quebec 2030 (part a) : how confident should quebecers be?

Quebec 2030 (Part A): How Confident Should Quebecers Be?

Etienne Lacroix Boston, April 2011

We need to stop being a minority that perpetually worries about its survival. Survival is a word that will get us all sick.

‐ René Lévesque, 1976 After going through two referendums about its future within Canada, the social, demographic and economic situation of Quebec, the second largest developed French speaking society after France, has changed enormously. With a population growth rate and productivity level well below the Canadian average, the highest debt level of all the provinces, and a budget deficit planned until 2014, Quebec, the second largest economy in the country, has become one of the poorest on a per capita basis over the last 30 years. As the welfare‐state model of Quebec is getting economically stretched, the increasing immigration is sparking a charged cultural identity debate, and a number of public mismanagement scandals are emerging, several interest groups have developed, leading to frequent public and private project paralysis and a growing anomy within the population. Will a nation that for four hundred years has vigorously claimed a distinct specificity be able to preserve its welfare‐state model, maintain its high environmental expectations and protect its unique culture? Or is too late? Has Quebec, without even noticing it, already given away its ability to prevent its apparent decline?

Overview of Quebec history The end of New France and the creation of the Canadian Confederation In 1534, the French explorer Jacques Cartier discovered a continent that was occupied by Native populations. Cartier took possession of the land in the name of the King of France and named the colony New France (Exhibit 1). Less than a century later, in 1608, the French cartographer Samuel de Champlain founded Quebec City, the first permanent French settlement, in what was to become the province of Quebec. From 1660 to 1759, successive waves of war and peace occurred as the French and British struggled for control of land, fur trade, and fisheries. In 1759, while the Seven Years War was being waged in Europe and the Middle‐East, British soldiers led by General James Wolfe initiated a battle against Quebec City on the Plains of Abraham. The French soldiers, led by Louis‐Joseph Montcalm, were defeated. One year after the loss of Quebec City, the rest of the French colony surrendered to England, and a final settlement was reached in 1763 with the Treaty of Paris. When the United States gained independence in 1776, approximately 30,000 people loyal to the British regime moved North into what was to become Upper and Lower Canada. Upper Canada, which eventually became the province of Ontario, was mostly English‐speaking, whereas Lower Canada, which would become the province of Quebec, was mostly French‐speaking (Exhibit 2). Although French‐Canadians were able to elect French‐Canadian deputies, conflicts emerged because all legislation had to be approved by a British‐appointed Council. Those tensions resulted in the emergence of The Patriots, a

Quebec 2030: How confident should Quebecers be?

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French‐Canadian revolutionary movement led by Louis‐Joseph Papineau, whose stated goal was to achieve independence for Lower Canada. After winning one military battle in the village of St‐Denis in 1837, the movement was dissipated in 1839 after the British army burnt villages associated with The Patriots, publicly hanged twelve of the movement leaders, and deported fifty‐eight others. One year later, the British Parliament requested that Baron Durham provide recommendations to prevent further insurrections by French‐Canadians. In his report he noted:

It’s a nation without history or culture […] The union of lower and upper Canada would not only give an absolute majority to the English‐Canadians, but also a majority that grows every year over the influence of English immigration […] I have little doubt that the French‐Canadians once they become a minority would abandon their vain hopes of nationality.

One year later the Act of Union was passed uniting Upper and Lower Canada into a single province (Exhibit 3). Through this agreement, English was made the only official language and representation by population was refused to Lower Canada, whose population at the time outnumbered that of Upper Canada. In 1867, a new agreement uniting other British provinces located north of the United States led to the creation of the Canadian Confederation (Exhibit 4). As their relative importance in number within Canada went down, French‐Canadians’ hope for more independence vanished and they turned to the Catholic Church as an institution that would protect their language and heritage.

The First and Second World Wars At the beginning of World War One, tensions between French and English Canadians were at their peak. The province of Ontario had just passed a law that banned French as a language of instruction, and conscription had just been voted in. French‐Canadians were in no mood to be forced to fight for England. Through the summer of 1917, night after night, riots took place in the streets of Montreal. Tensions lasted until April, 1918, when the Canadian Government sent the Canadian army to Quebec City to stop a riot that had started four days earlier. Six people were killed and hundreds were injured. In 1940, during World War Two, history repeated itself. The Canadian Government asked the people to release it from an electoral promise made to French‐Canadians that mandatory military service would not be enforced. André Laurendeau, a highly respected French‐speaking intellectual, declared:

French‐Canadians are opposed to the very principle of the vote. They deny the Canadian Government the right to ask the majority to cancel a promise made to the minority.

In the rest of Canada, French‐Canadians were perceived as being a nation that was afraid to fight. Once again riots broke out in the streets of Montreal. As the rest of Canada voted “Yes” at 80% for a release from the promise, 72% of Quebec’s population voted “No”. A French‐language newspaper stated:

Although Quebec has lost the vote, its population has gained a new sense of national solidarity.

The Great Darkness Era In the mid “40s, business flourished in English. Francophone Quebec remained rural, subjugated and poor. Since the surrender of New France in the late 18th century, English‐Canadians had developed institutions to serve their interest: McGill University, the Bank of Montreal, the Montreal Stock Exchange, etc. Those institutions were run by English‐Canadians, even though over 80% of the population of Quebec was French‐speaking. A minority of the French‐Canadian elite could aspire to a liberal profession in medicine or law, for example, but business positions were held by English‐Canadians. French‐Canadians living in large cities were mostly factory workers working six days a week and at least ten hours a day. This period has become known as La Grande Noirceur (The Great Darkness).


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The workers’ harsh conditions led them to request the basic right to strike. They were supported by intellectuals such as Pierre Elliott Trudeau, who later became Prime Minister of Canada, and organizers such as Michel Chartrand, who later became president of the Confédération des Syndicats Nationaux (CSN), the second largest Union in Quebec. Unionization was perceived by French‐Canadians as the only way to stop English‐Canadian domination. At the time, English‐Canadians controlled capital and held most managerial positions. Expressions such as être né pour un petit pain (born for bread crumbs) appeared in French‐Canadian popular culture, reflecting the sentiment of a nation that had come to accept being treated like second‐class citizens. The Catholic Church, an institution at the core of French‐Canadian society, supported traditionalist politicians such as Maurice Duplessis. The authoritarian and nationalistic government was pro status‐quo, a determined friend of private industries, and it was accused of selling Quebec’s natural resources to outside interests. Although Duplessis practiced patronage and was considered to be corrupt, he was praised for establishing a provincial income tax and providing the province of Quebec with the financial means to develop institutions for French‐Canadians. His government was also recognized for adopting, in 1948, the current blue and white flag named Le Fleurdelisé, setting the foundation for a renewed national identity. The Quiet Revolution The death of Duplessis in 1959 enabled Quebecers to see that change was within their grasp. The Liberal Government led by Jean Lesage was elected in the province based on its campaign Maîtres Chez Nous (masters in our own house), in which it promised that Quebec would gain control of its own resources. In the fragmented French‐language education system, controlled by the Catholic Church, only 13% of students reached 11th grade, compared to 36% for English‐Canadian students. The Parent Report commissioned in 1961 recommended taking control from the Church and giving it to the Ministry of Education, a change that would lead to a province‐wide network of public French‐language colleges and universities. Throughout the ‘60s, the State would replace the Church as the institution that protected the interests and promoted the progress of French‐Canadian Quebecers. By 1970, 50% of Quebec households had stopped going to Church. The provincial government of Lesage would also initiate a wave of nationalization, expanded public services, and major public infrastructure projects. The nationalization of power utilities, led by René Lévesque, who would later form the first separatist political party, resulted in the creation of Hydro‐Québec. The subsequent hydro‐electric dam megaprojects would become an important symbol of the pride and ingenuity of the Quebec people (Exhibit 5). Additionally, by 1970, the government had created the Ministry of Health and Social Services, a universal contribution pension plan, as well as the Caisse de Dépôt, to manage Quebec pension fund revenues, a fund that until the 2008 economic downturn had remained the largest in Canada.

The emergence of the sovereignty movement In the early ‘60s, a new homegrown culture started to flourish in the province. Artists such as Gilles Vigneault, Félix Leclerc and Claude Gauthier were promoting both the French language and further freedom for Quebecers. This engaged culture would reach a peak in 1970 during Les nuits de la poésie (Nights of Poetry) where Michelle Lalonde presented a text called “Speak‐White” referring to an insult used by English‐Canadians against those who spoke other languages in public:


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Speak white Tell us that God is a great big shot And that we're paid to trust him Speak white Parlez‐nous production profit et pourcentage (Talk to us about production, profits and percentages) Speak white C’est une langue riche (It's a rich language) Pour acheter (For buying) Mais pour se vendre (But for selling) Mais pour se vendre à perte d’âme (But for selling your soul) Mais pour se vendre… (But for selling out)

In 1963, a radical socialist‐separatist movement was formed: the Front de Libération du Québec, FLQ (Quebec Liberation Front). During the next several years, the group exploded bombs in places that were symbolic of the English Monarchy both in Montreal and Quebec City, like the Canadian National Railroad, the Canadian Army building, a Royal Canadian Mounted Police building, Canada Post mailboxes, etc. Those symbols were seen as evidence that Quebec was controlled from the outside. In 1964, when the Queen of England visited Montreal, English‐Canadians celebrated their British heritage. For Quebecers, this was a manifestation of British domination. The following day, riots exploded in the streets of Montreal, and hundreds were arrested in what was later called Truncheon Saturday. Three years later in 1967, Montreal appeared on the international scene by hosting the Expo 67 World’s Fair. That same summer the President of France, Charles de Gaulle, gave his controversial speech Vive le Québec libre (Long live free Quebec) from the balcony of Montreal City Hall, further legitimizing the idea of Quebec independence. A year later, René Lévesque quit Quebec’s Liberal Party to form the Parti Québécois, a moderately socialist provincial party intended to give Quebecers the chance to choose for themselves between becoming an independent state or remaining a Canadian province. In 1970, the terrorist activity of the FLQ reached its peak during the events of the October Crisis. When British diplomat James Richard Cross and Quebec Minister of Labor Pierre Laporte were kidnapped, Pierre Elliott Trudeau, Prime Minister of Canada, instituted the War Measures Act and sent the Canadian Army to Montreal. The Act enabled police to search without warrants and allowed prolonged detention without charges being made or access being given to a lawyer. As basic human rights were violated and hundreds of Quebecers were arrested and put in jail by soldiers from the Canadian Army who barely spoke French, an impressive wave of sympathy for the independence cause emerged. The crisis unfolded in less than a month, with Pierre Laporte found dead in the trunk of a car while some of the terrorist group leaders went into exile in Cuba. In 1976, the Parti Québécois led by René Levesque won the provincial election. At that time, the very existence of Canada was being openly questioned by 25% of Quebecers. In 1977, Bill 101, known as the Charter of the French Language, was passed. This controversial bill made French the official language of business in the province, enforced French as the pre‐eminent language for commercial signs, and imposed French as the language of instruction for all children unless their parents had been educated in English in Quebec. In a public speech given in 1976, Lévesque summarized French‐Quebecers’ perspective about the protection of the French language:

I’m sick of constantly talking about protecting the French language; it’s ridiculous to have to worry about it all the time. In normal societies, language is just spoken, not spoken about.

That same year, the motto on vehicle license plates changed from La Belle Province (The Beautiful Province) to the more politically charged Je me souviens (Yes, I remember).


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The 1980 and 1995 referendums In 1980, the rise of the independence project within the French‐speaking population led René Lévesque to craft the first referendum about Quebec’s future within Canada. The Quebec Government asked its citizens to let him negotiate with the Federal Government the terms of a sovereignty‐association with Canada, covering trade, monetary, social and defense policies. Upon completion of negotiations, the Quebec Government would hold a second referendum to vote on the agreed terms. This never happened because Quebecers voted “No” at 59.56%. The night of the referendum, when the “No” victory was confirmed, Lévesque made an emotional speech in which he said to Quebecers:

If I understand you correctly, you are saying, “Until next time.” Although the “Yes” camp had been defeated, Federalists understood that Quebec’s place within Canada had to be renewed. Prime Minister Trudeau’s first step was to bring home the Canadian Constitution, which was still held by the British Government. The process involved unanimous agreement from all the provinces. During the negotiations, Lévesque’s only request was to get financial compensation for provinces opting out of federal programs, which was a way for provincial governments to gain control over more policy areas. At the approach of the negotiations deadline, during some late night bargaining in Ontario, premiers from other provinces removed Lévesque’s opt‐out clause. Lévesque, who was sleeping on the other side of the Ottawa River in Quebec, was not informed. In the morning, as the provincial premiers celebrated the agreement in front of the press, Lévesque learned about the late night change. He stood up and walked out in silence. Later on, he declared the following to journalists:

Maybe second thoughts and further events will make them understand that this could have incalculable consequences.

Although the other provinces said that they acted in good faith, in Quebec this event would become known as the Night of the Long Knives. In 1982, when the Queen of England was in Canada to return the Canadian Constitution to the Government, all provincial premiers were present except for Lévesque. That day, Lévesque ordered that Quebec flags be flown at half staff. It was later discovered that Lévesque had learned two weeks prior to the last round of negotiations that the main strategist on Quebec’s constitutional position, Claude Morin, was an undercover agent for the Royal Canadian Mounted Police. Lévesque died without revealing this information. In 1987, the new Prime Minister of Canada, Brian Mulroney, tried again to get Quebec’s name on the Canadian Constitution. The Meech Lake Accord was to meet Quebec’s requirements, including one recognizing Quebec as a distinct society. The legislators had a three‐year deadline to pass the accord, but during negotiations, some criticisms emerged leading to substantial dilutions of its content. Lucien Bouchard, a key supporter of the accord within the Federal Government, became fed up with his own party’s attempts to dilute the accord. He resigned and created a new political party. The Meech Lake Accord was never signed. In 1992, a third attempt to resolve Quebec’s status through a formal constitutional process, The Charlottetown Accord, also failed. The governments of Quebec and Canada were once again at a dead‐end. Lucien Bouchard’s new federal party, Le Bloc Québécois, has deputies elected only in Quebec and exists to promote Quebec sovereignty at the federal level. In 1993, during the first elections it took part in, the Bloc won 54 of the 75 seats in Quebec and due to vote division in the rest of Canada, became the official opposition in the Canadian Parliament. In 1995, the growing tensions resulting from three failed attempts to integrate Quebec into the Canadian Constitution led Bouchard and Jacques Parizeau, then premier of Quebec, to hold a second referendum. This time, the Quebec Government asked the population to agree that Quebec become sovereign after having made a formal offer to Canada for a new economic and political partnership. The margin was incredibly thin, 49.42% against 50.58%, but again, the “Yes” camp was defeated. This second defeat led Parizeau to resign and Bouchard to become premier of Quebec. The Quebec Government then focused


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on controlling its deficit, and the sovereignty project was shelved until what was referred to as “winning conditions’’ could be created.

Current status of the collective mindset

Identity anxiety From the defeat in 1760, Quebecers of French‐Canadian descent took over 200 years to develop an arms‐length relationship with the rest of Canada. Although they now fully participate in every institution in their society, French‐Quebecers tended to live in anxiety about their double status: members of the majority in Quebec, and members of a minority in Canada and North America1. This anxiety has been manifested in several ways. In 2011, when asked if Quebec’s Charter of the French Language was still necessary to protect the French language, 90% of French‐Quebecers answered “Yes”, while “67%” of English‐Quebecers answered “No”2. Similarly, 66% of French‐Quebecers believed the French language was still threatened whereas 64% of English‐Quebecers thought it wasn’t. From 1981 to 2006, the proportion of Quebecers who spoke French as their first language went down from 82.5% to 79.6%3 (Exhibit 8). More recently, Quebec’s anxiety was reflected in the rejection of cultural harmonization measures requested by the growing wave of immigrants arriving in Quebec (Exhibit 6). The province, who had one of the largest demographic deficits in Canada (Exhibit 9), had been relying more and more on immigration to correct the situation. As those new immigrants arrived with their own culture and traditions, a minority of them requested accommodations or adjustments that were perceived as illegitimate or as a type of threat to Quebec society’s values, including the importance of the French language, democracy, secularism and gender equality4. In 2008, the government mandated historian Gérald Bouchard and philosopher Charles Taylor to hold a province‐wide commission on harmonization practices. The authors noted:

The wave of adjustment has opened these old wounds and touched several emotional chords. The result has been an identity counter‐reaction movement that has expressed itself by the rejection of harmonization practices5 […] What just happened in Quebec may give the impression of a face‐off between two minority groups, each of which is asking the other to accommodate it6 […] French‐speaking Quebec is a minority culture and needs a strong identity to allay its anxieties and behave like a serene majority7.

Some argued that the Quiet Revolution destroyed the founding traditions of Quebec society and that the basic ideals that sustained it have not been replaced. This can be perceived in Quebecers’ paradoxical relationship with religion. For example, from 1960 to 2009, the number of marriages per thousand people in Quebec went down from 7.0 to 2.98. In comparison, the Canadian average in 2009 was 4.79. Although French‐Quebecers continued to become more and more secular, they weren’t yet ready to remove from their institutions symbols of their Catholic heritage. When the Bouchard‐Taylor Commission recommended removing the crucifix from the Salon Bleu at L’Assemblée Nationale, (the main chamber in Quebec’s Parliament) a wave of public protest emerged claiming that it would be similar to erasing a portion of Quebec’s history10. Societal immobilism Quebec’s population remains emotionally attached to the institutions inherited from the Quiet Revolution that have enabled it to affirm its national identity. Accordingly, unions, who played a significant role in improving the working conditions of French‐Quebecers, have kept a strong political influence today. In 2009, Quebec had the highest unionization rate in Canada, with 39.8% compared to 27.6% in Ontario and 25% in Alberta (Exhibit 10)11. Similarly, the Quebec Government, which has been


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an important actor in the development of French‐Quebec, remains proportionally larger than other provincial governments. In 2007, 20.2% of the Quebec workforce worked for the provincial government, while in Ontario, Alberta and British Columbia, provincial civil servants made up 17.8%, 15.6% and 16.5% of the workforce respectively (Exhibit 13)12. In 2005, a group of Quebec intellectuals published a manifesto called Pour un Québec lucide (For a Realistic Quebec), questioning the sustainability of the “Quebec Model”13. Some argued that this event marked the starting point of a battle against immobilism in Quebec: those who favor changes in the Quebec model arguing against those who favor the model’s reinforcement. The “Quebec Model” was characterized by a wider range of public services and lower inequality than in the rest of Canada. But as the province’s debt level has risen and fiscal challenges have become increasingly apparent, economic think tanks and thought leaders have recommended reductions in the role of the state, cuts in public spending, further acceptance of globalization, and measures to increase productivity. At the same time, community groups, unions, professional associations, environmentalists and other interest groups have opposed what they perceive as an attack on Quebec’s values and identity14. In 2005, when Le Cirque du Soleil, a Quebec based circus that was internationally acclaimed for its artistic performances, proposed to co‐invest with Quebec’s state‐owned lottery to create a $1.2B casino‐circus‐hotel entertainment complex in Montreal, community groups protested, which led to the project being aborted15. Although the project would have created 6,500 direct and indirect jobs, opponents claimed that the location was socially inappropriate because the selected neighborhood was one of the poorest in Montreal and so the presence of the complex could have led to gambling problems for its residents16. Quebecers’ environmental considerations have also fueled severe public discontent and led to project cancellations. Power generation and natural resource exploitation projects have had to deal with growing public scrutiny, often resulting in interest groups being formed specifically to stop certain projects. In 2004, the Government had to stop a natural gas thermal plan project due to growing protest. Similarly, the development of the shale gas industry in Quebec and the construction of new hydro‐electric dams continue to attract objections from several groups who promote projects with lower environmental risk, greener forms of energy, the increase of energy efficiency, and better public transport services. Quebec immobilism was reflected in public institutions. In 2006, the Government initiated the development of a mega hospital in Montreal, due to be finished by 2010. However, growing conflicts between the Government, opposition parties, and universities led to a wave of impact studies and public debates that paralyzed the project until 2010. Delivery is now planned for 2019, with project costs doubling from $1B to 2.1B17. During that time, McGill University moved ahead with its own new hospital project, mostly financed by private foundations18. Realignment of the political debate Since 1960, the Parti Québécois (PQ) and the Parti libéral have been the only two parties to govern the province, typically alternating every four or eight years. The liberal party was centrist and generally federalist and the PQ was more left of center and sovereignist, but both parties would have been considered to be on the left of the political spectrum in the United States. They both promoted, to different levels, progressive and redistributive measures with strong government involvement in a variety of public services. The Quebec political landscape had continued to evolve since the second referendum, and some evidence now pointed to a transition from a separatist‐federalist debate to a more conventional left‐right debate. The first piece of evidence lied in the loss of momentum for the sovereignty option. In 2010, 64% of Quebecers were not interested in having a third referendum about Quebec independence19. In fact, 58% thought the debate was not relevant anymore as Quebecers felt they had no more reason to separate from Canada. That same year, 22% of the population identified as Federalist


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while 24% identified as Quebec nationalist with 47% taking positions somewhere between the two ideologies20. The second piece of evidence came from the emergence of left and right political parties, interest groups and opinion leaders. In 2007, l’Action Démocratique du Québec (ADQ) a right of center political party, succeeded in getting 41 deputies elected to the Quebec Parliament, making the organization the official opposition party before the PQ. Similarly, Québec Solidaire, a party on the very far left of the political spectrum, was able to get one deputy elected in 2008. Less than two years later, Francois Legault, ex‐minister from the traditionally sovereignist PQ government, publicly suggested that improvement of state efficiency and tighter fiscal management should be priorities over independence21. This realignment of the political spectrum also gave birth to right and left wing interest groups. Réseau Liberté Québec was created to promote the reduction of the role of government and higher individual responsibility. The leftists had also responded by creating their own group in late 2010, L’Alliance Sociale, with the goal of toning down what some described as the rise of right‐wing ideology in Quebec22. Francois Legault, in an attempt to reconcile both positions, recently declared:

Our nation can’t let the current situation continue anymore. It can only accelerate the quiet decline of our society […] Our collective recovery starts with trust. Trust in ourselves; trust in our future; trust in our ability to change the course of things23.

Political cynicism and corruption scandals Beginning in early 2003, a wave of corruption allegations took place in Quebec, involving the Federal Government, provincial and municipal governments, union organizations and private enterprises. The constant presence of corruption issues in the media has led to growing cynicism about the political class. In 2010, a survey revealed that 87% of Quebecers were discouraged by the lack of integrity of politicians24. In fact, only 15% of the population trusted politicians, compared to 33% who trusted investment bankers and 38% who trusted Catholic priests25. The main event that started this trend of widespread cynicism and lack of belief in politicians was the Sponsorship Scandal that occurred from 1997 to 2003. The Gomery Commission, set up to examine the matter, later revealed that the Federal Government had used $332 millions in public funds to support a post‐referendum public relations campaign with the goal of promoting the positive impact of the Federal Government in Quebec26. The Commission highlighted the lack of government spending controls involving marketing firms that made out fake invoices and practiced overbilling. Some viewed the Federal campaign as another attempt to assimilate French‐Quebecers. Other major corruption scandals erupted in 2009 and 2010. Some involved improper political party financing, the bribing of civil servants, price collusion in the Quebec construction industry, union organizations being infiltrated by organized crime, inexplicable cost overruns on public infrastructure projects, and perceived conflicts of interest in the government tendering process. Paul St‐Pierre Plamondon, an engaged but non‐partisan political actor who represents the Y generation in Quebec, has listed a total of over 25 major corruption scandals from 2003 to 201027. Maclean’s, a respected Canadian current affairs magazine, rated Quebec the most corrupt province in Canada in a highly controversial issue28. Collective pride Since the year 2000, Quebecers had started to derive their collective pride from new sources, the most prominent being cultural products that were increasingly recognized abroad. People and organizations such as Robert Lepage, Arcarde Fire, Céline Dion, Le Cirque du Soleil, Denis Villeneuve, and Denis Arcand, represented Quebec’s creativity in a variety of artistic domains. One of the most significant cultural industries was movie production. The artistic quality of Quebec’s cinema had largely improved since the first referendum, with movies such as The Decline of the American


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Empire and its sequel The Barbarians Invasions that won the 76th academy award for best foreign film. Although both films were strong critiques of capitalism as well as of Quebec’s social‐democracy, they communicated to other cultures Quebecers’ unique and sometimes paradoxical perspective. Because Quebec cinema was popular among French speakers, whereas English‐Canadians tended to prefer Hollywood movies, Quebec films did significantly better at the box office than did other Canadian films29. Environmental values were another element contributing to Quebecers’ collective pride. By 2012, Quebec will have succeeded in reducing its greenhouse gas emissions by 6%, making it one of the only regions in North America to meet its share of the Kyoto Protocol30. In fact, each Quebecer produced only 11.1 tons of greenhouse gasses per year compared to the Canadian average of 22.1 tons. In 2010, the province won the South Australian Climate Change Leadership Award, which California had won the year before31. Similarly to other Canadians, Quebecers were also proud of their more egalitarian society. This sentiment was commonly shared not only by the middle class but also by the business elite who value equal opportunity. Accordingly, Quebec institutions were designed to enable social class mobility. Free public schools, low cost universities and universal healthcare were provided as a means to prevent lack of personal wealth from being a barrier to personal accomplishments.

Quebec’s economy in 2011 The growth and productivity gap With a population of 7.9 millions, Quebec, despite its position as the second largest economy in Canada, was also one of the poorest provinces in terms of GDP per capita (Exhibit 6). In 2010, Quebec GDP per capita was $40,257, 15% lower than the Canadian average (Exhibit 11). In addition, the annual real GDP growth rate in Quebec from 2002 to 2010 had been only 1.6% compared to 2.0% for Canada. These differences were consistent with the lower cost of living in Quebec, notably in real estate and in electricity costs, but also with lower income32,33. Income differences were often in the 10% range reaching 30% and even 50% for higher paid public professionals such as doctors or lawyers (Exhibit 23) 34,35. Since 2009, these groups, as well as others like policemen, had became more vocal about the widening gap between Quebec and other provinces and had started to protest and demand that the Quebec government improve the situation36,37 . This relatively poor economic performance could be explained by a lower productivity rate and a more rapidly aging population. For instance, real GDP per worker per hour was consistently lower than in the rest of Canada38. In 2010, the average Quebec worker produced $46.15 per hour while the average Canadian worker produced $52.93 per hour (Exhibit 22). In addition, workers tended to work less in Quebec than in the rest of Canada. From 1980 to 2009, the average of hours worked per week went down from 37.7 to 35.2 in Quebec while in Canada, weekly hours worked were reduced from 37.9 to 36.0 (Exhibit 21). This difference could potentially be explained by the more progressive income tax system in Quebec that reduced the benefits associated with working extra hours (Exhibit 36). Similarly, from 2000 to 2010, labor participation and unemployment have remained on average 1.8% below and 1.2% above the Canadian average respectively (Exhibits 19 and 18). This situation changed in 2010, when, for the first time since 1990, Quebec unemployment was at par with the Canadian average, at 8.0%. This convergence could perhaps be explained by Canada experiencing a higher unemployment rate due to the economic downturn while Quebec better resisted the crisis. Fixed investment in Quebec was also lagging (Exhibits 7 and 8). From 2006 to 2010, it stood at an average of 20.5% of the GDP, 1.8% below the Canadian average (Exhibit 10). The low exchange rates combined with the relatively low cost of labor and higher tax on capital were likely causes of this underinvestment. To that regard, in 2010, the Quebec government eliminated the tax on capital for


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companies incorporated at the provincial level. Similarly, by the end of 2011, taxes on capital will also be abolished for companies operating in Quebec but incorporated at the federal level39. It had yet to be seen if the now higher exchange rate combined with Quebec’s improved policy on capital taxation will help bridge the fixed investment gap. The more rapidly aging population also impacted Quebec’s economic performance, a situation that had been exacerbated by the strong decline in birth rate following the province’s first and second referendums (Exhibit 17). In 2010, Quebec’s population was growing at only 0.8% while the Canadian average was 1.1% (Exhibit 6). In addition, Quebec’s dependency ratio was 45.3% versus 44.1% for Canada (Exhibit 16). According to demographic projections produced by the Institut de la Statistique du Québec, the province’s population will continue to age, with the dependency ratio reaching 65.5% by 2030. By that time, the Canadian dependency ratio was expected to reach 63.2%. The paradox of an attractive business environment with a relatively poor economic performance Although slow economic growth had led to a small but growing protest movement about the deterioration of the standard of living in Quebec, other aspects of the economy were highly encouraging. In fact, Quebec had a much diversified economy that resisted the economic downturn better than any other Canadian province40. In late 2010, Quebec already had 62,000 more people working than before the crisis41. In comparison, Ontario was still facing a 68,000 job deficit. Like most developed countries, Quebec’s economy was primarily based on the service industry, with 77.5% of the province’s workforce employed in related sectors42. Quebec’s economy was still fueled by abundant natural resources, notably in the mining and forestry industries. The province was the number one exporter of newsprint in the world, the second largest magnesium producer and the fourth largest aluminum producer in the world43. Quebec had also fully embraced the high‐tech and knowledge economy. For instance, Montreal had one of the highest concentrations of high‐technology jobs in North America, along with San Francisco, Seattle and Boston44. Approximately 1.1 million Quebecers, or 27% of Quebec’s workforce, worked in science and technology45. Moreover, the province was the one with the highest R&D spending as percent of GDP (Exhibit 27). As a result, Quebec ranked 11th worldwide on this measure while Canada ranked 17th 46. Quebec’s high‐tech industry was primarily clustered in the Greater Montreal Area. The city was recognized as a world leader in aeronautics, on the same level as Seattle and Toulouse47. Over 60% of Canadian aerospace production took place in Montreal, with over 40,000 jobs, and sales reaching $12.4B48. Companies such as Bombardier, Bell Helicopter, CAE, Pratt & Whitney, Rolls‐Royces, GE Aviation, Lockheed Martin, MDA Space and Messier Dowty were established. In total, 234 aerospace related businesses operated in the province49. The industry was supported by the education system, which had adapted to answer its needs. Throughout the province, six universities, five technical colleges and one specialized trade school offered programs directly related to the industry. The field of life sciences was another dominant high‐tech industry in the province. Quebec represented 23% of Canada’s population, yet it held 68% of drug patents, 42% of pharmaceutical investments and 41% of biotechnology investments50. Companies such as Novartis, AstraZaneca, Merck, Pfizer, Medtronic, as well as approximately 70 biotechnology start‐ups, were present in the province. In total, more than 450 businesses operated in the field of life sciences, and they employed more than 32,000 people51. In addition, the province had over 13,000 researchers in the public and parapublic sectors and over 5,000 new graduates per year completed degrees in biopharmaceutical related programs52. In 2009, Montreal ranked 8th in North America for the number of jobs in the pharmaceutical sector and by 2019, it will have the largest hospital in the world, providing installations for over 200 additional research centers53. Video game development, although not as large a sector as aerospace or life sciences, was one of the fastest growing development clusters, not only in Quebec but in the world, experiencing over 600% growth since 200354. With 80 companies employing approximately 7,000 people, the industry was


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represented by organizations such as Ubisoft, Electronic Arts, Actvision, EDIOS, Gameloft and Funcom55. Leveraging Quebecers’ artistic creativity, the industry had produced hits like Assassins Creed, Prince of Persia, and Tom Clancy sequels. The natural resources and high‐tech industries were supported by the lowest electricity tariffs of all industrialized countries. Hydro‐Québec, a state‐owned power utility that had a monopoly in the province, generated its electricity from Quebec’s abundant hydraulic resources. In fact, Quebec held approximately 6.5% of the world’s freshwater reserves out of which a little less than half was renewable56. Consequently, the state‐owned enterprise produced 97% of its electricity from hydraulic renewable sources. Through its operations, Hydro‐Québec employed 22,000 workers, and generated $12B in revenue and $3B in profit57. As electricity prices were regulated in the province, the state‐owned enterprise was increasingly focusing on exporting as a means to provide more revenue to the economically stretched provincial government. In 2009, 8% of exported capacity generated 30% of the company’s profit58. The power utility was within the most competitive in North America, with a production cost of only $2.19 per KWh59. Additionally, the organization had an important role in establishing the province’s industrial and environmental policies. For example, subsidized electricity costs have enabled the creation of a vibrant metallurgy sector. Similarly, Hydro‐Québec was a key contributor in establishing the provincial policy on the electrification of transportation. In 2010, Quebec launched the largest electric‐vehicle trial in Canada60. Other major industry clusters were also present in ground transportation manufacturing, with companies like Bombardier and Novabus, in information technology, with the likes of BCE, IBM, Ericsson and CGI and in optics and photonics with companies like ABB, Creaform, and Nortel. The high concentration of high‐technology companies had resulted in Quebec being the main recipient of venture capital across Canada61. Venture capital investments had dropped by more than 35% since 2007, but in 2009, Quebec was the only province experiencing growth in dollars invested compared to 2008. The province received a total of $431M through 159 deals, representing 43% of all Canadian venture capital investments62. Similarly, Quebec’s financial sector was still growing faster than the province industry average (3.4% versus 1.9%) even though it had lost its relative global importance over the last 20 years63. In 2010, Montreal ranked 25 out of 75 on the Global Financial Centers Index, while Toronto ranked 13 and Vancouver 2164. The industry employed 100,000 people, 38% of whom were involved in the financial intermediation sector, 40% in the investment finance sector and 22% in the insurance sector65. The main financial institutions were Desjardins Credit Union, with $176B in assets, National Bank of Canada, with $145B in assets, and La Caisse de Dépot, Quebec’s sovereign wealth fund, with $152B in assets66. Quebec’s success factors Some of the province’s success in attracting strong industry clusters was due to the low cost of doing business in Quebec combined with the presence of a highly‐skilled workforce and open economy. More specifically, the lower fully burdened cost of doing business was due to the low cost of labor, real estate, electricity and corporate income taxes. According to KPMG, the cost of doing business in Quebec was 7.4% lower than in the United States and 2.4% lower than in the rest of Canada67. For example, the corporate income tax burden in Quebec was 28.4% in 2011, which was higher than Alberta’s (26.5%) but slightly lower than Ontario’s (28.5%) (Exhibit 26). Furthermore, the Quebec corporate income tax rate was expected to decrease to 26.9% in 201268. Also contributing to the attractiveness of Quebec’s business environment was the presence of a highly‐skilled workforce. Quebecer’s level of education was strong compared to international levels, but slightly below the Canadian average. For instance, in 2010, 25% of the population above 24 years of age hadn’t completed a high‐school degree, whereas the Canadian average was 23%. University graduation rates were also below the Canadian average. In 2006, 16.5% of Quebec’s population had a bachelor’s degree or higher while the Canadian average was 18.1% (Exhibit 28). On the other hand, in 2009, Montreal ranked first in terms of number of university students per capita amongst the 20 largest metropolitan


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centers in North America69. Montreal was also the Canadian leader in terms of numbers of foreign university students (more than 17,000)70. This was primarily due to the quality of the learning institutions combined with the low cost of education in Quebec. McGill University, Université de Montréal, Université Laval, Université de Sherbrooke, and Concordia University are all located in the province. Quebec also had a relatively open economy. The province’s proximity to New‐England as well as the presence of the St‐Lawrence River had resulted in Quebec becoming one of Canada’s export powerhouses (Exhibits 7 and 8). The province was covered under the NAFTA trade agreement, and the provincial government had been highly involved in on‐going negotiations to create a similar agreement with Europe. In 2009, Quebec exported approximately $133.8B or 44.5% of its GDP. This was significantly more than the Canadian average that stood at approximately 30%. Additionally, Quebec exported more outside of Canada than it did within Canada. The share of Quebec international exports was 57.5%, whereas the share of its interprovincial exports was 42.5%. The main international export destinations were the US, with a 69.2% share, and Europe, with a 15.6% share (Exhibit 29). The top three export product groups were aluminum and alloys, airplanes and newsprint (Exhibit 30). To further expand foreign trades Quebec was in the progress of creating a new economic space with France, where over 100 professions would be mutually recognized, facilitating labor migration71. This will continue a long tradition of economic relations. France was in fact the largest foreign investor in Quebec after the United States. In 2008, around 30,000 Quebecers were employed by 350 French companies established in the province72. The hidden cost of doing business in Quebec Some were arguing that the cost of doing business in Quebec was not really as low as comparative studies indicated. In fact, there were many hidden costs to doing business in Quebec, mainly related to French language regulation and to more rigid labor regulation as well as a different legal system than in the rest of Canada. For instance, companies employing more than 50 people had to use the French version of any software, publish all communications to employees in French, and provide purchase orders and invoices to suppliers and customers in French. Similarly, not only was the unionization rate higher in Quebec, but related regulations were also stronger. As an example, union certification and decertification in Quebec didn’t require mandatory secret ballots as it did in most of the other provinces73. In addition, the threshold for union accreditation was lower in Quebec than elsewhere in Canada74. Those regulations, as well as other business regulations, were governed by the Code Civil du Québec (Civil Code of Quebec). Quebec was indeed the only province that used a French inspired civil‐law legal system, as all other Canadian provinces used common‐law.

Quebec welfare state in 2011

A more egalitarian society but a poorer society Quebec was a more egalitarian society than the rest of Canada. Wealth redistribution was achieved by the highest tax burden of all Canadian provinces as well as through a wide range of social programs and fiscal exemptions. As a result, the GINI coefficient was 90 basis points higher than the Canadian average before taxes and transfers, but 160 basis points lower after taxes and transfers. In 2008, Quebec had a GINI coefficient after taxes and transfers of 0.380 while the Canadian average stood at 0.396 (Exhibit 33). Surprisingly, Quebec also faced more poverty. In 2008, the prevalence of low income was 190 basis points higher than the Canadian average with 17.5% of Quebec families below the low income cut‐off (Exhibit 34). One reason why the higher tax burden had not succeeded in further reducing poverty was that Quebec had more low income families and fewer wealthy families than the rest of Canada to start with (Exhibit 35). In addition, proportionally fewer people were paying taxes in Quebec than in the rest of Canada.


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Quebec individual income taxes were not only higher they were also more progressive. For example, the combined federal and provincial income tax rate for an individual earning $40,000 was 31.1% in Quebec, but 23.5% in the rest of Canada. In contrast, the combined income tax rate for someone earning $80,000 was 36.3% in Quebec, but 27.8% in the rest of Canada (Exhibit 36). The sales tax, typically perceived as a regressive tax, was also higher in Quebec. In 2011, it stood at 13.9% and was 100 to 200 basis points higher than in similarly developed provinces (Exhibit 37). Since its implementation, the Quebec government had instituted a wide range of exemptions and credits that resulted in the provincial sales tax to be progressive75. Every year those measures cost approximately $3.4B in uncollected government revenue76. The higher taxes in Quebec resulted in more public services being offered than in other provinces. Consequently, budgetary expenditures, as a percentage of GDP, were higher than the Canadian average – 25.8% versus 20.5% (Exhibit 38). On a per capita basis, those expenditures amounted to $10,339 in Quebec and to $9,909 in the rest of Canada. Between 2006 and 2010, government expenditures rose slightly faster than its revenue and led observers to start questioning the long‐term sustainability of the Quebec welfare state (Exhibit 31 and 32). The lower economic growth in Quebec combined with an older and more rapidly aging population were putting pressures on public finances, threatening the so‐called “Quebec Model”. Since then, the government had increasingly focused on cost management, as very few additional levers existed to significantly increase revenue without stifling the economic growth. As a result, the reduction in the quality of public services had become increasingly apparent, notably in healthcare, education and infrastructure. An underfunded but same quality education system The main services provided by the government of Quebec were public education, including universities, and universal healthcare, which combined, represented 52.2% of total government spending (Exhibit 38). This was similar to other provinces, who also offer their own version of these programs. The Quebec education system costs its users significantly less than other education systems in the rest of Canada, while providing similar quality education. On the 2009 OECD PISA test, 15 year olds in Quebec ranked amongst the most proficient students evaluated, behind countries such as Japan and Finland. Compared to other Canadian provinces, Quebec achieved better results in mathematics and was only slightly below the Canadian average in reading and science77. Lower cost of education in the province was primarily reflected in university tuition fees. For instance, the average university tuition fee was $1,603 in Quebec and $4,077 in the rest of Canada78. At the same time, the Quebec government spent less on education than other provincial governments, resulting in the education system being largely underfunded. Current government spending on education was estimated at $1,866 per capita, or 4.6% of the GDP. In contrast, the Canadian average was $2,299 per capita, or 4.7% of the GDP (Exhibit 38). This governmental underinvestment combined with extremely low contribution rates from users had led to an annual funding gap for universities that was estimated at more than $500 million in 201079. Many experts had publicly stated that the situation wasn’t sustainable and that the quality of university education would soon start to suffer80. As a result, in its 2011 budget, the government had announced that tuition fees would increase by a total of $1,625 over the next five years, bringing university costs closer to the Canadian average81. This measure was expected to provoke protest among student associations, who typically claimed that increased tuition reduces accessibility and worsens student debt levels. Other solutions, such as replacing the current flat rate tuition fee policy across programs for one where program fees would reflect the cost of the education provided, were also rejected by student associations. Those groups typically advocated that such a system would prevent less wealthy individuals from registering for higher cost programs such as medicine and therefore would reduce social class mobility. In 2010, anthropology students were paying approximately 40% of the cost of their education, while medical students were paying for around 14% of their program.


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A healthcare system similar to the rest of Canada The Canadian healthcare system was universal, independently managed by each province, and delivered comparable results throughout the country. In fact, there were no significant differences in life expectancy between the provinces82. Canadian life expectancy was 80.4 years, and ranked 11th worldwide behind France83. The analysis of healthcare expenditure across provinces yielded also very similar results and showed that Quebec was within the Canadian average. Although Quebec’s spending, at approximately $28B, was slightly higher when calculated as a percentage of the GDP (8.8% versus 7.9%), it was lower on a per capita basis ($3,526 versus $3,857). Quebec healthcare expenditure represented 34.1% of government spending, while the Canadian average was 39.0% (Exhibit 38). In 2010, Quebec, Ontario and British Columbia were all ranked top performers in care delivery for high priority medical conditions, but frictions in their healthcare systems were becoming more apparent84. For instance, it wasn’t uncommon to have to wait more than sixteen hours at the hospital if the emergency was minor, as in the case of a small fracture, or for up to four weeks between the detection of a cancer and the first radiotherapy treatment. Moreover, in 2010, approximately 24% of Quebecers didn’t have access to a family doctor85. A province providing more social and family‐oriented services As Quebec spent less on education and was within the Canadian average for healthcare expenditure, differences in provided services compared to other provinces were primarily rooted elsewhere, notably in family and social measures. In total, Quebec spent $4,067 per capita or 10.1% of its GDP on non‐healthcare and non‐education related services while the Canadian average was $3,306 or 6.8% of GDP. Two programs were contributing the most of the difference. The first one was the maternity, paternity and parental leave system known as the Régime Québécois d’Assurance Parentale (RQAP). Through this program, the mother or father of a new‐born could receive 50% to 75% of his or her income during a period of 28 to 50 weeks86. The program, costing an estimated $1.7B, had 126,000 beneficiaries that received an average weekly payment of $58087. The second program was the Quebec province‐wide network of daycare centers known as Centres de la Petite Enfance (CPE). For $7 per day, parents could receive childcare services from professionals who had three years technical training leading to a diploma. In addition to the user fees, the government spent $1.8B in 2010 to support this program88. Combined, the RQAP and the CPE had resulted in a mini baby‐boom as well as structural changes in the workplace. The province’s fertility rate, after typically lagging behind the Canadian average, was now the highest. In 2010, Quebec’s total fertility rate was 1.686 while the Canadian average stood at 1.660 (Exhibit 17). In addition, women’s employment rate in Quebec had seen impressive growth over the last 10 years. In 2000, it was lower than the Canadian average at 71.4% versus 74.8%, but became higher in 2009 with 78.8% versus 76.7%89. As families had increased access to quality daycare, and fathers could also benefit from the parental leave measures, many women decided to pursue their careers. A well managed government but a government in debt Quebec had proportionally more revenue than other provincial governments, but it also had the most debt (Exhibit 46). In 2010, the province had a net debt of $143B, representing a net debt to GDP ratio of 47% (Exhibit 39). In contrast, the Canadian average was approximately 30%. When factoring in the portion of the federal debt that was owned by the province, the debt to GDP ratio, according to the OECD, was approximately 95%, making Quebec the 5th nation with the most debt after Japan, Italy, Greece and Iceland90. Surprisingly, it wasn’t accumulated deficit that had mostly contributed to the rise of Quebec’s debt over the last 10 years (Exhibit 40). In fact, the Fraser Institute, a Canadian economic think tank, had ranked the Quebec government 3rd behind British Columbia and Manitoba for control of public spending91. The proportion of debt due to accumulated deficit was decreasing and had only contributed to 9% of the total debt increase over the previous 10 years (Exhibit 41).


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The main source of Quebec’s rising debt was in fact government investment. Since 1998, 38% of the debt increase could be attributed to investment in state‐owned enterprises such as Hydro‐Québec and the Société Générale de Financement (SGF)92. Hydro‐Québec used those funds to expand its power generating assets, while SGF invested in turn in Quebec‐based business to promote economic growth. Another 32% of the increase could be attributed to investment in fixed assets such as roads and bridges. Finally, 21% was due to investment in the healthcare and education networks to fund capital expenditures. The Quebec government’s debt wasn’t perceived as significantly more risky than the debt of other provincial governments. In fact, in 2010, the yield spread over federal government 10‐year securities was only 80 basis points, the same as Ontario (Exhibit 43). The Quebec debt structure could also be considered relatively safe. Approximately 95% was denominated in Canadian dollars while the remaining 5% was divided between Yen, Swiss Francs, Euros and US dollars (Exhibit 48). In addition, 72% of the debt was under fixed rate securities, while the remaining 30% was at variable rate securities93. In 2011, Quebec’s debt was rated Aa2 with a stable outlook, the best credit rating the province had achieved since 1995 (Exhibit 45). This rating was one rank lower than similarly developed provinces like Ontario or Alberta, that ranked Aa1 (Exhibit 47). Many factors explained the low risk Quebec’s debt represented relative to its size, one of these being that Quebec’s debt risk was tied to the Canadian debt risk. Although it wasn’t known if the federal government would act as a lender of last resort in the event of the provincial government facing a liquidity crisis, this very likely possibility reduced the province’s debt risk premium. Since 1995, the Canadian government had maintained a conservative fiscal management policy, which had resulted in an AAA credit rating. In addition, the 2008 economic downturn has increased the world’s confidence in the Canadian financial system as its banks withstood the crisis fairly well. In 2010, the big five, namely Royal Bank of Canada, Toronto Dominion Bank, Scotia Bank, Canadian Imperial Bank of Commerce and Bank of Montreal, were all ranked among the world’s top 50 safest banks94. The second factor that potentially contributed to Quebec receiving a low risk premium was that its debt was somewhat collateralized by a substantial asset: Hydro‐Québec. The equity of the state‐owned enterprise was currently accounted for at book value in the government assets and, as a result, it could be argued that Quebec’s net debt was overvalued95. If Hydro‐Québec was to be privatized and the artificially low electricity tariff in Quebec deregulated, the market equity value of the state‐owned enterprise, according to some economists, would be worth over $130B96. This would bring the provincial debt level to a negligible amount while enabling further annual savings of approximately $5B in debt maintenance97. Although the Quebec government had repeatedly stated that it had no intention of divesting Hydro‐Québec, the option would likely be assessed or even imposed by a lender of last resort in the eventuality of a potential debt default.

Quebec 2030: Is it already too late? Early warnings The Quebec government had controlled its program expenses relatively well compared to other provinces, but economists and analysts were beginning to be concerned about its ability to maintain such control in the future. In late 2010, the Conference Board of Canada (CBC) published a blunt report titled “Quebec’s fiscal situation: The alarm bells have sounded”, raising serious doubt about the government’s ability to uphold a balanced budget over the next 20 years98. The aging population and low economic growth compared to the rest of Canada would lead to booming healthcare costs and lower government revenue. According to the CBC, unless the government increased its revenue and tariffs while cutting programs, the province would face a deficit for the next 20 years while its debt level would become increasingly critical99.


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Similarly, in early 2011, Moody’s issued a warning to all Canadian provinces, notably Quebec and Ontario, for them to change their fiscal management. In the Case of Quebec, Moody’s was becoming particularly concerned about the government’s will and ability to cut program spending, as the increase in revenue from the economic growth wouldn’t be enough to bridge the public finance gap100. This situation was exacerbated by the coming election in Quebec that would likely result in populist measures. According to the rating agency, if it wanted to maintain its Aa2 rating, Quebec would have no other choice but to cut programs in the short‐term101. A survey performed in late 2010 showed that the population of Quebec was perhaps supportive of increased fiscal discipline. Approximately 83% of the population was in favor of eliminating the deficit within the next one to four years102. Also, 81% of the population was in favor of reduced public expenditure, versus 11% in favor of increased revenue103. The same survey also showed that a majority supported cuts in public administration, as 62% of the population thought there were too many public officials to manage public programs104. According to some sociologists, the recent wave of corruption scandals among the political class led the province’s population to become unwilling to provide additional fiscal effort as long as they perceived that the government wasn’t doing its part by becoming more efficient. A societal model that’s slowly eroding at both ends At one end of Quebec’s societal model, the GDP per capita gap with Canadian average was expected to widen from 15% to 35% over the next 20 years as the population would grow more slowly and age faster (Exhibit 49). It could therefore be anticipated that the differences in the standard of living would continue to fuel social protest while lower government revenue would impact the quality of public services and increase the deficit. At the other end of the model, the growing debt was threatening the nation’s current level of autonomy within the Canadian Confederation. This situation was caused by program expenses that were projected to grow faster than the government revenue until 2030 (4.6% versus 3.8%) resulting in consistent deficits and mounting already high provincial debt (Exhibits 50, 51, 52 & 53). The Quebec population could only speculate on what level of debt investors would accept before they started asking for increasingly high risk premiums, putting further pressure on public finances and quality of public services. Even more uncertain were the austerity measures lenders of last resort would impose should Quebec become unable to refinance its debt. Many expected the Canadian federal government to play an important role in such a situation, but social and cultural differences could potentially lead to important tensions between Quebec and other provinces. For example, as Quebecers worked less, retired sooner and enjoyed more social services, other Canadian citizens would likely be unwilling to lend to the province unless it underwent changes that would ensure the sustainability of its public finances. Austerity measures supported by other provinces could potentially target some of the rigidities that Quebecers willingly support in their economy, such as stronger labor laws and more restrictive language policies, or public services not offered elsewhere in Canada, such as subsidized daycare and generous parental leaves. One thing was for certain, macroeconomic projections showed that the magnitude of change that would be required after 20 years if nothing were done sooner would be more dramatic and less democratic than changes that could have been made immediately. Of all the programs, healthcare, which took up over 40% of the provincial budget, was posing the largest threat to the Quebec model (Exhibit 32). Under the reference scenario, healthcare was expected to grow at 5.5%, 20 basis points lower than what it grew at from 2006‐2010 (Exhibit 51). Such growth in expenditure would result in Quebec having a 5% deficit as a percentage of the GDP and a net debt to GDP ratio of 77% by 2030 (Exhibits 52 & 53). As those services are demand based and access cannot be easily limited, it was unlikely that the government would succeed in getting healthcare expenditure growth below 5%. Perhaps no other program had as much impact on Quebec’s deficit and debt. A healthcare expenditure growth variation of plus or minus 100 basis points from the reference scenario could result in the province’s net debt reaching either 52% or 105% of the GDP by 2030 (Exhibit 54).


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A more fiscally responsible scenario that would also be more aligned to Quebecers’ values would be to maintain funding in highly sensitive programs such as healthcare, education, family and social programs, while slowing spending by 200 basis points annually in other programs such as agriculture, government administration, municipal affairs, immigration, etc. But even under such a scenario, net debt would continue to grow over the next 20 years reaching 62% of the GDP (Exhibit 52). The fiscally responsible scenario was a possible solution to the likely loss of provincial autonomy resulting from the growing debt, but not to the erosion of the standard of living. If they wanted to preserve their societal model, Quebecers had no other choice but to increase their economic productivity. An annual 100 to 200 basis point increase in productivity over the 0.8% historical 10 year growth rate (1.8% to 2.8% annual increase) would bring the net debt to GDP ratio within the 23% to 42% range by 2030 (Exhibit 52). This scenario would not only remove the threat posed by Quebec’s rising debt but also provide the financial means to pursue common good projects such as strengthening the vitality of Quebec’s culture or pursuing the development of one of the greenest societies in North America. But history and international comparisons show that seeing such productivity growth as a solution was overly optimistic. In fact, Quebec hadn’t attained such a rate since its Quiet Revolution and only a few countries such as Japan, Finland, Norway and Korea had ever sustainably achieved such a rate105. A choice that isn’t really a choice High productivity growth was therefore quite a stretched goal for the province, but could Quebec afford not to try to achieve it? Would Quebecers be willing to study longer in order to get higher levels of education, move into more productive economic sectors, work longer hours or retire at an older age? At the same time, would Quebecers be willing to sacrifice some of their lower priority public services and social programs in the mid‐term in order to maintain their provincial autonomy in the long‐term? Or had they already given up on the nation they had protected for the last four hundred years? Most of Quebec’s population was in no mood to provide extra efforts as they perceived that their politicians and other leaders weren’t playing by the same rules, but who had the most to lose by letting Quebec society reach a dead‐end of indecisiveness?


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Exhibit 1 Map of New‐France in 1645

Source: Parks Canada

Exhibit 2 Map of Upper and Lower Canada in 1791

Source: The Canadian Encyclopedia


19

Exhibit 3 Map of the province of Canada in 1841

Source: The Canadian Encyclopedia

Exhibit 4 Map of the actual Canadian Confederation

Source: Government of Canada


20

Exhibit 5 Hydro‐Québec, Daniel‐Johnson hydro‐electric dam, inaugurated in 1968

Source: Hydro‐Québec, 2008


21

Exhibit 6 Quebec and Canada general economic indicators

Source: Adapted from Institut de la statistique du Québec, 2010

Exhibit 7 Quebec national income accounts


Exhibit 8 Canada national income accounts



22

Exhibit 9 Gross domestic product growth rate in Quebec and Canada

Source: Compiled based on data from Statistics Canada and Institut de la statistique du Québec, 2010

Exhibit 10 Fixed investment in Quebec and Canada

Source: Adapted from Statistics Canada, 2010

Exhibit 11 Gross domestic product per capita by Canadian province



23

Exhibit 12 Composition of Quebec population based on first language


Exhibit 13 Immigrants in Quebec based on their knowledge of French and English

Source: Adapted from Le Québec économique, 2010

Exhibit 14 Quebec migration balance

Source: Adapted from Le Québec économique, 2010


24

Exhibit 15 Proportion of the population by age group for Quebec and Canada – 2010


Exhibit 16 Projection of the population dependency ratio for Quebec and Canada

Source: Calculated based on data from Statistics Canada and Institut de la statistique du Québec, 2010

Exhibit 17 Population fertility rate in Quebec and Canada

Source: Adapted from Statistics Canada and Institut de la statistique du Québec, 2010


25

Exhibit 18 Unemployment in Quebec and Canada


Exhibit 19 Labor force participation in Quebec and Canada


Exhibit 20 Employed population in Quebec and Canada



26

Exhibit 21 Weekly hours worked in Quebec and Canada


Exhibit 22 Gross domestic product per worker per hour in Quebec and Canada


Exhibit 23 Average disposable income by Canadian province – 2010



27

Exhibit 24 Population and labor force structure by Canadian province ‐2008

Source: Compiled from Institut de la statistique du Québec and Canadian Federation of Independent Business, 2008

Exhibit 25 Public sector employment and wages by Canadian province – 2008

Source: Compiled from Institut de la statistique du Québec and Canadian Federation of Independent Business, 2008

Exhibit 26 Corporate income tax rates by Canadian province ‐ 2011

Source: Canada Revenue Agency, 2011


28

Exhibit 27 R&D expenditure by Canadian province ‐ 2008


Exhibit 28 Population by highest degree achieved in Quebec and Canada ‐ 2006


Exhibit 29 Quebec international exports by destination ‐2009


Exhibit 30 Quebec international exports by good ‐2009

Source: Gouvernement du Québec, 2009


29

Exhibit 31 Quebec government revenue

Source: Compiled based on data from Gouvernement du Québec, 2010

Exhibit 32 Quebec government expenditure

Source: Compiled based on data from Gouvernement du Québec, 2010

($CAD, million)

($CAD, million)


30

Exhibit 33 GINI coefficient ‐ families and unattached individuals ‐ before and after taxes and transfers in Quebec and Canada


Exhibit 34 Low income population – families and unattached individuals ‐ before and after taxes and transfers in Quebec and Canada


Exhibit 35 Population by income group – families and unattached individuals ‐ before and after taxes and transfers ‐ 2008



31

Exhibit 36 Combined federal and provincial income tax rates based on gross income by Canadian province ‐ 2011

Source: Calculated based on data from Canada Revenue Agency and Revenu Québec, 2011

Exhibit 37 Provincial sales tax – 2011

Source: Compiled based on data from Canada Revenue Agency and Revenu Québec, 2011


32

Exhibit 38 Comparison of revenue and expenditure by Canadian province – 2010



33

Exhibit 39 Provincial and federal government net debt

Source: Compiled based on data from EIU and Gouvernement du Québec, 2010

Exhibit 40 Provincial and federal government surplus and deficit

Source: Compiled based on data from EIU and Gouvernement du Québec, 2010

Exhibit 41 Quebec government debt based on different concepts

Source: Adapted from Gouvernement du Québec, 2010


34

Exhibit 42 Yield comparison between Quebec, Canada and US debt

Source: Calculated based on data from EIU and Gouvernement du Québec, 2010

Exhibit 43 Yield spread on 10 years securities

Source: Gouvernement du Québec, 2010

Exhibit 44 Quebec government debt service coverage

Source: Calculated based on data from Gouvernement du Québec, 2010

Percen

t


35

Exhibit 45 Quebec credit rating versus government net debt

Source: Compiled from Gouvernement du Québec and Institut de la statistique du Québec, 2010

Exhibit 46 Net debt by Canadian province


Exhibit 47 Credit rating based on Moody’s by Canadian province

Source: Compiled from respective provincial government, 2010


36

Exhibit 48 Quebec debt contracted on capital markets – 2010

Source: Adapted from Gouvernement du Québec, 2010

Exhibit 49 Projection of gross domestic product per capita in Quebec and Canada under different

scenarios

Source: Casewriter


37

Exhibit 50 Quebec government revenue estimates – reference scenario

Source: Casewriter

($CAD, m

illion)


38

Exhibit 51 Quebec government expenditure estimates – reference scenario

Source: Casewriter

($CAD, m

illion)


39

Exhibit 52 Projections of Quebec net debt under different scenarios

Source: Casewriter

Exhibit 53 Projections of Quebec surplus and deficit under different scenarios

Source: Casewriter

Exhibit 54 Projection of the impact of healthcare expenditure growth on Quebec net debt under

different scenarios

Source: Casewriter


40

End Notes 1 Bouchard, Gérald and Taylor, Charles. “Building the future – A time for Reconciliation,” Commission de consultation sur les pratiques d’accommodement reliée aux differences culturelles, Québec, 2008, p. 74 2 Leduc, Louise. “La langue, un débtat sans fin.” Cyberpresse, February 14, 2011, http://www.cyberpresse.ca/actualites/quebec‐canada/national/201102/13/01‐4369914‐la‐langue‐un‐debat‐sans‐fin.php, accessed February 2011. 3 Institut de la statistique du Québec. “La francophonie canadienne,” Governement du Québec February 22, 2008, http://www.stat.gouv.qc.ca/donstat/econm_finnc/conjn_econm/TSC/pdf/chap3.pdf, accessed February 2011. 4 Immigration et Communautés culturelles, Québec. “Valeurs communes” Government du Québec website, http://www.immigration‐quebec.gouv.qc.ca/fr/avantages/valeurs‐communes/index.html, accessed February 2011. 5 Bouchard, Gérald and Taylor, Charles. Building the future – A time for Reconciliation,” Commission de consultation sur les pratiques d’accommodement reliée aux differences culturelles, Québec, 2008, p. 74. 6 Idem. 7 Bouchard, Gérald and Taylor, Charles. “Building the future – A time for Reconciliation,” Commission de consultation sur les pratiques d’accommodement reliée aux differences culturelles, Québec, 2008, p. 75. 8 Institut de la statistique du Québec. “ Mariages et taux de nuptialité, Québec, 1900‐2009.” Governement du Québec , 2010, http://www.stat.gouv.qc.ca/donstat/societe/demographie/etat_matrm_marg/501a.htm, accessed February 2011. 9 Statistics Canada. “The Daily, Marriages” January 17, 2007, http://www.statcan.gc.ca/daily‐quotidien/070117/dq070117a‐eng.htm, accessed February 2011. 10 Chouinard, Tommy. “Le crucific restera au Salon bleu” Cyberpresse, February 15, 2011,

http://www.cyberpresse.ca/actualites/quebec‐canada/politique‐quebecoise/201102/14/01‐4370297‐le‐crucifix‐restera‐au‐salon‐bleu.php, accessed February 2011. 11 Human Ressources and Skills Development Canada. “Work – Unionization Rates,” Government of Canada, 2009,

http://www4.hrsdc.gc.ca/.3ndic.1t.4r@‐eng.jsp?iid=17, accessed February 2011. 12 Mallet, Ted and Wong, Queenie. “Wage Watch, A Comparison of Public‐Sector and Private‐sector Wages,” Canadian Federation

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15 Lapointe, Charles. “Le Complexe de divertissement du bassin Peel ‐ Pourquoi il nous faut aller de l'avant” Le Devoir, November 9,

2005, http://www.ledevoir.com/non‐classe/94573/le‐complexe‐de‐divertissement‐du‐bassin‐peel‐pourquoi‐il‐nous‐faut‐aller‐de‐l‐avant, accessed February 2011. 16 Lévesque, Kathleen. “Le basin Peel, le pire endroit pour un casino”, Le Devoir, February 22, 2006,

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41

23 Legeault, Francois and Sirois, Charles and others. “Coalition pour l’avenir du Québec,” February 22, 2011, p. 1.

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http://www.ruefrontenac.com/nouvelles‐generales/faitsdivers/30619‐gardiens‐de‐prison‐entente‐rejetee‐syndicat‐agents‐de‐la‐paix‐services‐correctionnels‐qujebec‐gouvernement, accessed 2010. 38 HEC Montréal. “Productivité et prospérité au Québec – Bilan 2010,” Centre sur la productivité et la prospérité, September 2010,

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39 Investissement Québec. “The Benefits of Investing in Québec, Taxation – Capital tax exemption,” Investissement Québec

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42

42 Investissement Québec. “The Benefits of Investing in Québec, Québec: A dynamic and Profitable Business Environment,”

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p. 14.

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