What price separation?

Right off the top, Quebec would lose $3 billion

Ian Urquhart March 7 1977

What price separation?

Right off the top, Quebec would lose $3 billion

Ian Urquhart March 7 1977

What price separation?


Right off the top, Quebec would lose $3 billion

Ian Urquhart

In both Ottawa and Quebec City, the question is one that makes the politicians distinctly uncomfortable: if Quebec were to separate, who would benefit and who would lose in terms of dollars and cents? Would Quebec suffer and Canada-with-out-Quebec prosper? Would both sides be worse off? Or possibly even better off?

Lévesque: ‘a future immeasurably richer and more stimulating than the 109-year-old bind’

Quebec premier René Lévesque has attempted to paint a rosy picture of separation, saying it would lead to a “new northern tier” of Quebec and Canada-withoutQuebec with “a future immeasurably richer and more stimulating than the 109year-old bind in which two nations more often than not feel and act like Churchill’s two scorpions in the same bottle.” But so far he has offered little evidence to support this vision; no balance sheets of Confederation to show how much Ottawa spends in Quebec. The provincial government won’t even say that it has the figures, and when he was asked if Quebec was compiling them a spokesman for Finance Minister Jacques Parizeau responded: “Absolutely no comment.”

Federal Finance Minister Donald Macdonald’s department was even more nervous and coy when asked the same question. At first they denied that any study was being done; then, in response to a followup question, simply refused to give any answer at all. Not even a “no comment.” Says one well-placed Ottawa source: “If a study is being done, and I’m not admitting one is being done, it is being done on a very lowkey basis and you’ll never get your hands on it.”

Quebec’s reluctance to discuss the hard economics of separation is understandable because the figures would show that they gain much more from Confederation than they return in tax dollars. Ottawa’s reluctance is based on a different ground; it stems partly from fear of spurring Western separatism by demonstrating how much Quebec gains from Confederation and partly from the bad experience Robert Bourassa had campaigning on the platform of “profitable federalism.”

It’s clearly true, as super-federalist Bryce Mackasey says, that “there’s a lot more to Canada than dollars and cents.” It would be folly to focus the debate over separatism exclusively on economics while overlooking the social, cultural and political impact. How, for example, does one place a value on the sense of space and mobility that comes with a country that stretches 4,000 miles without crossing an international border? How would Canadian culture, fragile as it is, survive if the French element were removed? How could Canada-without-Quebec avoid eventual absorption by the United States? These and other important questions do not lend themselves to a dollars-and-cents evaluation. But the separatists, both in Quebec and in the west, are bound to trot out figures supporting their causes as Lévesque’s plebiscite on Confederation approaches (Alberta separatist Milt Harradence has already said that “If Quebec goes it will be an economic godsend for Alberta”) and the federalists will have to respond, even if it is not the battleground they would choose.

The fact is that the breakup of Canada, far from being the benign event that Lévesque pictures, would be an economic catastrophe, at least on the short term, not just for Quebec but for the rest of Canada. Says federal Trade Minister Jean Chrétien: “It would be a traumatic experience that would not only involve strife, bitterness, and maybe even violence, but, if it came about, would impoverish both Quebec and the rest of Canada.” While Chrétien might be accused of hyperbole, there is no question that the various regions of Canada are economically interdependent and any significant disruption of the status quo would mean economic loss. The original motive for Confederation indeed was economic: it provided a common market for the goods and services produced in British North America. Not only did producers gain a larger market, but they were also able to specialize and depend on other regions to supply the goods they required.

Says University of Toronto economist A. E. Safarian: “The size of the market permits more than a high degree of specialization of production and of sources of supply. It also gives the agents of production a wider setting in which to seek employment, to increase their individual rewards and to find more desirable occupations. In the process, not only is the welfare of the individual worker or investor enhanced, but the income of the community is also raised.”

Most of the economic advantages of Confederation could, of course, be saved after separation if Quebec and Canada were to form a customs and monetary union, as envisaged by Lévesque. But few observers expect this to happen. Says McGill University economist Eric Kierans, a friend and former colleague of Lévesque: “Promises of monetary union and common markets are a sop to pacify the doubtful, the hesitant and the uncertain in Quebec by suggesting that one can separate and still live together on the same old terms. Such statements are purely for Quebec consumption. Independence leads to independence and nowhere else. There is no halfway house or home in which the Canadian community survives after it is destroyed.”

Chrétien: ‘if it came about it would impoverish both Quebec and the rest of Canada’

Even if a customs and monetary union were arranged after separation, Quebec and Canada would be no better off in the long term and would suffer considerable economic disruption in the short term, says André Raynauld, former chairman of the Economic Council of Canada and now a Liberal member of Quebec’s National Assembly. “Is it worth the risk?” he asks. Assuming, however, that no customs and monetary union was set up after separation, the biggest losers would be Quebec itself and Ontario, the economic heartland of Canada and the two chief beneficiaries of Confederation. Only the West, especially resource-rich Alberta and British Columbia, might be better off economically on their own. But even they would suffer from short-term economic disruption. Overall, the sum of economic output of a divided Canada would be lower than the whole and the standard of living of the average Canadian would fall.

The calculation of the impact of separation on trade, investment and other economic areas involves a good deal of speculation. Says McGill University economist Antal Deutsch: “Forecasts of the economic consequences of Canada’s disintegration are based on a great deal of guesswork and cannot be taken seriously enough for policy formulation.” More bluntly, University of Toronto economist Albert Breton adds: “It’s a lousy subject. There’s nothing you can say with certainty. Any guy who opens his mouth is an ass.” Maclean ’s has nevertheless attempted to forecast the overall economic consequences of separation in four separate areas: federal spending, trade, investment, and currency.

Federal spending: If Quebec separated, all federal spending in the former province would, of course, stop. The question remains: how much does Ottawa spend in Quebec and how does it equate with the tax revenue it collects in the province? A number of studies done on this question over the years have come up with varying results but one clear trend: Ottawa is spending more and more in Quebec and the gap between the money it spends and the revenue it raises in the province is growing. A federal study of the fiscal year 1961-62 showed that Ottawa spent about $200 million more in Quebec than it raised. But a counter-study by Quebec for the fiscal year 1963-64 documented the opposite: the province paid up to $225 million more in taxes to Ottawa than was spent. A follow-up study by Quebec for the fiscal year 1971-72 showed, however, that the picture had changed substantially and Ottawa was spending up to $650 million more in Quebec than it was taxing. Finally, a study by University of Calgary economist Warren Blackman for the period 1966 to 1974 showed that Quebec was a consistent winner, with a net gain ranging from about $200 million in 1966-67 to a staggering $1.49 billion in 1973-74.

Kierans: ‘promises of monetary union and common markets are sops to the hesitant’

Maclean’s own study proves that the trend continued in Quebec’s favor during 1975-76 with Ottawa spending more than three billion dollars more in Quebec than it raised.* The increase is largely attributable to higher unemployment insurance, family allowances, equalization payments and the new subsidy to hold down oil

* The figure does not include proceeds from the Olympic lottery and its successor, Loto-Canada, which together have contributed more than S240 million toward offsetting Quebec’s Olympic deficit. However, more than 40% of the tickets are sold inside Quebec.

prices. Such figures are, of course, open to challenge. Says McGill’s Deutsch: “Economic analysis does not provide us with useful tools to attribute to Quebec an overall contribution to or benefit from federal finances. Any politician who appears with a set of figures is suspect.” Separatists argue that it is unfair to include in the federal expenditure all the salaries and fringe benefits of federal civil servants and military personnel working in Quebec. They say an independent Quebec would be more efficient and eliminate many of these jobs by cutting back on defense spending and ending the duplication of effort between Ottawa and Quebec City. On the other hand, these federal employees do pump money into the Quebec economy and the elimination of some or all of these jobs would mean an economic loss. While some unemployed civil servants would no doubt emigrate, an independent Quebec government would have to find jobs for the rest or face huge welfare rolls. The government might even decide to expand the military in Quebec to soak up surplus labor.

Some might also quarrel with the inclusion of a portion of the public debt charges (27%, equivalent to Quebec’s portion of the total Canadian population) as an expenditure. But the Parti Québécois itself, in its 1970 booklet, La Souveraineté et l’Economie, offers to assume that part of

the debt proportional to its population in return for the surrender of federal assets such as airports and post offices in the province. Likewise, an independent Quebec would surrender its proportional share of federal assets in the other provinces.

Finally, there might be some controversy over including Quebec’s share of “all other (federal) government costs” on the expenditure side.-Quebec’s portion of these costs totaled! almost $1.4 billion in 1975-76. While an independent Quebec might write off some of this amount entirely, such as its share of foreign aid (about $100 million), much of the rest involves the purchase of goods and services in the province and could only be dispensed with at an economic loss. In summary, says Liberal economist Raynauld, “an independent Quebec would be incapable of maintaining the present level of public services without a significant increase in the fiscal burden. Indeed, this would appear to be the major drawback of separatism.”

On the other side of the equation, the separation of Quebec would not necessarily mean that the rest of Canada would have an additional three billion dollars to play with. Many federal government activities would have to be carried on at the same scale as before, but without Quebec’s tax dollars. Some departments might be able to lay off staff, but others, particularly External Affairs, would have to take on more to deal with a new foreign country. While Canada-without-Quebec would probably still come out ahead in this equation, Ontario might be a net loser because Quebec would have fewer dollars to buy its goods. Says the University of Calgary’s Blackman: “The burden of taxation paid by residents of Ontario is compensated by expenditures of federal funds in other provinces which involve the purchasing of items manufactured in Ontario. It is just a matter of cycling Ontario’s tax dollars through Newfoundland back to Ontario.”

Trade: Latest federal government figures on interprovincial trade (see chart) are a decade out of date. Furthermore, they cover just manufactured goods, not raw materials or services. But manufacturing would be the field most affected if tariff walls were erected between Quebec and Canada, as most assume would happen. Says former federal deputy finance minister Simon Reisman: “The so-called economic union is a phony. Most of Quebec’s secondary industry depends heavily on the highly protected Canadian market. Other Canadians are prepared to accept this cost only to the extent that they can believe it is part of the cement that binds a nation together.”

But Ontario probably benefits as much from the tariff as Quebec and could be hurt as much if it lost the Quebec market, where it sells about 13% of its manufactured goods. Says McGill’s Deutsch: “Quebec consumers would soon discover that it would be cheaper to buy TV sets from Japan than from Ontario if both sets were subject to the same rates of duty.” If the West were to follow Quebec’s lead and separate as well, Ontario would lose both markets.

Between them, Ontario and Quebec account for more than 80% of the manufacturing output and employment in Canada. And, according to a study by the Economic Council of Canada, about 37% of the manufacturing jobs in Quebec and 27% in Ontario are dependent on tariff-protected sales to other provinces. -The ECC also found that, in industries protected by a tariff of 10% or more on imported competition, 49% of the jobs are in Ontario, 37% in Quebec, and only 14% in the rest of Canada. It is difficult to say exactly what impact the imposition of internal tariffs would have on these jobs, but it would not be insignificant.

In the West, however, there is little manufacturing and what there is would scarcely be affected by internal tariffs, BC, for example, ships just 6.5% of its manufactured goods to points east of Manitoba. If the four western provinces were to separate and form their own country, they could, in fact, raise their standard of living substantially by unilaterally removing the existing tariff barriers, at least until their natural resources ran out. One recent study put the cost of the tariff to the West at $200 million in 1970. Another put the cost of the tariff and other federal economic policies to Alberta alone at $1.3 billion in 1974.

Raynauld: ‘an independent Quebec could not maintain present levels of public services’

The Atlantic provinces could also increase their standard of living if they were to lower unilaterally the tariffs protecting their industries, but only at the expense of an out-migration of labor. Imported goods would cost less, but workers in manufacturing industries would have to look elsewhere for jobs.

Investment: Whether or not Quebec and Canada-without-Quebec form a customs and monetary union after separation, investment in both nations would probably decline, at least in the initial stages. Says one Bay Street analyst: “Investors aren’t so much political as they are nervous. If Quebec separated, they wouldn’t know what it meant, and they would hold off.” After the initial shock, investors could be attracted back if there were an economic union between the two separate parts, but many would stay away if no union came about. The economy of scale of separate markets, one with a population of about six million and the other with about 17 million, just could not sustain the same level of investment as one market with a population of 23 million.

Without an economic union, says Eric Kierans, Quebec would become a “warehouse economy,” where imported goods were stored for labeling and inspection but few goods were manufactured. Unless the rest of Canada were to stay together, Ontario would also be seriously hurt by the diminishing economy of scale. Again, the West, with its emphasis on resource extraction, would be better off than Ontario. The Atlantic provinces could hardly be worse off than they are now.

Reisman: ‘most Quebec secondary industry now depends on a very protected Canadian market’

Existing corporate holdings in Quebec might also fall in value after separation. That could hurt foreigners and Canadians outside Quebec, who have substantial assets in the province, more than Quebeckers. Alcan Aluminium, a company with vast Quebec holdings, for example, is 47.5% internationally owned, 32.5% owned by Canadians outside Quebec and only 20% owned by residents of Quebec. Similarly, Bell Canada, another corporate giant with large Quebec holdings, is 75% owned by Canadians outside Quebec. André Raynauld has estimated that French-speaking Quebeckers control just 15% of all the province’s manufacturing output and a mere 2% of its mining output. The stock market may already have discounted the value of Quebec-based stocks in anticipation of separation, however. A survey of 16 major Quebec-based stocks in early February showed just one—Alcanhad increased in value since the November 15 election of the Parti Québécois. Some of the others had declined substantially in value.

Currency: While some people believe a customs union between an independent Quebec and Canada would be possible, almost no one foresees a monetary union. Says Antal Deutsch: “A central bank receiving conflicting orders from its two sovereign masters cannot operate for long. Monetary separation would be an inevitable consequence of Quebec’s secession.” Even Quebec’s Parizeau admits: “The possibility of common currency is probably not very great at the present time.”

What would be the result of splitting our currency in two? The uncertain situation would probably prompt speculators to drive -down the value of the currencies of both Quebec and Canada on the international money markets. This trend would probably be accompanied—and encouraged—by an outflow of investment capital from Quebec and Canada in search of safer havens. As the value of the two currencies declined, imports would cost more and it would also be more expensive to borrow the money abroad to pay for the goods. The Wall Street credit ratings of both Quebec and Canada ’’’could only go in one direction—down,” says Jack Phillips, executive vice-president of Moody’s. The lower rating would mean borrowers would have to pay higher interest, if they could find anyone at all who would lend them money. To cut down on such expensive borrowing, governments would be forced to turn to austerity measures to lower their deficits.

The governments of both Quebec and Canada might also have to resort to exchange controls, such as those already being applied in Italy and Rhodesia, to limit the outflow of capital. All regions of Canada, not just Ontario or the Atlantic provinces, would be adversely affected, as well as Quebec itself.

In 1967, the late Blair Fraser, writing in Maclean’s, concluded that separation would mean economic catastrophe. “But,” he added, “the wiser of Canadian statesmen, in Ottawa and the English-speaking provinces, know that these material factors will not alone subdue the threat of separatism. Awareness that they now lack the (economic) capability of declaring independence will increase, not diminish, the sense of frustration among French Canadians and their resolve to find or make a way out of the trap that holds them. At most, these material circumstances may assure us some time—perhaps no more than a few years—in which to remove the grievances and satisfy the aspirations that created separatist feeling in the first place.”

That was written 10 years ago. We may be running out of time.