Our man in Ottawa illustrates why there is strength in numbers
One of the most well-worn arguments against Quebec sovereignty is the challenging debt dynamics that would emerge for the province should it decide one day to separate from Canada. The argument goes something like this: an independent Quebec would be forced to assume its share of the national debt based on its share of the Canadian population in addition to the substantial provincial debt it already has. The resulting debt-to-GDP equation for the newly-sovereign nation would send it into a Greek-like spiral of insolvency as bond markets turn on it like a school of piranhas. Or at least so it goes for many commentators in the rest of Canada.
This scenario is impossible to predict accurately. Yes, La Belle Province does have a substantial stock of debt. So do all the provinces and territories. It is also certain that an independent Quebec — or any other province that separates — would have to assume its share of the national debt, which today sits at around $582 billion, or about $16,500 for every woman, man, and child in Canada. It is also doubtless that in the uncertainty surrounding independence, Quebec would face higher interest rates than what all other Canadians today enjoy
on public debt.
PREFERRED STATUS
But to argue that simply by separating Quebec overnight adds to its debt burden by some astronomical amount ignores a fundamental reality of the Canadian federation and the debt dynamics we all face: that debt exists already. Every Quebecer — just like every Manitoban, Albertan and Prince Edward Islander — owns their share of all accumulated provincial and national debts. If Canada were to break up tomorrow into 13 sovereign states those debts would still exist. The one difference is that they would not be mutualized under the banner of the triple-A-rated federal government, which as of this writing could borrow for 30 years at a little over two per cent.
It is here where the greatest disconnect exists between our public debt reality and the functioning of the Canadian federation. The federal government does not explicitly guarantee territorial and provincial debt (the $6.3 billion Muskrat Falls deal in Labrador being one recent high-profile exception to this rule). It is, in theory, responsible only for the $582 billion in accumulated deficits at the federal level. This number is equal to about 33.8 per cent of Canada’s GDP — an entirely manageable number. Interest on that debt costs less than two per cent of GDP. The record-low rates at which Ottawa can borrow reflects, in part, these favourable debt dynamics at the federal level.
However, no one seriously believes Ottawa would let a province or territory go bust. Therefore there exists an implicit and not explicit backstop for all sub-national governments in Canada. Part of the reason, say, Saskatchewan can borrow so cheaply is because it is part of Canada, figure bond investors. The feds would never let a province go bankrupt. And this assumption is most likely true. The federal government would face intense pressure to step in should one of its provinces or territories face insolvency. The disconnect exists because no one seems to have priced this assumption into federal borrowing rates: 30-year bonds are barely above inflation today, which indicates investors are willing to accept real returns that are almost negative for the privilege of lending to Canada.
FOOD FOR THOUGHT
Our assumptions and conversations about deficits and debt too often ignore the public debt reality in this country: provinces and territories account for almost half the entire stock of debt we owe bondholders. In GDP-percentage terms, once both levels of government are added, the often-cited 33 per cent federal number becomes 60 per cent. This does not put us anywhere near some of the countries facing the most challenging debt dynamics today, but it ought to give us some pause.
Canada’s provinces and territories are among the most powerful sub-national governments on earth in terms of their taxation and spending power. Their ability to pile on debt is therefore very strong. Until interest rates reflect the true risk of the debts we are incurring, governments will be encouraged to borrow more. Though we are very far from a Greek-style meltdown anywhere in Canada, the dynamics exist to keep it in the realm of the possibility. The higher interest rates an independent Quebec would face may reflect little more than the risk all of us have already assumed.
