WHO GETS WHAT AND OWES HOW MUCH?
Who gets what is always the biggest bone of contention in a divorce. Nothing can enrage a spouse more than the other partner laying claim to a cherished belonging like Grannie's priceless silverware or the family dog. In Canada's case, the prospects for conflict are even greater. The country's assets are far exceeded by the national debt. Negotiations will be a bit like trying to reach agreement on which partner will get to pay the $100,000 mortgage on the charred remains of the family's uninsured home. Going out of a union with less property is bad enough; going out of it deeper in debt is even worse.
Disputes over the division of assets and liabilities have been the powder kegs that have touched off civil wars. The War between the American States started when Confederate militia seized federal property with force of arms, not when the state legislatures voted to secede from the Union. In Canada's case with a federal government so far in the hole it can't see any light at the top, it is the division of the debt, not the assets, that is the high-stakes issue.
And the stakes have been quickly mounting. Back in 1980, when Quebec last held a referendum on sovereignty, the net public debt of the federal government was only $76 billion or 27.4 per cent of Canada's annual gross domestic product. (GDP provides a good benchmark for comparing a country's total debt load.) The division of the debt after Quebec separation was not a preoccupation in that referendum debate.
Since then, Canada's debt has grown more than sevenfold. By the end of the current fiscal year, the federal government's net public debt will total almost $550 billion or almost three-quarters of GDP. This is more than $18,700 for every man, woman and child in Canada. Interest charges alone on the public debt now total a crushing $44 billion a year. The public debt has become such a heavy burden for Canadian taxpayers that making sure we don't get stuck with a disproportionate share must be the main objective in any negotiations with Quebec.
The federal debt has been called the "bonds that tie" because of the common financial obligation that they impose. They could equally be called the "bonds that break" because of the incentive they provide Quebec to try to get out from under it.
Old debts may not seem worth getting too worked up about but when a single percentage point is worth $5.5-billion and the collection agencies are breathing down your neck, they are at least worth a few good arguments. For negotiators haggling over the breakup of Canada, the stakes will be enormous. Depending on what principle is used for figuring out what portion of the debt Quebec should pick up, Canada could end up as much as $25-billion deeper in the hole than it would be otherwise. This is almost $1,150 per person or $4,600 for a family of four. So getting the right formula will have an effect not only taxes but the taxes of our grandchildren and great grandchildren.
One of the main reasons that sovereignty has gained support in Quebec among more conservative, business-oriented voters is the perception that the federal government has been fiscally irresponsible and that it is hamstrung by its enormous debt. The wellspring of fiscal benefits that has flowed to Quebec from Ottawa in the past is running dry. Even though generations of federal politicians from Quebec helped to create the problem, the separatists feel no shared responsibility to deal with it. For them, the federal debt is, above all, English Canada's burden. Jacques Parizeau sums up the sentiments of sovereigntist business people with the slogan "en sortir pour s'en sortir" which he translates as "to get out (of Canada) to get out of this mess."
The starting point in any negotiations is the fact that federal government debt bears the promise that the Government of Canada, will pay the interest owing and will pay back the principal at maturity. Canadian and foreign investors purchased Government of Canada debt on the basis of the federal government's promise. No investors purchased it expecting to collect a nickel from the Government of Quebec.
Quebec separatists know that Canada is on the legal hook for the federal debt so they like to say that they will pay their "fair share" on moral grounds, not because they have to. This means that Canada will have to use its weight in other areas of negotations like trade arrangements and the use of the Canadian dollar, where it has more bargaining clout. Only by linking these issues together and doing a little arm twisting will Canada be able to make sure that Quebec assumes its fair share of the debt voluntarily. The negotiations will not be easy. But it is encouraging that Quebec leaders, including Jacques Parizeau himself, have stated their intention to share the debt. Quebeckers realize that the credit rating of an independent Quebec and its credibility in international financial markets depend on its willingness to assume its share of the federal government's debt.
For Canadians, the goal must be to walk away from the table with an equitable part of the national debt burden. We should not allow Quebec to take advantage of our greater financial capacity to escape with less than its fair share of the debt. Nor should we make the burden on Quebec too onerous. Like a vindictive spouse, we should not try to soak the departing partner dry through alimony payments that can't be met. Canadians won't be the winners if a separate Quebec proves incapable of paying its share of debt payments because it has been stuck with too high a bill.
Before Jacques Parizeau donned the grave mantle of Premier, the PQ leader flippantly observed that "There are really two criteria to use [to divide the debt]: population and Gross Domestic Product." He added, "We will, I suppose, haggle for a few weeks before we come to something like a quarter (25 per cent)." Not surprisingly, a commission and committee later, he has changed his tune. Quebec's position is now much more complicated and calls for a share much less than 25 per cent. Before turning to Quebec's likely opening offer, let's look at the issue in a broader context.
WHAT DOES INTERNATIONAL LAW SAY?
International law doesn't lay down any hard and fast rules about sharing assets and liabilities after countries break up. If we decide what we want, there will be no difficulty hiring a sharp international lawyer to argue our case. But we cannot afford to leave international law to the lawyers, as it will provide the language of the negotiations and will have an important influence on their outcome.
Despite all of the geo-political changes that have taken in the past 50 years, there is no comparable example of a member state seceding from a federation that could be applied to the separation of Quebec from Canada. Most cases of secession, whether it's Bangladesh splitting from Pakistan or the Baltic states from the former Soviet Union, involve relatively unsophisticated economies with none of the huge buildup of debt that Canada has experienced. International case law provides no firm guidance on the distribution of assets and liabilities in the event of the break-up of a country such as Canada.
Using the principles of international law on the division of government assets, a separate Quebec will take on ownership of all federal property in Quebec without being required to pay for it in cash. This includes roads, bridges, railways, airports, seaports, post offices, public buildings, military establishments, penitentiaries and customs posts at the border. Federal buildings such as Place du Portage and the Museum of Civilization in Hull and the Complexe Guy Favreau and Maison Radio-Canada in Montreal would be transferred to the Quebec government. Federal government office leases would also be switched to Quebec. Gatineau, Forillon and La Mauricie federal parks would become Quebec parks. The Canadian Forces Base at Bagotville would become a Quebec Forces Base. Quebec would even be lucky enough to assume title to the statue of General Wolfe that stands proudly on the Plains of Abraham in Quebec City, now a federal park.
The principle of location also applies to other kinds of property. Federal office furniture and equipment, computers, military hardware, and vehicles in Quebec would all become the property of the Quebec government. The CF-18s based in Bagotville would all become QF-18s unless they happened to be in Cold Lake, Alberta for the day. If separation happens by the time the new National Archives storage complex in Gatineau is supposed to open in 1996, key Canadian historical records would also become Quebec property. The flip side of this argument is that all real estate and other property on the Canadian side of the border stays with Canada. That means Canada keeps the Parliament Buildings, the art treasures of the National Gallery, Banff National Park and all of the new navy frigates, none of which are based in Quebec.
But none of this is carved in stone. If there is property in Quebec such as official records, works of art or military hardware that we can't live without, we can try to make a deal with Quebec. We might offer to tradeQuebec historical manuscripts in the National Archives or masterpieces of Quebec art in the National Gallery.
While no money will change hands between Quebec and Canada, the value of what Quebec takes over is important because it will be used in the final division of the debt. The lower the value of the assets that Quebec receives, the lower its share of the debt. So it will be in Canada's interests to ensure the highest possible value is placed on the federal assets assumed by Quebec.
Beyond the division of real estate assets, Canada should make sure that Quebec takes responsibility for loans and investments made to Quebeckers by Canada Mortgage and Housing Corporation, the Federal Business Development Bank, and and other federal agencies. Otherwise, Canada will end up being a banker and mortgage lender to the citizens of a foreign country.
Crown corporations doing business entirely in Quebec such as the ports of Montreal and Quebec City and the agency running Montreal's Jacques Cartier and Champlain bridges would be handed over to Quebec. Crown corporations that had assets both in Quebec and elsewhere in Canada like the National Capital Commission and Canadian National Railways would have only their Quebec assets transferred to Quebec.
When it comes to overseas assets like embassies and consulates, international law says only that these assets are supposed to be divided in an equitable manner. When Czechoslovakia split up in 1993, their overseas missions and all other assets were divided on a 2-for-1 basis, with the Czech Republic getting the bigger share. That gave the Czechs the former Czechoslovak embassy in Washington, while the Slovaks ended up with the old Czechoslovak embassy in Ottawa. The result is that the tiny Slovak mission to Canada is comfortably housed in a spacious four-storey building while the Czech embassy is squeezed into rented accommodations in a second floor walkup. In splitting up foreign assets, Canada will no doubt want to hold on to the spectacular new Arthur Erickson-designed embassy on Pennsylvania Avenue in Washington and the exquisite embassy facility in Tokyo near the Imperial Palace. Secondary properties could go to Quebec.
There is no consensus in international law on how to divide government debt when a secession takes place but it's generally accepted that the new state should pick up a fair share of the debt of the old country. Defining what's equitable is left to the parties to negotiate. Until this is done and the new state voluntarily assumes the debt, the creditors of the old state have no claim against the new one.
While the obligations of a breakaway state like Quebec to assume its share of the debt are regrettably weak, there are precedents that should give Canadians hope. When Ireland left the United Kingdom in 1921, when Singapore was expelled from Malaysia in 1965 and when Pakistan and Bangladesh split up in 1971, the new states all agreed to accept a part of the general debt. More recently, the Czech Republic and Slovakia, keeping it nice and simple, divvied up the debt of Czechoslovakia on a two-to-one basis, with population as the benchmark.
As to the money that must be put aside to pay future pensions to retired civil servants, international law calls for the new state to assume responsibility for the civil service pensions of the old state. That presumes that the old state disappears, as in the case of Czechoslovakia. It is less clear what would happen if Quebec separated from Canada because Canada will presumably continue to exist. In this case, Canada remains responsible for the pensions of all retired federal public servants, even those living in Quebec, until Quebec voluntarily assumes those liabilities.
|Canadian National Railways||2,414|
|Canada Post Corporation||1,067|
|Export Development Corporation||926.4|
|1 Patrol Frigate||750|
|St. Lawrence Seaway Authority||554.1|
|Canadian Museum of Civilization||250|
|Montreal Ports Corporation||206.1|
|Place du Portage||190|
|Port Cartier Prison||65|
|Future pensions of government employees||94.1|
|Canada Savings Bonds||31.3|
The most rational approach would be for both sides to agree on the overall shares of total debt and then distribute the specific assets and liabilities. Once Canada and Quebec figure out who is on the hook for how much debt, credits could be given for the extent to which the federal assets located in Quebec fell short of the agreed upon share, resulting in a reduction in the debt assumed by Quebec.
This approach requires that all assets and liabilities be appraised to find their current market value. The valuation of federal assets and liabilities would be one of the largest valuation exercises ever undertaken. Determining fair market value for Lake Louise, Kingston Penitentiary and the Citadel at Quebec City won't be easy. This effort would be costly but unavoidable if we are to arrive at a fair sharing of assets and liabilities.
The very act of breaking up the country could have significant effects on property values and raises the issue of whether prices should reflect the value before or after the breakup. Canada's position on this issue should be clear. It would be in our interest to use pre-separation prices because real estate values in Quebec would likely decline after separation. It's easy to imagine that a renewed flight of head offices from Quebec would depress the value of the federal government's office towers in Montreal as well as the rest of Ottawa's Quebec holdings. If Quebec wants to be independent, it should bear the cost of the anticipated reduction in Quebec property values.
THE BÉLANGER-CAMPEAU PROPOSAL
Not surprisingly, the Bélanger-Campeau commission cooked up a scheme for the sharing of assets and liabilities that is advantageous for Quebec. This proposal has been the source of much confusion in Canada because of its complexity. Since it could become Quebec's opening offer in any negotiations, we need to understand it fully. The proposal, which is based on assets and liabilities in 1990, claims to set Quebec's share of federal non-pension financial liabilities equal to its share of total federal assets. This approach results in an unacceptably low 16.5-per-cent share of debt, which is much lower than Quebec's 24.9 per cent population share.
Bélanger-Campeau's rationale for calculating the share of public debt based on the share of assets is weak because Ottawa didn't incur the public debt simply to purchase assets like buildings and bridges. Rather, the debt grew because of successive years of deficit spending on cash payments to people and provinces.
Arriving at that 16.5 per cent share follows some adroit calculations that blend widely different proportions of different assets. For one thing, Quebec ends up with a minuscule 3.8-per-cent share of financial assets, through a very selective process where it proposes taking over some small Crown corporations operating only in Quebec, like the port of Montreal and a share of certain Canada-wide Crown corporations that Quebec would like to retain. Quebec also takes a partial share of the St. Lawrence Seaway Authority, the CBC, the National Capital Commission, Canadian National Railways, Via Rail, Canada Post and several other corporations because of their role in transportation and communication between Quebec and the rest of Canada and because of their economic importance to Quebec.
However, if Bélanger-Campeau gets its way, Canada would be left holding the bag for billions of dollars in loans to Quebec individuals and corporations extended by federal government financial institutions like the Canada Mortgage and Housing Corporation, the Farm Credit Corporation, and the Canada Deposit Insurance Corporation. None of these agencies turns up on the list of assets Quebec would share. Nor does Petro-Canada or the Canadian Wheat Board. Why should we continue to be responsible for mortgages on Quebeckers' homes and commercial loans to Quebec businesses and support for Quebec depositors in failed financial institutions? And why should we bear sole responsibility for loans to foreign governments made by the Export Development Corporation and often supported sales to these countries by Quebec companies like SNC-Lavalin and Bombardier?
Under the Bélanger-Campeau proposal, Quebec would also get away with a mere 13.3 per cent of the federal government's pension liabilities for its employees under the Bélanger-Campeau proposal. It calls for Quebec to be responsible for paying pensions only of federal employees working in Quebec who would be transferred to the Quebec government. It assumes that the rest of the country would take on all the responsibility for the thousands of former federal employees who are already pensioned off, including those in Quebec. This is unacceptable to the rest of Canada because existing pensions have been earned by public servants providing services to all Canadians, including Quebeckers, and should be shared on the same basis as any other federal government debt.
When it comes to the biggest portion of assets of all, the accumulated deficit, which accounts for more than half of the total, the Bélanger-Campeau Commission proposed that it be shared based on Quebec's average share of federal revenues between 1972 and 1988. That yields a share of 22.8 per cent, which is approximately equal to Quebec's 1992 share of the Canadian economy but well short of its proportion of the population.
In total, the proposal calls for Quebec to assume 16.5 per cent of the federal government debt. While this figure is not as low as it looks because it does not credit Quebec for its reduced share of federal assets, it still comes out to only 20.3 per cent of the debt after accounting for those assets. This is significantly less than Quebec's share of population, which is 24.9 per cent.
Not surprisingly, according to the Bélanger-Campeau's calculations, Canada's debt burden would rise substantially while Quebec's would fall if its formula for division of the debt is followed. If every province could play its own similar debt and deficit game, there would be a rush to separate. Every province would discover that it would be better off not being part of Canada. The last province remaining would be the one stuck with the billions of dollars in debt that nobody else was willing to claim.
|Note: GDP comes from Statistic Canada's provincial economic accounts for 1993; population is for July 1, 1994; and the estimate for historical benefits was provided by Robert Mansell based on the provincial economic accounts from 1961 to 1992 adjusted to account for the effect of regulated prices for energy and other factors. The total net public debt estimated for 1994-95 to be distributed between Quebec and the rest of Canada is $547.9 billion and is taken from Department of Finance, Creating a Healthy Fiscal Climate: the Economic and Fiscal Update, October 1994.|
PRINCIPLES OF SHARING
After the complex system of dividing the debt thought up by the Bélanger-Campeau Commission, here's the simple yet logical formula proposed by Samuel Oak of Chilliwack, B.C. in a letter to the editor of The Globe and Mail. "When Quebec separates, how do we divide the national debt? Take the national debt on the day Quebec officially ceases to be part of Canada, divide it by the total population of Canada as recorded in the most recent census. Multiply this number by the population of Quebec as recorded by the same census and you should arrive at a figure that will be around 25 per cent of the total. What could be more equitable or simpler?"
Using Oak's formula, Quebec has 24.9 per cent of Canada's population (using 1994 figures) so it would take on the same percentage of the debt. The advantage of this method is its simplicity. It's understandable to everyone, not just accountants and economists, and it is based on the most fundamental concepts of equity. Preston Manning favours using population as the basis for the division, emphasizing that the formula "has to make sense to people on the street." Even Jacques Parizeau's musings about a one-quarter share support this indicator.
Dividing the debt by population would leave Quebec responsible for $136.4 billion and the rest of the country with $411.5 billion.
Yet sharing debt according to population takes no account of the debtor's ability to pay, which suggests that the amount of debt assumed should be directly related to the debtor's income. Having lower incomes than the rest of the country, Quebec would clearly prefer to use the ability to pay principle. Using Quebec's share of Canada's gross domestic product, the province would end up with 22.6 per cent of the debt or $124 billion, or $12-billion less than under the population principle. Another way of dividing the debt would be to use Quebec's contribution to federal revenues, it involves more complicated calculations, but yeilds results very close to those for gross domestic product.
Quebec has every interest in using ability to pay rather than population as the basis for dividing the debt. But for the rest of Canada, it means allowing Quebec to leave on the same basis as it participated in Confederation, paying less for the federal government than its population would justify. Most Canadians probably feel that if Quebec decides to withdraw, it is making a voluntary choice to forego the benefits of revenue sharing among the provinces and should be prepared to live with the consequences. It would be unrealistic for Quebec to expect to continue to enjoy a fiscal benefit of Confederation after independence.
For those who think that Quebec has been the spoiled child of Confederation, there's yet another way of dividing the debt. That's using the principle of historic benefits. Using statistics dating back to 1961 (when Statistics Canada began compiling those figures and the national debt was only $20.1 billion) which have been adjusted by Robert Mansell of the University of Calgary to account for the effect of regulated prices for energy and other factors, the proportion of the debt can be attributed to each province according to where the money was spent. Since Quebec was a less well-off province, its people benefitted from federal spending to a greater extent than its population share.
Using the historic benefits principle, Quebec would be saddled with as much as 35.9 per cent of the debt, for a total of $196.7 billion, even though it makes up only 24.9 per cent of the population. Under this principle, the division of the debt could be regarded as a final settling of accounts. Quebec would have to pay up for all those years in which it received more out of the federal treasury than it paid in taxes. Among the most outspoken supporters of the historical benefits formula for dividing up the debt is Paul Boothe, an Alberta economist. Not surprisingly, the formula shows that Alberta is the province that has paid the most into Confederation for the least returns and therefore has the smallest per capita share of the national debt.
Although many Canadians would love to see Quebec forced to take as big a share of the national debt as possible, the 35.9 per cent share proposed under the historic benefits system would be punitively high. And Quebec, with its already high provincial debt, would simply not be able to afford to pay it and would likely default. It would be much preferable to set the population share of 24.9 percent as Canada's bottom-line target. It's fair and it's easily undestood by everyone.
One final point. Because Quebec actually has a share of total federal assets that is less than its share of population (and because Quebec does not want its full share of financial assets according to Bélanger-Campeau), Quebec's fair share of debt could be as much as $17 billion lower than the share calculated solely on the basis of its share of the population.
GETTING QUEBEC'S DEBT OFF OUR BOOKS
The transfer of debt and assets to Quebec must be done in a way that minimizes uncertainty and transition costs. Foolish borrowers who take actions that increase uncertainty pay the price in higher interest rates. The existing public debt is an obligation of the federal government of Canada and until it matures it must remain so. There must never be any question about the federal government's readiness to meet its obligations. From the outset, the federal government must reassure everybody that it stands firmly behind its obligations, regardless of the outcome of its negotiations with Quebec. Preston Manning recommends that "the day after referendum approving secession, the Governor of the Bank of Canada and finance ministers should quickly hammer out an agreement that they are committed to honouring their collective indebtedness."
The negotiations over the sharing of the debt must take place within a calm and rational atmosphere. Recriminations and threats at the bargaining table would be counterproductive and would undermine the credibility of both the Canadian and Quebec governments. Resulting increases in interest-rates risk premiums on government debt would punish Canada as well as Quebec. Our ability to secure financing would also be impaired.
Canada's position on the sharing of the debt must be clear. Quebec must eventually assume full responsibility for the share of the federal debt it is inheriting. As Ottawa's debt comes due, Quebec must refinance its portion in its own name through bonds or other obligations issued by the Government of Quebec. So far, Jacques Parizeau has displayed a reluctance to assume that debt, musing instead about paying the federal government the interest, but not taking on the principal itself. That's the equivalent of selling your house but being forced to keep the mortage in your name with the new owner only paying the interest.
Of course, Parizeau would prefer to leave the Canadian federal government stuck with financing the public debt and with carrying the debt on its books. This would mean that creditors would only be able to come after us for payment and not Quebec. Such an arrangement would be beneficial for Quebec, but not for Canada. The interest paid to the federal government by Quebec for its share of public debt charges would be regarded as much less secure than the federal government's previous full access to the Quebec taxes. This could jeopardize the Canadian government's credit rating and would make it both more difficult and more costly to raise money.
Another disadvantage of keeping all federal debt in Canada's name indefinitely is that it would give Quebec a lever over Canada that could be used in subsequent negotiations over unrelated issues. Quebec could always threaten to withhold the interest payments until it got its way on any issue. Indeed, Jacques Parizeau has speculated that in certain circumstances Quebec's "cheques might leave a little later." Economist William Robson of the C.D. Howe Institute has called this "a gun to Ottawa's head."
States have a deplorable tendency to renege on their debt to other governments, particularly where huge sums are involved. The Paris Club of wealthy lending nations meets regularly to reschedule the debts of countries that get in over their heads. How much of the war reparations that the Germans owed us after the First World War did we end up collecting? Better to get the money from Quebec now.
With Quebec already a big borrower both at home and abroad, transition problems could be expected if Quebec were forced to take on its share of the debt more rapidly than markets could be developed to absorb it. But there's no reason Quebec can't absorb this extra debt eventually. A reasonable timetable might be to transfer half of the debt over a five-year period with the remainder over the balance of the decade. This should allow sufficient time for the expansion of the market for Quebec government debt both in Quebec and outside.
In the meantime, it would be nice to have some collateral, even if only paper, for Quebec's share of the debt. Economists Paul Boothe and Richard Harris have suggested that Quebec should issue bonds to the federal government until it was able to assume its own debt.
Transitional costs would be much lower if a common currency could be preserved. Lenders would be reassured about the security of their principal. Quebec would also be able to assume its share of the Canadian dollar public debt more easily if it were to belong to a monetary union with Canada.
The good credit ratings of Canada and Quebec have been earned over the years through their responsible behaviour as borrowers. These ratings make it easier for private as well as public borrowers to obtain financing and support needed foreign investment. Let's not destroy our credibility in heated divorce proceedings. But Quebec must take its 25 per cent share of our common debt if it goes.