THUNDER BAY, ON – Politics- As Quebec moves towards its election day and the possibility of a PQ majority, the prospect of another sovereignty referendum looms. The basic economic consequences of Quebec separating from Canada include disruption of the Canadian economic union with a consequent hit in the short term to the GDP of both Quebec and the rest of Canada.
While it is true that, eventually, life will go on, it is instructive to contemplate how, much like with any divorce, both sides can face diminished economic circumstances.
Quebec Election Could be Like a Divorce
Based on international data for advanced economies from the International monetary Fund’s World Economic Database, Canada at present has a GDP of about US$1.844 trillion. Of 34 advanced economies, Canada ranks as the seventh largest of these economies and is a member of the G-7. Quebec currently accounts for approximately 20 per cent of Canada’s GDP and on its own has an economy of about US$369 billion. Without Quebec, Canada’s output would shrink to about US$1.475 trillion. These numbers assume a best-case scenario that separation does not cause a decline in GDP for either party.
On the surface, nothing much seems to change except that the seventh largest advanced economy in the world is now two smaller economies. Canada’s output in the absence of Quebec becomes a bit larger than Spain and smaller than Australia. If the separation is disruptive and GDP falls, then Canada without Quebec could fall behind Spain and perhaps even South Korea. As for Quebec, it goes from being a member of a country in the G-7 to one ranked 18th out of 34 advanced economies in terms of total GDP. Its economy would be a smaller than Austria and larger than Denmark. After separating, Quebec and Canada will be much smaller economic players on the world stage.
Economic Diminishment has Consequences
Where economic diminishment will also have consequences is when it comes to public finances – especially for Quebec. Quebec within Canada already has the largest provincial net public debt both in per capita terms and as a share of GDP. If Quebec separates, then it will be taking its provincial public debt with it. Moreover, one expects it will be taking a share of the federal debt with it. Let us assume for arguments sake that it is an amicable division of debt based perhaps on the province’s share of national GDP as a reflection of economic ability to pay – that is, Quebec simply takes 20 per cent of the federal net public debt with it. We won’t even get into a discussion of assets or any other additional obligations the two sides might have or negotiate with each other.
Quebec’s net public debt in 2012-13 was US$176.6 billion and 20 per cent of a net federal debt of $671.4 billion would add another $134.3 billion to its load. The new nation would come into the world with a net public debt of $311 billion to service on its own. Quebec would have a net debt to GDP ratio of 84 per cent, putting it in a select league of indebted advanced economies that includes Belgium, France and the United States. If gross public debt is used, Quebec’s debt to GDP ratio will be well over 100 per cent.
As for the rest of Canada, losing 20 per cent of its GDP and 20 per cent of its net debt means its federal net debt to GDP ratio stays at about 34 per cent. Even with the addition of all provincial net debt, the combined federal-provincial net debt to GDP ratio without Quebec may actually fall slightly from about 63 per cent to 58 per cent. However, the economic uncertainty of separation means higher interest rates for both sides when financing their debt.
Taking Quebec Premier Pauline Marois’s public statements at face value, a sovereign Quebec will run its own affairs and yet use the Canadian dollar, keep using Canadian passports and have no border controls – much like what currently exists. Breaking up a country all sounds pretty much like business as usual, except that it won’t be. Quebec will be a small country and could have a debt to GDP ratio of over 100 per cent. It will join a select group of indebted countries with precarious public finances.
As for the rest of Canada, it will likely lose its status as a member of the G-7 and what little international influence it has to date been able to assert. The result is diminished economic circumstances for both sides – and that assumes an idealized amicable separation out of a fantasy world that does not exist.
Any divorce is always much more complicated than that.
Livio DiMatteo is Professor of Economics at Lakehead University.