Quebec's share of government of Canada assets and liabilities.

(4)     Quebeckers would face a difficult fiscal choice after separation. Should they wish to continue to enjoy the same level of services and benefits from their new national government in Quebec City as previously received from Ottawa, their federal taxes that would be going to Quebec City, which presently go to Ottawa, would have to be sharply increased, perhaps by as much as 53.5 percent.

(5)     If there is opposition to higher taxes and Quebeckers continue to pay the same amount of tax to their new national government in Quebec City that they presently send to Ottawa, the services they would receive for programs after the annual payment of their Separation Obligation to Canada would be 46.5 percent of the level of program expenditures received prior to separation.

(6)     An independent Quebec would have an all-government net debt-to-GDP ratio of 149.4 percent, compared with a Quebec as a Canadian province net debt-to-GDP ratio of 127.1 percent as of March 31, 1994. This measure of debt includes all levels of government in Quebec.

(7)     The debt burden of an independent Quebec would be more severe than that of any Canadian province, except Newfoundland, and more severe than that of any OECD country, including Belgium, Ireland, and Italy.

(8)     Based on the "Fraser Institute SIC List 1994" of the world's most severely indebted economies, an independent Quebec would be the 28th most severely indebted country in the world, with a government debt burden just behind Madagascar and just ahead of Jamaica. An independent Quebec would join the Third World in terms of its all-government indebtedness.

(9)     Taking all levels of government into account, total debt charges would be an estimated $23.7 billion as of March 31, 1994 for an independent Quebec, compared with $15.3 billion for Quebec within Confederation. This 54.9 percent increase in debt charges would pose a significant financing challenge for an independent Quebec.

(10)     A final potential consequence of Quebec leaving the Canadian Confederation may be an unwillingness of foreign and domestic investors to lend money, not only to Quebec, but also to the Rest of Canada. The negotiations leading to separation would dispel whatever government debt illusion that may have existed on the part of investors in Canadian and Quebec government bonds as to the severity of the debt burden facing Canadians and Quebeckers and the impossibility of servicing this debt while maintaining government services without unprecedented tax increases and/or further borrowing.

(11)     The study considers alternative repayment plans based on Canada-Quebec federal debt repayment periods of 20, 25, and 30 years at different interest rates. Just as with a house mortgage, the quicker Quebec's Separation Obligation to Canada is repaid, the less costly the debt becomes to existing and future taxpayers in Quebec.

(12)     Should an independent Quebec continue to use the Canadian dollar as its currency after separating from Canada, Quebec should continue to contribute to the maintainance of Canada's total net foreign exchange accounts.

(13)     The government of Canada should immediately make public a "Quebec Federal Property Inventory" that includes all land, residential and non-residential structures, machinery, equipment, and inventories owned by Canada and located in Quebec territory. A "Rest Of Canada Federal Property Inventory" should also be published to assist in the final determination of Quebec's Separation Obligation to Canada.

(14)     Quebec's $150.6 billion Separation Obligation to Canada is a minimum estimate since it could be increased by as much as $25 billion to resolve aboriginal land claims. The study urges the government of Canada to lift its veil of secrecy over aboriginal land claims and to provide full disclosure to the Canadian public of the potential cost of these settlements. Quebec should accept its full obligation to all of Canada's aboriginal peoples if it chooses to separate from Canada.

About the Author

Robin M. Richardson, M.A., C.F.A., is Director of The Fraser Institute's International Centre for the Study of Public Debt. Born in Vancouver, B.C., his formal education includes a B.A. in Honours Economics from the University of Western Ontario where he was the gold medalist and candidate for the Rhodes Scholarship. He went on to earn a Masters degree in Political Economy at the University of Toronto, followed by post-graduate doctoral studies in international economics, money, and banking at Harvard University. Mr. Richardson is also a Chartered Financial Analyst.

Mr. Richardson's experience includes National Research Director and Chief Economist of The Canadian Taxpayers Federation, Senior Economist of the Toronto Dominion Bank, Senior Economic Advisor to the Canadian Federation of Independent Business, and Director and Chief Economist for Loewen, Ondaatje, McCutcheon and Company Ltd. In this latter capacity, Mr. Richardson represented his firm at the Toronto Stock Exchange as Vice Chairman of the Index Committee and helped develop the TSE 300 Stock Index.

Concerned over the waste and duplication of government services, and the need to reduce regional tensions and foster national unity, Mr. Richardson assembled and co-ordinated a team of authors across Canada for the Fraser Institute to study how to disentangle federal and provincial spending within the existing constitutional framework. This study, Canadian Confederation at the Crossroads-the Search for a Federal-Provincial Balance, was published in 1978 by The Fraser Institute.

Elected Member of Parliament for Toronto-Beaches in 1979, Mr. Richardson served as Special Advisor on pension reform to the Minister of Finance and Special Advisor on small business policy to the Minister of State for Small Business in the Thirty-first Parliament of Canada.

Mr. Richardson's publications include contributions to technical journals, newspapers and financial periodicals, including Canadian Public Policy, The Globe and Mail, The Financial Post, and Equity magazine. A director of the Toronto society of Financial Analysts for many years and a founder and Past President of The Toronto Association of Business Economists, Mr. Richardson is now Vice President of the Association of Professional Economists of British Columbia and a member of The Association of Investment Management and Research, The Vancouver Society of Financial Analysts, and The Canadian Association for Business Economics.

Introduction

At the present time there appears to be some confusion and a lot of wishful thinking by some politicians, economists, and others in Quebec about the terms of separation should Quebeckers decide to leave the Canadian Confederation.

What is the source of this confusion and wishful thinking? It largely emanates from some of the studies prepared by the Bélange-Campeau Commission in 1991, in particular the Commission Secretariat's study entitled, "A Pro Forma Analysis of Public Finances Under the Hypothesis of Quebec Sovereignty."

One respected economist said of the Bélanger-Campeau Secretariat's study that "the Secretariat's estimates and conclusions need to be seen for what they are and taken with a large grain of salt. Masquerading as objective analysis, they are really nothing more than exercises in numerology designed to assuage the legitimate concerns of Quebeckers about the economic impacts of sovereignty." Patrick Grady, The Economic Consequences of Quebec Sovereignty, Vancouver, BC: The Fraser Institute, 1990, p. 100.Note

The objectives of this study are:

•to provide a sound methodology upon which Quebec's Separation Obligation to Canada can be determined should Quebeckers choose in a provincewide referendum to leave Canada

•to estimate the size of this obligation

•to show how it could be paid off to Canada over a reasonable time period

•to identify some of the fiscal implications for Quebec taxpayers of forming a separate country, and

•to measure the size of all-government debt in an independent Quebec taking into account Quebec's Separation Obligation to Canada.

Chapter 1: Preliminary Considerations

The allocator: population

The negotiators for Canada and Quebec need not spend much time discussing the choice of an allocator for the federal debt. Considerable research has been done on alternative methods of dividing the debt in the event of Quebec separation. These estimates range from a low of 16.6 percent proposed by the Secretariat of Quebec's Bélanger-Campeau Commission to a high of 32.0 percent based on the "historical benefits" approach of Paul Boothe, Barbara Johnston, and Karrin Powys-Lybbe. McCallum, John, ed., Closing the Books: Dividing Federal Assets and Debt If Canada Breaks Up, Toronto, ON: C.D. Howe Institute, 1992, p. viii.Note

In rejecting these two extremes, Parti Québécois Leader Jacques Parizeau shows great wisdom in saying, "We will...haggle for a few weeks before we come to something like a quarter." Jacques Parizeau, "What Does Sovereignty Association Mean?" Notes for a speech to be delivered at a special joint meeting of The Empire Club of Canada and The Canadian Club, Toronto, ON, December 11, 1990, pp. 9-10. The full text of Mr. Parizeau's remark was, "What share? There are really two criteria to use: population and gross domestic product. We will, I suppose, haggle for a few weeks before we come to something like a quarter."Note This need not even take "a few weeks" since it is obvious that population as the allocator of the federal debt makes the most sense on economic and political grounds.

This now appears to be the official position of the Parti Québécois in that a number of PQ candidates have been quoted during the current provincial election campaign using a figure of 25 percent, by population, for Quebec's share of the federal debt.

Table 1 shows four alternative approaches to dividing the federal debt: federal tax share, adjusted federal expenditure share, population share, and Gross Domestic Product(GDP) share. Federal tax share and expenditure share figures are taken from Fraser Institute studies, with the expenditure share adjusted by the author of this report to remove the significant distortion in the regional distribution of federal expenditures caused by the way Statistics Canada records interest in the Provincial GDP accounts. The distortion results from the way Statistics Canada reports interest on the public debt in the provincial gross domestic product (GDP) accounts. Since a significant portion of the interest is paid into pension accounts (owned by Canadians across the country), many of which are located in Ontario, and on holdings of debt by the Bank of Canada allocated to Ontario because of the location of the federal government, it is more insightful to view total expenditure by province excluding interest as reported by province in the GDP accounts from the expenditure distribution profile. Interest is then added back to expenditures according to their percentage of the Canadian population to give "adjusted" federal expenditure share as shown in table 1.Note

Click here to view Table 1: Alternative Approaches to Dividing of the Federal Debt (1991 percent distribution)

It is obvious from table 1 that Quebec receives far more in federal expenditures than it pays for. Quebec's adjusted share of federal expenditures is 30 percent higher than its share of federal taxes. Some of this federal expenditure reflects previous and current years' borrowed dollars, and is therefore reflected in the Canadian national debt. Adjusted expenditure share is therefore a better allocator for the federal debt than is revenue share.

Population share happens to be remarkably close to adjusted expenditure share for Quebec, but this is not the case for some other provinces shown, in table 1.

Ontario, Alberta, and British Columbia are provinces that do not receive federal equalization payments and their population shares are higher than are their adjusted expenditure shares. All other provinces receive federal equalization payments. Except for Quebec, the population shares of these provinces are lower than are their adjusted expenditure shares. The reason for the disparity with Quebec is that Quebec has opted out of certain federal programs in return for receiving federal "tax points." Allowing for this would in all likelihood result in Quebec's adjusted expenditure share exceeding its population share, as it would for other recipients of federal equalization payments.

Population share exceeds GDP share for all of Canada's poorer provinces, including the province of Quebec. The reverse is the case for Ontario, Alberta, and British Columbia. This reflects differences in the structures of provincial economies and the natural inertia involved in population movement among provinces, especially when there are distinct cultural and language differences. These latter considerations are especially important for the province of Quebec.

The final and, in many ways, the most compelling reason to use population is that the public might readily understand and accept it as both fair and reasonable. Public acceptance is critical. Further negotiations would be pointless if the allocator were unacceptable to the majority of taxpayers in Canada and Quebec.

All things considered, Jacques Parizeau is correct that "something like a quarter" is the correct percentage to use as an allocator for dividing the federal debt. This "quarter" should be based on Quebec's share of the Canadian population for the year immediately preceding the date of actual separation. The population figure should be for April 1 and should be applied to the appropriate March 31 year-end balance sheet figures as published in the Public Accounts of Canada for the fiscal year that begins on that date.

The accounting system: Public Accounts of Canada

After agreeing on the allocator to use for dividing the federal debt, the next major decision for the Canada-Quebec negotiators would be to agree upon the source of financial information for federal assets and liabilities.

Basically, there are two primary sources: The National Balance Sheet Accounts (NBSA) published annually by Statistics Canada and the Public Accounts (PA) of Canada published by the Receiver General of Canada. Each system uses different accounting procedures and is used for different analytical purposes.

The NBSA presents balance sheets for each sector of the Canadian economy, including the government sector. Details of the level of non-financial assets, financial assets, liabilities, net debt, and net worth of each sector are shown. The federal government sector within the NBSA is composed of the following sub-sectors: federal government, federal non-financial government enterprises, federal public financial institutions, the Bank of Canada, the exchange fund account, and other monetary authorities.

For the purpose of the financial analysis required in determining Quebec's share of the federal debt, the Public Accounts (PA) of Canada as audited by the Auditor General of Canada is the statistical source that should be used because of timing, coverage, accounting procedure, and public acceptability. It should, however, be supplemented by the NBSA insofar as the federal government's non-financial assets are concerned.

Timing

The PA debt statistics are recorded for fiscal year-ends while those of the NBSA are calculated for calendar year-ends. The PA data are therefore more current than are those of the NBSA. They are also more timely since they are the primary source for the federal government component of the NBSA. For example, the most recent NBSA for December 31, 1992 was published by Statistics Canada in February 1994 whereas the PA for March 31, 1993 was published on December 30, 1993.

Coverage

Federal public service pensions

The PA treats the federal public service pension liabilities (the "superannuation accounts") as if they were funded, recording future pension liabilities as notional, non-existent federal long-term bonds. In contrast, in the NBSA these liabilities are not recognized because the pension plans are unfunded. Contributions to these pension plans are recorded as general government revenues and pension benefits are treated as current transfers.

NBSA guidelines indicate that the pension plans are part of the government accounts if they are unfunded. An unfunded pension plan exists when an employer has promised to pay specified benefits under certain conditions but has not set aside explicit assets (invested assets) for ensuring payment. Since the employee pension plans (superannuation plans) are administered by the federal government without any outside trustee arrangement, the NBSA treats the plans as unfunded and considers them part of government. In consolidating the plans as part of government, the NBSA eliminates or excludes the unfunded pension liability ($87,911 million at March 31,1993) from the federal government balance sheet. This treatment leads to a considerably lower net debt in the NBSA than exists in the PA.

Other differences

The other major difference between the PA and the NBSA is that the PA includes allowances for future and contingent liabilities, whereas the NBSA does not. The other differences between the PA and the NBSA are small by comparison with the treatment of federal public service pensions and contingent liabilities. Broadly speaking, the PA data are presented on a cash basis while the federal government balance sheet in the NBSA is prepared on an accrual basis to the extent possible. The definition of what is contained within the federal government also differs somewhat in the two systems. Partly as a result, some instruments are classified differently in the PA than in the NBSA. For example, the NBSA recognizes coin in circulation, but the PA does not.

Accounting procedure

Presentation of the financial statements

The presentation of the financial statements also varies between the PA and the NBSA. One fundamental accounting relationship in the PA is the following:

FINANCIAL ASSETS + ACCUMULATED DEFICIT = LIABILITIES

whereas in the NBSA the corresponding relationship is the following:

FINANCIAL ASSETS + NON-FINANCIAL ASSETS = LIABILITIES + NET WORTH

The treatment of non-financial assets

In the PA presentation, the purchase of capital assets such as buildings and machinery is recorded as a budgetary expenditure in the year of acquisition. The PA values fixed assets at one dollar as far as the government's balance sheet is concerned.

The PA does not distinguish between capital and current expenditures. Fixed assets and inventories are deemed to be fully written off in the year of acquisition and do not appear in the balance sheets.

The NBSA records non-financial assets such as land, structures, machinery and equipment, and inventories for the federal government as at December 31. Thus, it serves as a useful supplementary source of information to the PA on these matters.

Government business enterprises

The PA and the NBSA account for the profits of government business enterprises in different manners. In the NBSA the retained earnings of government business enterprises are considered as assets of the government, but they are not in the PA.

Public acceptability

The final and most compelling reason to use the Public Accounts (PA) of Canada as the accounting system in determining the size of Quebec's Separation Obligation to Canada is that the public is used to hearing these numbers and is more familiar with the concepts underlying the PA than it is with the NBSA. Members of Parliament study the PA, and budgets are presented using the accounting procedures of the PA. The Auditor General of Canada audits the PA, not the NBSA. Finally, but not least, the media report figures and ratios derived from the PA, not from the NBSA.

Chapter 2: Measuring Quebec's Separation Obligation to Canada

Quebec's Separation Obligation to Canada is estimated in table 2 to be $150.6 billion as of March 31, 1994. This estimate is based on the most recent Public Accounts of Canada for the fiscal year ending March 31, 1993, updated with official government estimates to March 31,1994.

Click here to view Table 2: Statement of Assets and Liabilities of the Government of Canada, Including Other Federal Obligations and Credits, and Showing Quebec's Separation Obligation to Canada (Millions of Dollars, Unless Otherwise Stated)

Quebec's Separation Obligation to Canada amounts to $20,888 for every man, woman, and child in 1994, or $83,522 per family of four.

Contingent liabilities

Other federal obligations as shown in table 2 include an estimated $46.4 billion of conditional liabilities as at March 31, 1994, of which $13.4 billion was with international organizations. In addition to these conditional liabilities, there could be as much as $100 billion of additional contingent liabilities for aboriginal land claims already registered with the government of Canada but not as yet recorded (see the section of this chapter entitled, "Aboriginal land claims").

In total, the negotiators must take into account about $146.4 billion of conditional liabilities, of which Quebec's share if full recorded values were accepted would be $36.7 billion.

This study adopts a more conservative approach to the treatment of conditional liabilities. While it is true that some conditional liabilities become actual liabilities at their original recorded contingent values, and, sometimes, even in excess of their original recorded contingent values, it is more often the case that the final value of a conditional liability is less than the contingent value. For example, a lawsuit for $50 million against the government of Canada might be settled for $35 million, or an aboriginal land claim for $1.8 billion might be settled for $1.2 billion after negotiations.

The question then becomes: by how much do we discount contingent liabilities in determining Quebec's Separation Obligation to Canada? Because of the extremely large estimated unreported $100 billion contingent liability represented by aboriginal land claims, the author has chosen to include all reported contingent liabilities of $46.4 billion at face value, but to not include the $100 billion of as yet unreported but registered aboriginal land claims, in determining the base for calculating Quebec's Separation Obligation to Canada. Thus, Quebec's share based on population is $11.6 billion, or 31.6 percent of $36.7 billion of total estimated contingent liabilities including reported aboriginal land claims.

Under usual circumstances, discount factors of from 10 to 50 percent would be used in determining the actual amount to be used for conditional liabilities, depending on the probabilities of such conditional liabilities becoming actual liabilities. Until the government of Canada provides full disclosure of the conditional liabilities represented by aboriginal land claims, Quebec has been given a 68.4 percent discount in our study from its share of total estimated government of Canada contingent liabilities including potential aboriginal land claims.

Shareholders' equity of enterprise crown corporations

It is important to note that the shareholders' equity of Canada's enterprise crown corporations is treated as a credit in this calculation, thereby lowering the total net debt base upon which Quebec's Separation Obligation to Canada is calculated. Appendix A shows the assets, liabilities, shareholders' equity, and employment of these enterprise crown corporations.

Table 3 shows the federal crown corporations located entirely in the province of Quebec that would be candidates for a privatization sale. Some of these are consolidated crown corporations, such as the Canadian Museum of Civilization located in Hull, PQ, the old ports of Montreal and Quebec City, and the Jacques Cartier and Champlain Bridges, and therefore do not appear in appendix A. The province of Quebec may wish to bid for these federal crown corporations. These companies should definitely not be just given to the Quebec government, which has already received a credit for them in the calculation of Quebec's Separation Obligation to Canada. The proceeds of this sale would go entirely to the government of Canada and should be used to reduce the federal debt.

Click here to view Table 3: Assets, Liabilities, and Shareholders' Equity of Federal Crown Corporations Located Entirely in the Province of Quebec (Millions of Dollars as at March 31, 1993)

Appendix B shows the assets, liabilities, shareholders' equity, and employment of consolidated crown corporations of the government of Canada.

An independent Quebec may decide to contract-out for services now being rendered by federal crown corporations such as Canada Post Corporation, the Canadian National Railway System, and the St. Lawrence Seaway Authority. If Quebec decided to provide these services on its own, these and other federal crown corporations should privatize their Quebec operations, again using the proceeds to pay down the debt in the rest of their operations.

Canada's foreign exchange accounts and Quebec's use of the Canadian Dollar

Some Quebec separatists have indicated that an independent Quebec would like continued use of the Canadian dollar. Canada should support Quebec in this matter with the full understanding that Quebec would receive no credit for any portion of Canada's $10.8 billion net foreign exchange accounts should Quebec continue to use the Canadian dollar as its currency. These reserves form a portion of financial assets, which, when deducted from total liabilities, result in the accumulated deficit. Thus, Canada's total net debt after credits must be increased by the full amount of the net foreign exchange accounts, to accommodate the currency arrangement preferred by Quebec and to arrive at the total adjusted net debt of the government of Canada used as a base for determining Quebec's Separation Obligation to Canada.

The total adjusted net debt of the government of Canada amounted to $600.6 million as at March 31,1994 and is the amount upon which Quebec's Separation Obligation to Canada is calculated, using the population allocation formula. For the fiscal year 1993-94, Quebec's share of the total Canadian population was 25.07 percent. Multiplying Canada's net debt by Quebec's population share results in Quebec's Separation Obligation to Canada of $150.6 million as at March 31,1994.

Non-financial assets

Table 2, part IX shows non-financial assets of the federal government for Canada as a whole and an estimate of Quebec's portion using population share.

These figures are from the National Balance Sheet Accounts (NBSA) and serve to give the reader an approximate idea of the magnitude involved. At most, based on Quebec's share of the Canadian population, Quebec's share of federal non-financial assets amounted to $7.3 billion as of March 31, 1994.

Table 4 shows government of Canada commitments under capital lease arrangements for some of the major federal buildings located in the province of Quebec. Estimated remaining minimum lease payments for the five major public works listed in table 4 were just over $1 billion as of March 31, 1993.

Click here to view Table 4: Government of Canada Commitments Under Capital Lease Arrangements Located Entirely in the Province of Quebec (Thousands of Dollars as of March 31, 1994)

Statistics Canada does not publish a province-by-province breakdown of the government of Canada holdings of non-financial assets in each province. In the event of Quebec's separation from Canada, it would be essential that the value of all property located in Canadian and Quebec territory be appraised by independent appraiser approved by both Canada and Quebec. Quebec's population share of this evaluation would represent a credit to Quebec from Canada and would form part of the settlement between Canada and Quebec.

Rather than going to the expense of appraising non-financial assets in the rest of Canada, it may be acceptable for the government of Canada to sell all of its non-financial assets inside Quebec to Quebec for $1.00 in return for a release by Quebec of any further claim to the federal government's non-financial assets in the rest of Canada and abroad. Still, an inventory of all federal assets located in Quebec should be prepared with a fair market appraisal to keep the public informed. The transaction must not only be fair, it must be perceived as being fair by everyone in Quebec and the Rest of Canada. The government of Canada should publish this "Quebec Federal Property Inventory" as quickly as possible so as to facilitate the public debate on this important matter.

The uncertainty surrounding the Quebec separation issue would hurt property values in Montreal and, especially, in Hull, PQ. A realistic appraisal of land and real estate holdings would take this into account.

Aboriginal land claims

The contingent liability represented by aboriginal land claims is greatly understated in the Public Accounts of Canada. The figure of $2.2 billion, including the Nunavut Settlement, only represents 3 out of 76 land claims, 38 of which are in British Columbia. More aboriginal land claims will likely arise in years to come. This raises the question of whether or not an independent Quebec would have a responsibiliity to pay a share of future land claims based on the argument that they are long-standing debts of Canada as of yet only partially clarified and calculated. How would Quebec's contingent liability be determined in the absence of its participation in some future land claim negotiations? Would the government of Canada remain liable for native land claims in an independent Quebec? Clearly these are difficult and painful questions that point to the immense difficulties and complexities of separation.Note The potential liability to Canada may be in the order of $50 billion to $100 billion based on the cash settlements already made with certain aboriginal people. Quebec's Separation Obligation to Canada for these aboriginal land claims would be from $12.5 billion to $25 billion in the event of separation.

Table 2, part X shows a provision for aboriginal land claims of $100 billion, of which Quebec's share based on population would be $25 billion.

This contingent liability is not included in the calculation of Quebec's Separation Obligation to Canada shown in part VIII of table 2 since this calculation is based entirely on published figures as found in the Public Accounts of Canada. It is shown in table 2, however, to illustrate that Quebec's $150.6 billion Settlement Obligation to Canada is a minimum estimate that would be increased once the full extent of aboriginal land claims were disclosed.

In view of the possibility of Quebec independence, the federal government should immediately lift the veil of secrecy over aboriginal land negotiations and should make immediate and full disclosure of all aboriginal land claims everywhere in Canada. Quebeckers share in B.C. and Manitoba settlements, just as British Columbians and Manitobans share in Quebec claims. Quebec should accept its full obligation to all of Canada's aboriginal peoples if it chooses to separate from Canada.

Chapter 3: Repaying Quebec's Separation Obligation to Canada

Once Quebec's Separation Obligation to Canada were determined, an essential part of the negotiations would revolve around the terms of repayment. Canada would insist on knowing that there be a definite "Canada-Quebec Separation Debt Elimination Period," probably beginning on April 1 at the start of a fiscal year and ending on March 31 some 20, 25, or 30 years ahead. Much like a house mortgage, Quebec's payments to Canada should be a fixed amount representing both principal and interest. The size of payment would, in a large part, be determined by Quebec's ability to pay within the fiscal constraints it would find itself in as an independent nation.

The Canada-Quebec separation debt repayment schedule

Canadian and Quebec taxpayers would expect the publication of a Canada-Quebec separation debt repayment schedule with annual reports by Quebec's Minister of Finance on Quebec's progress in repaying its Separation Obligation to Canada.

Prior to the commencement of the Canada-Quebec separation debt elimination period, the Quebec Minister of Finance would have to prepare and lay before the National Assembly a Canada-Quebec separation debt elimination plan showing the debt repayments, including sinking fund payments, to be made each year during the Canada-Quebec separation debt elimination period, that would be necessary and sufficient to eliminate totally Quebec's Separation Obligation to Canada on or before the end of the period.

Debt repayment illustrations

How quickly could Quebec repay its Separation Obligation to Canada? The illustrations in figures 1 to 3 assume that repayment of Quebec's $150.6 billion (1994 dollars) Separation Obligation to Canada would begin in 1995 and would continue for 20, 25, and 30 years at average long-term interest rates of 8 percent, 10 percent, and 12 percent respectively.

Click here to view Figure 1: A 20-Year 8% Illustration for the Repayment of an Independent Quebec's Seperation Obligation to Canada

Click here to view Figure 2: A 25-Year 10% Illustration for the Repayment of an Independent Quebec's Seperation Obligation to Canada

Click here to view Figure 3: A 30-Year 12% Illustration for the Repayment of an Independent Quebec's Seperation Obligation to Canada

Table 5 shows the annual payments required to retire Quebec's $150.6 billion Separation Obligation to Canada at long-term average rates of interest of 8 percent, 10 percent, and 12 percent for different debt elimination periods. Table 6 shows the total costs of repayment under different interest rate assumptions for 20, 25, and 30 year Canada-Quebec separation debt elimination periods.

Click here to view Table 5: Annual Payments Required to Retire Quebec's $143.9 Billion Separation Obligation to Canada (Billions of Dollars)

Click here to view Table 6: Total Cost of Repayment of Quebec's $143.9 Billion Separation Obligation to Canada (Billions of Dollars)

The debt repayment illustrations in figures 1 to 3 show that the quicker Quebec's Separation Obligation to Canada were paid off, the less costly the debt would become to existing and future taxpayers. If the $150.6 billion debt were amortized over 20 years at an 8 percent average interest rate, the total cost of repayment would be $306.8 billion and annual payments would be $15.3 billion. Amortized over 25 years at a 10 percent average interest rate, the total cost of repayment would rise to $414.8 billion with annual payments of $16.6 billion. Finally, a 30-year repayment plan at a 12 percent average interest rate would put the total cost of payments at $560.9 billion with annual payments of $18.7 billion.

Term structure of Quebec's debt obligation

Continuing the house mortgage analogy, Canada and Quebec negotiators would want to consider the term structure of Canada's national debt. Currently the average term-to-maturity of government of Canada bonds held by the general public is an incredibly short 4 years and 9 months. Federal finances are highly subject to the vagaries of interest rate fluctuations. In effect, the principles of sound long-term financing appear to have been abandoned by the government of Canada and its advisers.

There appear to be three options open to Canada and Quebec negotiators with respect to the terms of repayment of Quebec's Separation Obligation to Canada. The first would be a long-term repayment plan as outlined in the previous section. For example, the 25 year, 10 percent plan would call for fixed annual payments of $16.6 billion. In effect, the term of this plan would be the same as the amortization period, 25 years, and the interest rate would be fixed over the entire period. This option would give Quebec and Canada the most certainty for financial planning purposes.

The second option would be to fix the term to match the term to maturity of Canada's outstanding debt, at, say, 4 years and 9 months, and to reset the interest rate and term at the end of this period. Under this option, an independent Quebec would share the same risks as would Canada with respect to exposure to volatile interest rates and investor confidence in government of Canada securities.

A variation of this second option would be to have Quebec's debt service costs fully reflect Canada's borrowing costs while Quebec's Separation Obligation to Canada were still outstanding. This would protect Canada from the risk of financing Quebec at a fixed rate at a time, or times, when Canada's own cost of funds were skyrocketing. Under this plan, the amortization factor would still be on some long-term basis, say, 25 years, but the interest cost would reflect the average cost of funds to Canada for financing this loan to an independent Quebec. The interest rate would fluctuate, calculated monthly or quarterly, to reflect Canada's average cost of funds.

The third option would be for Canada to set a fixed term, say, ten years, and expect full payment at that time. The full amount of Quebec's Separation Obligation to Canada would still be amortized over 25 years at 10 percent with $16.6 billion annual payments, but Quebec would be expected to refinance the balance owing at the end of the 10 year period and pay it all back to Canada.

Within these three options there are obviously many other possibilities that could be considered. The essential point is that whereas Quebec must honour its Separation Obligation to Canada, Canada in its turn should help Quebec find a way to make its payments in a regular manner with some degree of predictability without having to default.

Fiscal implications for the Quebec taxpayer

Quebec's new government would want to provide its citizens with most, if not all, of the programs and benefits they previously received from Ottawa. Whether or not it could do so at a higher or lower cost without having to raise taxes remains to be seen.

Table 7 shows that Quebeckers received about $35.1 billion in federal services in 1990 (of which $8.8 billion was interest on the federal debt) and only paid $24.5 billion in federal taxes. By 1995, federal spending in Quebec is expected to be about $43.2 billion ($12.2 billion of which is the cost of interest on the federal debt), while Quebeckers will only be paying about $31 billion to Ottawa in taxes. After separation, assuming a 25 year Canada Separation Debt Elimination Period, the annual federal debt repayment would be $16.6 billion at a 10 percent average interest rate. Thus, if Quebeckers were to enjoy the same level of benefits net of interest payments as they did pre-separation ($31 billion) and still make the annual $16.6 billion payment on their Separation Obligation to Canada, they would need $47.6 billion in taxes, a 53.5 percent increase in what they would be paying prior to separation.

Click here to view Table 7: Fiscal Impact on Quebec Taxpayers of Quebec Separation from Canada (Billions of Dollars)

Alternatively, another way to look at the fiscal impact of separation is to assume that Quebeckers, like the taxpayers in the rest of Canada, have "hit the wall" as far as their tax burden is concerned. The new Quebec government would not be able to raise the overall tax burden beyond what Quebeckers were paying prior to separation. Under this scenario, Quebeckers would now pay their $31 billion to Quebec City. What level of services could they expect? Not the $43.2 billion previously received since the annual $12.2 billion "net benefit" from Confederation would no longer exist.

This "net benefit" represents the difference between what Quebec received from Ottawa (line 1 of table 7) and what they paid to Ottawa (line 4 of table 7). It is comprised of two components: Quebec's net gain from federal transfer payments and Quebec's share of the federal deficit. Neither of these would be available to Quebec were it to separate from Canada.

But not even the $31 billion that remains, should Quebec separate from Canada, would be available to Quebeckers for program expenditures from their new national government in Quebec City since $16.6 billion would have to be paid to Ottawa as an annual payment toward reducing Quebec's Separation Obligation to Canada. Only $14.4 billion, or 46.5 percent, of Quebeckers' $31 billion in taxes could be spent on programs and benefits previously received.

Quebeckers in an independent nation would only receive 46.5 percent of what they receive as Canadians from the government of Canada (net of tax cost of interest on the federal debt) while they would still pay the same amount of taxes to their new national government in Quebec City. The choice of what to cut would be challenging, to say the least.

Some limited relief could be achieved by stretching out the repayment of Quebec's Separation Obligation to Canada from 25 to 30 years. It is unlikely that Canada would want to accept a payment schedule longer than 30 years.

Finally, the new government of an independent Quebec might attempt to borrow heavily in order to sustain government spending without imposing an unprecedented tax increase. The problem here would be whether an independent Quebec could borrow to the same extent as Canada is able to do on Quebec's behalf as a province in the Canadian Confederation. How creditworthy would an independent Quebec be? What would the public debt of an independent Quebec be?

Chapter 4 of this study seeks to answer these crucial questions about the future of an independent Quebec.

Chapter 4: The Public Debt of an Independent Quebec

Coverage

Once Quebec's Separation Obligation to Canada were determined and its terms of repayment established, this obligation would be figured in as a part of the total all-government public debt of an independent Quebec. We follow here the methodology of the recent study by the Fraser Institute's International Centre for the Study of Public Debt, Inside Canada's Government Debt Problem and the Way Out. This study considers the debt of all levels of government in each jurisdiction: federal, provincial/territorial, and local, including hospitals. The study identifies 30 categories of government debt for Canada as a whole and for each province and territory and measures 22 of them for which statistics were available.

All-government debt tables with economic and indebtedness indicators for each year for 1988 to 1992 for Canada as a whole, and for each province and territory, are also available in the Statistical Annex to Inside Canada's Government Debt Problem and the Way Out.

The Fraser Institute study is unique in many respects. Its data include the debt of hospitals and their endowment and special purpose funds, unfunded liabilities of civil service pension plans, workers' compensation plans, and the Canada and Quebec Pension Plans. Aboriginal land claims are included where information is available, as well as contingent liabilities such as student and business loan guarantees and government contributions to mega-projects such as Hibernia.

Government business enterprises (GBEs) are divided into two categories. The debt of tax-supported GBEs is included in the measure of all-government debt. The debt of self-supported GBEs, which represents 85 percent of total GBEs, is not.

All of the information on debt and public debt charges (mostly interest) for this earlier Fraser Institute study came from Statistics Canada's Financial Management System (FMS) for public institutions with the exception of hospital debt, the unfunded liabilities of the Canada and Quebec Pension Plans, provincial/territorial employee pension and workers' compensation plans, and federal and provincial contingent liabilities, including aboriginal land claims.

Net debt vs. gross debt

For comparison among countries and provinces, the Fraser Institute study, Inside Canada's Government Debt Problem and the Way Out, uses a "net debt"concept. Net debt is gross debt (total liabilities) minus total financial assets. Net debt and gross debt have different analytical purposes. For example, gross debt is more appropriate in measuring the overall government debt burden on Canadian and Quebec taxpayers. It is used for debt per person and debt per family of four statistics. It is the total amount that would eventually have to be paid off through higher fees and taxes and/or reduced government services and/or sale of physical and financial assets. Gross debt statistics also provide information on the term structure of the debt, i.e., how much is long-term and how much is short-term.

Net debt takes into account the financial health of the government insofar as the size of its financial assets are concerned. Financial assets include such categories as cash on hand, receivables, advances, and securities. A jurisdiction with substantial financial assets may be in a better position to support a larger gross debt.

Using net debt to calculate total all-government debt for comparative purposes between governments is the more conservative way of doing this type of analysis. It assumes that the government entity under consideration gets full book value for all its financial assets and then applies these funds to reducing the gross debt.

The Fraser Institute SIC List 1994 allocator: federal tax share

In the earlier study, Inside Canada's Government Debt Problem and the Way Out, all categories of the federal debt, with the exception of the unfunded liabilities of the Canada and Quebec Pension Plans, are allocated to the provinces and territories by their shares of federal taxes paid. These figures were obtained from various issues of The Fraser Institute study Tax Facts. They are used to calculate the provincial portion of federal debt in determining all-government nebt debt-to-GDP ratios for comparative purposes for inclusion in the Fraser Institute SIC List 1994.

The purpose of the Fraser Institute SIC List 1994 (Worldwide All-Government Debt-Severely Indebted Category) is to present the all-government indebtedness of Canada and its provinces in a broader international context, thereby providing Canadians with a comparative analysis and benchmark of the magnitude of the debt of all governments, no matter where they live in Canada.

The rationale for using federal tax share as the allocator for each member of the Canadian Confederation in the Fraser Institute SIC List 1994 is that total all-government debt represents deferred taxes, which would eventually have to be paid by members of the Canadian Confederation. Fundamental to dispelling the all-government debt illusion is a recognition of this basic fact. The practical way in which this deferred taxation enters into the government budgetary process is via interest payments on past borrowings. Thus, the geographic incidence of debt charges and the underlying debt that it represents should bear a close correspondence with the geographic distribution of federal tax collections.

Should Quebec leave the Canadian Confederation, it could not expect to have its Separation Obligation to Canada determined by its portion of total federal taxes as calculated in the earlier Fraser Institute study. This is explained in chapter 1 of this study. Having decided to leave Confederation, the proper way to view the accumulated deficit of the government of Canada and, indeed, the adjusted federal net debt upon which the Separation Obligation would be calculated, is that it represents past deficits that can be considered net benefits purchased on credit that Quebec has derived from Confederation. If Quebec were to leave, Quebec would be expected by the rest of Canada to pay back its share of these benefits based on population, since the entire population of Quebec has benefited from past federal expenditures in excess of the taxes it has paid.

Total all-government debt in an independent Quebec

In measuring the public debt of an independent Quebec, Quebec's Separation Obligation to Canada must be added to the debt of Quebec's provincial government, local governments, hospitals, and the other debt categories identified in the earlier Fraser Institute study. Table 8 and 9 show the results of this addition for the fiscal years ended March 31, 1993 and 1994. Including the Quebec Pension Plan (QPP) unfunded liabilities, total all-government debt for Quebec was $415.8 billion at March 31, 1993. This represented $58,304 for every man, woman, and child in Quebec, or $233,216 for a family of four. It rose to $434.0 billion by March 31, 1994, equal to $60,192 per person or $240,788 for a family of four.

Click here to view Table 8: The Public Debt of an Independent Quebec for the Fiscal Year Nearest March 31, 1993 (Millions of Dollars, Unless Otherwise Stated)

Click here to view Table 9: Indicators of Total All-Government Net Debt for an Independent Quebec at the End of the Fiscal Year Nearest March 31, 1994 (Millions of Dollars, Unless Otherwise Stated)

Excluding the QPP unfunded liabilities and after deducting total financial assets, table 9 shows that Quebec's all-government net debt was $224.5 billion and an estimated $239.3 billion as of March 31, 1993 and 1994 respectively. Expressed as a percentage of gross domestic product, Quebec's net debt-to-GDP ratio rose from 142.9 to 149.4 percent over the same period.

A word of caution is in order about the unfunded liabilities of the Quebec Pension Plan. The earlier Fraser Institute study, Inside Canada's Government Debt Problem and the Way Out, contains in chapter 2 a detailed analysis of the unfunded liabilities of the Canada Pension Plan based on published information from the Chief Actuary of Canada. Several attempts were made to obtain comparable information from Quebec officials for the unfunded liabilities of the Quebec Pension Plan, but to no success. Unable to obtain an official estimate of the unfunded QPP liability, the author of this report made an estimate for his study by prorating the CPP unfunded liability on the basis of population. This is a very rough estimate of the QPP unfunded liability since Quebec's demographics differ significantly from those of the rest of Canada. Also, the economic assumptions, especially for earnings, may differ for Quebec since the QPP funds are managed professionally by La Caisse de Dépôt et Placement du Québec. This is a major difference between Quebec and Canada since the Canada Pension Plan is not managed in this manner. A further difference might be the contribution rate in Quebec compared with that of the rest of Canada.

In the absence of better information, the QPP prorated unfunded liability is used in tables 8 and 9, but is de-emphasized in the presentation of these tables. It is not used in interprovincial or international comparisons because of lack of comparable data in other jurisdictions. Still, within Quebec, taxpayers should insist that their government calculate and publish the unfunded liabilities of the Quebec Pension Plan to better inform the public about the magnitude of its all-government indebtedness problem.

The Fraser Institute SIC List 1994 showing Quebec as an independent country

The earlier Fraser Institute study compares Canada, the ten provinces, and the two territories with 172 other economies for which debt statistics can be obtained. Four indebtedness indicators were used to classify the total of 185 economies into three categories according to the severity of government indebtedness. These categories are: Severely Indebted Category (SIC), Moderately Indebted Category (MIC), and Less Indebted Category (LIC). The study focuses on the severely indebted group and contained a 64 economy Fraser Institute SIC List 1994.

Although a combination of four indebtedness indicators was used to identify and classify a country as SIC, the most recent three year averages of the countries' net debt-to-GDP ratios were used to rank these economies on the Fraser Institute SIC List 1994. For this study, the net-debt-to-GDP ratios for Canada and its provinces have been updated using the methodology and debt categories contained in table 2 and estimated to March 31, 1994 in view of information in this year's budgets.

The results of these calculations are shown in table 10. Government debt statistics for provincial-hospital and local government sectors are from our earlier study, Inside Canada's Government Debt Problem and the Way Out. Table 10 shows that the all-government net debt-to-GDP ratios for all provinces within Confederation are calculated using each province's federal tax share to calculate its portion of the overall federal debt. Quebec as an independent country uses population share to determine its Separation Obligation to Canada.

Click here to view Table 10: Total All-Government Net Debt Categories and Net Debt-to-GDP Ratios for Canada and Its Provinces, as of March 31, 1994, Using the Methodology Contained in This Report (Millions of Dollars, Unless Otherwise Stated)

This revised and updated Fraser Institute SIC List 1994 (Worldwide All-Government Debt-Severely Indebted Category) showing Quebec as an independent country is reproduced in table 11. It shows that Canada and every one of the ten provinces have joined the Third World insofar as government debt is concerned. By the measure of net debt-to-GDP, Canada's all-government debt burden is more severe than those of Morocco, Poland, Ethiopia, Mexico, Argentina, and Brazil. This position places Canada as the 34th most severely indebted economy in terms of its all-government indebtedness as of March 31, 1994.

Click here to view Table 11: The Fraser Institute SIC List 1994 Showing Quebec as an Independent Country (Worldwide All-Government Debt--Severly Indebted Category)

Canada is also more severely indebted than are OECD countries such as Belgium, Ireland, Italy, Greece, Portugal, and New Zealand.

Quebec within Confederation ranks 28th in the world, just behind Panama and just ahead of Angola.

The trend of indebtedness is especially worrisome for Canada and each of its provinces. Every part of Canada is showing a worsening indebtedness trend.

Quebec as a Canadian province is exactly in the middle of the range of rankings of the Canadian provinces that appear on the Fraser Institute SIC List 1994. In these rankings, the measure is the debt of all governments in an economy. Thus, for Quebec, the province's share of the net federal debt is added to its own debt and those of local governments and hospitals. The net debt of tax-supported provincial GBEs is also included, as are unfunded liabilities of civil service pensions, workers' compensation plans, and other contingent liabilities.

Further, to get on the Fraser Institute SIC List 1994, the economy in question has to exceed the critical values of at least two out of four indebtedness indicators. These indicators measure both the level of debt in relation to economic indicators, such as GDP and exports of goods and services, and the ability to pay in relation to total government revenues and export earnings.

Canada exceeded the critical value on all four of these indebtedness indicators. The indebtedness selection criteria for determining whether or not an economy is in the Severely Indebted Category are:



"Severely Indebted" refers to a country (or Canadian province/territory) that exceeds the net debt-to-GDP ratio and at least one of indicators (2) and (3), or indicator (4) threshold or "actual values" of these ratios (averaged over 1989-91, or the most recent three years available.)

"Moderately indebted" means that the net debt-to-GDP ratio and one other qualifying ratio exceed 60 percent of, but do not reach, the critical levels for the severely indebted category.

All other economies are classified as "Less Indebted."

International comparisons for an independent Quebec

An independent Quebec would have a higher net debt-to-GDP ratio than would a Quebec that remains in Confederation. As shown in table 9, line 35, an independent Quebec's net debt-to-GDP ratio would have been 149.4 percent by March 31, 1994 were Quebec separated from Canada. This compares with a ratio of 127.1 percent for Quebec remaining in Confederation, as shown in table 10, line 6.

Based on the Fraser Institute SIC List 1994, an independent Quebec would move from 28th place to 19th place in the severely indebted category with a government debt burden just behind Madagascar and just ahead of Jamaica. Quebec's debt burden would be worse than that of any Canadian province, except Newfoundland, and would be substantially worse than that of any OECD country, including Belgium, Ireland and Italy.

Another major consequence of Quebec's separating from Canada would be a significant increase in its public debt charges. Assuming no increase in the overall tax burden, debt charges would be considerably higher, since the annual payments of Quebec's Separation Obligation to Canada would have to be included. Taking all levels of government into account, total debt charges would be an estimated $23.7 billion as of March 31, 1994 for an independent Quebec, compared with $15.3 billion for Quebec within Confederation. This 54.9 percent increase in debt charges would pose a significant financing challenge for an independent Quebec.

A final potential consequence of Quebec leaving the Canadian Confederation may be an unwillingness of foreign and domestic investors to lend money, not only to Quebec, but to the rest of Canada as well. The negotiations leading to separation would dispel whatever government debt illusion that may have existed on the parts of investors in Canadian and Quebec government bonds as to the severity of the debt burden facing Canadians and Quebeckers and the impossibility of servicing this debt while maintaining government services without unprecedented tax increases and/or further borrowing.

Conclusion

The public debt of an independent Quebec would be substantially higher than would be that of a Quebec that remains in Confederation. The need to pay Quebec's $150.6 billion Separation Obligation to Canada over a reasonable period of time, say, 25 years, would mean that Quebeckers in an independent Quebec would receive less than half of the government services previously enjoyed within Canada while paying the same amount of taxes to their new national government in Quebec City.

Taxes and/or borrowing in an independent Quebec would rise sharply if Quebeckers demanded the same level of government services as previously existed.

Taking all levels of government into account, total debt charges for an independent Quebec would be more than 50 percent higher than they would for a Quebec within Confederation. This would pose a significant financing challenge for an independent Quebec.

In conclusion, the consequence for Quebec of independence would mean a government debt burden that would be worse than that of any OECD country, including Belgium, Ireland, and Italy, and worse than that of Canada and all of its remaining provinces except Newfoundland. Other consequences would include higher taxes, increased borrowing, and reduced government services.

Bibliography

Articles, Books, and Studies

Bélanger, Michel, and Jean Campeau, co-chair. Commission on the Political and Constitutional Future of Quebec. Quebec City, PQ. In particular, see the Commission Secretariat's report, "Analyse pro forma des finances publiques dans l'hypothèse de la souveraineté du Québec," Background Papers, vol. 1. Quebec City, PQ, 1991.

Boothe, Paul, et al. Closing the Books: Dividing Federal Assets and Debt If Canada Breaks Up. No. 8, The Canada Round: A Series on the Economics of the Breakup of Confederation. John McCallum, ed. Toronto, ON: C.D. Howe Institute, 1992.

Boothe, Paul, and Richard Harris. "The Economics of Constitutional Change: Dividing the Federal Debt." Research Paper 1, Western Centre for Economic Research Series on Constitutional Change. Edmonton, AB: Western Centre for Economic Research, University of Alberta, 1991.

__________. "Alternative Divisions...of Federal Assets and Liabilities." Paper presented to the Conference on Economic Dimensions of Constitutional Change, sponsored by the John Deutsch Institute for the Study of Economic Policy, Queen's University, Kingston, ON, June 4-6, 1991.

Feilchenfeld, Ernst H. Public Debts and State Succession. NY, NY: MacMillan, 1931.

Gibson, Gordon. Plan B: The Future of the Rest of Canada. Vancouver, BC: The Fraser Institute, 1994.

Grady, Patrick. The Economic Consequences of Quebec Sovereignty. Vancouver, BC: The Fraser Institute, 1991.

Horry, Isabella, Filip Palda, and Michael A. Walker. Tax Facts 9. Vancouver, BC: The Fraser Institute, 1994, forthcoming.

Horry, Isabella D., and Michael A. Walker. Government Spending Facts 2. Vancouver, BC: The Fraser Institute, 1994 forthcoming.

Mansell, Robert L., and R.C. Schlenker. "An Analysis of the Regional Distribution of Federal Fiscal Balances: Upgraded Data." Unpublished Research Paper. Calgary, Alberta: University of Calgary, 1990.

O'Connell, Daniel Patrick. State Succession in Municipal Law and International Law. Vol. 1. Cambridge, UK: Cambridge University Press, 1967.

Perry, David B. "Government Surpluses and Deficits by Province, 1992." In Canadian Tax Journal. Vol. 42, Issue No. 2, pp. 567-577.

Poulose, T.T., ed. Succession in International Law. New Delhi, India: Orient Longman, 1974.

Raynauld, André, and Jean-Paul Vidal. "Les enjeux économiques de la souveraineté." Montreal, PQ: Conseil du Patronat du Québec, 1990.

Richardson, Robin M. Inside Canada's Government Debt Problem and the Way Out. Fraser Forum Critical Issues Bulletin. Vancouver, BC: International Centre for the Study of Public Debt, The Fraser Institute, 1994.

Whalley, John, and Irene Trela. Regional Aspects of Confederation. Vol. 68. Collected Research Studies of the Royal Commission on the Economic Union and Development Prospects for Canada. Toronto, ON: University of Toronto Press, 1986.

Government Sources

Government of Canada. Public Accounts of Canada. Volume 1: Summary report and financial Statements. Ottawa, ON: Receiver General of Canada, Annual, various issues.

Gouvernement du Québec. Budget Speech and Additional Information. Quebec City, PQ: Ministère des finances, annual, various issues.

__________. Public Accounts. Volume 1: financial statements of the Gouvernement du Québec. Quebec City, PQ: Ministère des finances, annual various issues.

Le Vérificateur Général du Québec. Rapport du Vérificateur Général à l'Assemblée nationale. Quebec City, PQ, annual, various issues.

Neilson, Hon. Erik. Task Force on Program Review. Real Property: A Study Team Report. Ottawa, ON: Supply and Services Canada, 1985.

Statistics Canada. National Balance Sheet Accounts. Annual Estimates 1983-1992. Catalogue 13-214, annual. ON, Ontario: Ministry of Supply and Services, February, 1994.

__________. Public Sector Assets and LiabilitiesHistorical Overview. Catalogue 68-508. Ottawa, ON: Ministry of Supply and Services, April, 1994.

__________. A Guide to the Financial Flow and National Balance Sheet Accounts: Definitions, concepts, sources, methods. Catalogue 13-585E, occasional. Ottawa, ON: Ministry of Supply and Services, February, 1989.

United Nations. Vienna Convention on the Succession of States in Respect of Property, Archives and Debts. U.N. Doc. A / Conf. 117 / 14 reproduced in (1983) 22 I.L.M. at 306ff. NY, NY: The United Nations, 1983.

Appendix A

Appendix B

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