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October 30, 2002

Presentation by the Honourable John Manley, P.C., M.P. to the House of Commons Standing Committee on Finance

Halifax, Nova Scotia

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ntroduction

Allow me to thank you, Madam Chair, and all of the members of this committee for inviting me today.

We meet here at one of Canada’s great historic landmarks – Pier 21. From 1928 to 1971 more than 1 million immigrants and refugees from all corners of the world passed through these buildings on their way to a new life in Canada.

Their reasons for choosing Canada were as different as the people themselves. Some came fleeing political and religious persecution in their homelands. Others came to escape poverty or the ravages of war to search for new opportunities in a country that promised fertile land, clear skies and freedom from fear. For hundreds of thousands of new Canadians, Pier 21 stood as a symbol of hope – and a starting point for opportunity.

All of them shared a dream – to build a better life in Canada for themselves and their families. It is the same dream that brings succeeding generations of newcomers to our shores every year. It nourishes and enriches our country, because it brings with it not only the traditions of the past, but the spirit, talent and drive of the present and the future. That dream built the Canada we cherish. It will help build the Canada we all want in the 21^st century.

Consulting With Canadians

Madam Chair, this is my second appearance before this committee as Minister of Finance.

In the four months since I last spoke to you, Canada has continued to post strong economic growth, surprising many analysts with our resilience and leading major economic forecasting agencies to predict that our nation will continue to lead the Group of Seven (G-7) in growth.

But we are also very cognizant of the global risks we face, both now and in the future. Global uncertainties have been rising. Economic growth is turning out to be weaker than expected in a number of industrialized countries. The decline in equity markets, the impacts of corporate scandals in the US, the possibility of armed conflict in Iraq and anxieties over global terrorism – these have all further increased the level of global uncertainty.

Against this backdrop, I am here today to provide an overview of Canada’s economic and fiscal forecast for the next five years, which the Government will use for planning purposes and will help frame pre-budget consultations.

Madam Chair, this committee’s deliberations have played a key role in establishing the Government’s fiscal and economic agenda. Your report, based on consultations held across the country, provides the Government and myself, as Finance Minister, with a clear sense of the fiscal and economic issues that Canadians find important and which we, as parliamentarians, must address.

Over the coming weeks you and I will hear from a wide range of individuals and organizations, all with their own specific ideas about what the upcoming budget should contain.

We know that Canadians are not shy in bringing their views to their elected officials, particularly when it comes to their economic well-being.

Canadians told us to eliminate the deficit and get the nation’s finances in order. This government listened. We balanced the budget in 1997-98 for the first time in 28 years and we have kept the books balanced ever since.

Canadians told us to pay down the national debt. Over the past five years we have reduced the debt by $46.7 billion.

Canadians told us they wanted governments to work together to improve health care. In the September 2000 health accord the federal government provided an additional $23.4 billion to the provinces for health care and early childhood development.

Canadians told us to reduce their tax burden. In October 2000 we delivered a five-year, $100-billion tax cut package for both personal and corporate taxes.

Canadians have made it clear that they want a policy of balanced books and a balanced approach to our nation’s finances. We agree, because we know – and Canadians know – that sound fiscal management and a prudent approach to spending are the surest path to a better standard of living for our citizens and a higher quality of life for every Canadian. It is how we ensure that Canada is a society of prosperity and opportunity for all. It is how we realize our potential as a "Northern Tiger."

Sound Fiscal Management

Madam Chair, when I met with the Finance Committee in June, I stated that Canada would not deviate from the fiscal and economic policies that have created the most rapidly growing economy in the G-7.

We will stay on course and on target. We will manage the hard-earned tax dollars of Canadians with care and caution. Our approach must be no different from that of Canadian families balancing their household budgets. We must spend wisely and live within our means.

The reasons are convincing and compelling. Sound fiscal management has allowed Canada to record five consecutive budget surpluses and pay down $46.7 billion of our national debt. In simple dollar terms, our debt reduction efforts mean we are now paying almost $3 billion less annually in interest payments, money that is now being used to address the priorities of Canadians. Our debt-to-GDP (gross domestic product) ratio has now fallen from its peak of 71 per cent in 1995-96 to its current level of 49 per cent, the largest decline recorded by any G-7 country in the same period.

This remarkable progress has been recognized by two leading international credit rating agencies. Earlier this year Moody’s Investors Service and Standard & Poor’s restored Canada’s credit rating to Triple-A, the highest rating these agencies give to a country.

Our clear commitment to fiscal responsibility, through economic ups and downs, is paying dividends. It protected the historic October 2000 personal and corporate income tax cuts as well as the new funding under the September 2000 health accord. Coupled with Canada’s excellent track record on inflation, it allowed the Bank of Canada to sharply reduce interest rates last year. And our prudent approach kept the Government’s finances in surplus during the recent economic downturn.

Canadians’ accomplishments in the area of fiscal responsibility are all the more remarkable when you consider the situation in the United States. Less than two years ago the US government forecast a budget surplus of $231 billion for the fiscal year that ended in September 2002. Now, figures released recently show the final result was a deficit of $159 billion, with no early return to surplus in sight.

But, while we have reason to be pleased with Canada’s fiscal performance, I believe there is more for us to do. We must continue to pay down debt. Despite the paydowns of recent years, our national debt still stands at more than $536 billion. In the last fiscal year we paid $37 billion in interest charges on our debt. It is still the largest single expenditure item in our budget, costing us some 22 cents out of every revenue dollar taken in. This is money that I would rather see spent on the needs of Canadians.

Moreover, it also means that Canada is vulnerable to economic shocks outside our borders that drive up interest rates.

But beyond the arguments about the consequences of debt today, we must look to the future. We must not saddle our children and grandchildren with today’s high debt burden.

Prudence in an Uncertain World

Prudent planning, coupled with the hard work and commitment to fiscal discipline by Canadians from all walks of life, have been crucial elements in our success.

In the past the Government’s approach to budget planning has included setting aside a Contingency Reserve and additional prudence to guard against the risks of unforeseen circumstances.

In the 2001 federal budget the Government used the economic prudence and a portion of the Contingency Reserve to deal with the exceptional fiscal pressures caused by the September 11 terrorist attacks and the global economic downturn. At that time we said that we would restore the full Contingency Reserve as soon as possible.

Therefore, today I am pleased to announce that the Government has restored the $3-billion annual Contingency Reserve, effective this fiscal year. This money will provide a buffer against unforeseen circumstances. As usual, any year-end surplus goes to pay down debt. Further, we will provide an additional degree of economic prudence in our budget planning to help ensure that the Government will not return to deficit.

Managing Tax Dollars Wisely

But sound fiscal management means more than simply avoiding deficits and reducing debt. It also means managing tax dollars well and responsibly, and delivering cost-effective and efficient government services. This is why the Government must assess its programs on an ongoing basis.

This is more than just good management. It is good common sense. Just as Canadians adjust their budgets to stretch their hard-earned dollars, the Government must also reassess its spending to ensure it best meets the needs of Canadians.

So, what does this mean in practice?

It means that in preparing the next budget, we will find opportunities to realign existing spending and improve efficiency.

It means that, where appropriate, the Government will reallocate money to programs that meet the immediate needs of Canadians from those that have already served their purpose. Such reallocation will not be used for debt reduction; instead, monies freed up will be used to help address new, pressing needs.

I believe this approach is based on a straightforward premise: that governments at all levels must constantly reinvent themselves. This means we must always strive to find new ways to meet the needs of Canadians in a cost-effective and efficient manner, while supporting the programs and services that make us a caring and compassionate society.

Sound Economic Performance

Madam Chair, when I appeared before this committee in June, I stated that Canadians had good reason to be optimistic about their economic future and that of the country as a whole.

Despite global weakness and uncertainties, Canada has not only emerged from the slowdown of 2001, it now finds itself in the midst of a much better than expected recovery. Consider the facts:

• In the first half of this year the Canadian economy grew at an annualized rate of more than 5 per cent, strongest in the G-7.
• In the nine-month period from January through September the Canadian economy created 427,000 new jobs. The majority of these were full-time, with gains in every region of the country and across all age groups. In fact, 77,000 young Canadians found new jobs during this period.
• Not only are more Canadians working, but they are also seeing an improvement in their personal financial situation. Real personal disposable income per person has increased 2.9 per cent over the last 12 months. That means an average of $600 for each Canadian.
• Canada’s net foreign debt as a share of GDP is now at its lowest level in 50 years, and is below that in the US for the first time in our history.
• Growth in business investment in machinery and equipment in Canada, a key element for sustained economic growth, has rebounded in 2002 and is outpacing the US.

To further illustrate our solid economic performance this year, let’s compare how the Canadian and US economies have responded during previous economic slowdowns.

In the past, slowdowns tended to be more severe in Canada than in the US, and our recoveries weaker. Indeed, in the 1980s and 1990s Canada had longer and deeper recessions than the US.

But times have changed. For the first time in more than 20 years, the Canadian economy outperformed the US economy during a downturn. The US economy had three consecutive quarters of negative growth last year while Canada avoided recession.

Equally important, we are outpacing the US in the current recovery period. The growth in our economy was almost twice that of the US in the first half of this year. And our record of creating over 400,000 jobs so far this year compares with a loss of almost 40,000 jobs in the US.

Thus, while our economic performance remains closely dependent upon the health of the global economy, particularly the US, the progress we have made has improved the resilience and flexibility of our economy and given us considerable economic momentum.

Canadians should be proud of this accomplishment – namely because it is their own. The people of Canada made clear nine years ago that they wanted a change in how national finances were run. They have worked hard and sacrificed, and accepted difficult choices – making it possible for us to be in this position today. The credit belongs to them.

Economic Outlook

Madam Chair, let me now turn to the economic and fiscal outlook.

First, I would like to explain how we arrived at these figures.

To gauge Canada’s growth prospects, the Department of Finance follows a rigorous and transparent process. It has surveyed a group of 20 private sector economists and used their average forecast of economic growth as the basis for our fiscal planning. Three macroeconomic modelling firms then use this economic forecast to generate fiscal projections over the next five years.

I have also met with a group of key private sector economists to seek their views on the projections, as well as the risks and uncertainties to the outlook. These private sector forecasters expect growth to average 3.4 per cent in 2002. This is more than double the 1.5-per-cent growth rate recorded in 2001. For 2003 private sector forecasters now expect economic growth of 3.5 per cent.

Both the International Monetary Fund and Organisation for Economic Co-operation and Development are in broad agreement with the views of the forecasts. They project that Canada will outperform all of its G-7 counterparts in economic growth, both this year and next.

Private sector forecasters expect solid job creation going forward, thanks to ongoing strength in business investment and consumer spending. Over the medium term they project that economic growth will average roughly 3 per cent.

But Madam Chair, they also stressed that, despite the positive Canadian outlook, there are clouds on the horizon. We face a period of global uncertainty in the months to come.

Outside of North America, European growth is forecast to be lower this year than last. Japan remains mired in a protracted slowdown. The fragile financial situation in emerging markets, especially in parts of Latin America, needs to be monitored closely. And most importantly for Canada, the US recovery has been very uneven. Corporate scandals, notably those involving Enron and WorldCom, have damaged investor confidence, not only in the US but globally, and contributed to large equity market declines. Finally, the continuing threat of terrorism and the growing possibility of conflict in Iraq add to global uncertainty. Taken together, these underscore the importance of remaining prudent in our budget planning.

Fiscal Situation and Outlook

Madam Chair, I would like to turn now to our fiscal situation and outlook.

As announced earlier this month in our Annual Financial Report, we have closed the books on fiscal year 2001-02. We realized a surplus of $8.9 billion, every single penny of which went to reduce Canada’s debt. This is our fifth consecutive budget surplus, the first time this has happened in my lifetime. Moreover, Canada is the only G-7 country expected to achieve a surplus this year.

Looking ahead, the average private sector projections of the fiscal surplus for planning purposes are as follows:

2002-03: $1.0 billion
2003-04: $3.1 billion
2004-05: $3.5 billion
2005-06: $6.8 billion
2006-07: $10.5 billion
2007-08: $14.6 billion

These planning surpluses take into account the $3-billion annual Contingency Reserve and an additional degree of economic prudence.

These private sector fiscal-planning projections indicate relatively small surpluses in the near term. This is due to two main factors: first, the ongoing impact of last year’s economic slowdown upon tax revenues; and second, the effect of previously announced policy initiatives, particularly the $100-billion Five-Year Tax Reduction Plan and the $23.4-billion health accord, both of which are still coming on stream.

Madam Chair, I should note that these figures were calculated using the Government’s current modified accrual method of accounting. As indicated in the 2001 budget, and supported by the Auditor General of Canada, the Government will switch to the full accrual accounting system. We are planning that this will take place with the upcoming budget, provided we are able to verify the accrual accounting amounts with sufficient assurance.

Meeting Future Challenges

Canadians know that maintaining balanced budgets and reducing our debt burden are crucial to our long-term economic health, and thus to our broad, national aspirations. But they are not ends unto themselves. They are a very necessary means to achieve our fundamental goal: improving the standard of living and quality of life of Canadians. These efforts are important to all of us as Canadians, not only because improving our standard of living puts more money into our pockets, but also because it provides more people with greater choices and opportunities.

Our efforts in this area are yielding results. Since we eliminated the deficit we have made significant strides in boosting the growth in our standard of living. Over the past five years both employment and productivity growth have been important contributors to the improvement in our standard of living. From 1997 to 2001 Canada recorded the fastest rate of growth in GDP per capita – which represents the best measure of living standards – among the world’s leading industrialized countries, including the US.

While we have made good progress, the message is clear: if we want the kind of long-term, durable economic growth that will continue to boost our standard of living and our quality of life, we must improve our productivity growth as a nation.

We have been talking about productivity for some time now. Some people might see it as an abstract economic term which has nothing to do with real people and their day-to-day lives.

I disagree. Improving productivity is about attaining that higher standard of living that we all want, and that our country deserves. It is not about people working harder and for less pay. That would defeat the purpose. Rather, it means working more effectively through improved skills, equipment and education.

Improved productivity does more than boost a company’s bottom line. It means more income and better jobs for employees. It means that more and more Canadians, wherever they live, will have the chance to learn and have more opportunities for personal growth and development.

Recognizing this, the Speech from the Throne outlined initiatives that the Government will undertake to ensure that Canada’s productivity growth continues to rise, and with it, the Canadian standard of living.

A key element in raising productivity growth will be to make Canada a magnet for talent and investment – a critical part of how we position ourselves as a Northern Tiger.

To encourage investment and entrepreneurship, we will review existing policies to ensure that our regulatory environment is as efficient, transparent and cost-effective as possible.

To protect the integrity and efficiency of our capital markets, we will work with all stakeholders and the provinces to implement new standards of corporate governance and to reform our current system of securities regulation.

But Canadians understand that investment in people is the intersection between our economic and social policies. And nowhere is this integration of economic and social policy more important than health care. This is why we will work with all stakeholders to ensure Canada’s health care system can continue meeting the needs of Canadians in the 21st century, and provide Canadians with a distinct advantage in the world.

Last week Senator Michael Kirby and his colleagues released a wide-ranging report on options for health care in Canada. In the coming weeks the Commission on the Future of Health Care in Canada, led by former Saskatchewan Premier Roy Romanow, will table its report. Both reports will help governments in their future deliberations to develop a national approach to addressing Canada’s health care needs.

Our government will do its part. The Prime Minister has indicated that we will work with the provinces and territories to agree on a long-term plan to modernize medicare, with a First Ministers Meeting early in the new year. We will provide resources to support implementation of that plan in the upcoming budget.

Madam Chair, our future depends on providing the best possible opportunities for our children. As a society, we must strive to ensure that every Canadian child, no matter where they live, has the best possible start in life and the chance to achieve their full potential.

This is why we have committed to further increase the National Child Benefit for low-income families, building on our reinvestments in recent years. Our challenge is nothing less than to equip our children with what they need to succeed in a rapidly changing world. Nowhere is this need more urgent than with Canada’s Aboriginal children.

Our challenge is also to invest in our nation’s infrastructure, building, for ourselves and our children, competitive cities and healthy, safe communities.

But that is not all.

Madam Chair, in the interest of future generations, it falls to this generation of Canadians to confront the issue of improving our environment. Canadians want clean air and clean water and they are concerned about the impact of climate change. On this, our government is working with the provinces and industry to ensure that Canada lives up to its international responsibilities on climate change, as embodied in the Kyoto accord.

These are important steps in what must be a continuous effort to shape our economy to meet the needs of both today’s citizens and future generations.

Conclusion

Statistics and percentages can shed a lot of light on where we stand as an economy, but we must never allow them to obscure what we stand for as a government and as members of Parliament. And that is to make the lives of individual Canadians and their families better and more secure than ever.

Madam Chair, there is a whole new generation of Canadians ready to take on the challenge of building an even stronger, more prosperous and more generous Canada. Their view is global and their dedication to this country and the values it stands for is inspiring.

People like Carla MacQuarrie of West Chezzetcook, Nova Scotia, who has combined the sciences of aquaculture and agriculture to create a successful farming operation that produces high-quality hydroponic vegetables and herbs.

Carla and her husband Peter Lenihan and their other partners, Dave and Joanne Roberts, own and operate Future Aqua Farms Limited. This company has attracted worldwide attention for its unique use of aquaculture technology, and Carla herself was one of 18 young business people between the ages of 19 and 30 who were recently awarded the Business Development Bank of Canada’s (BDC’s) Young Entrepreneur Award.

This award recognizes outstanding young Canadian entrepreneurs in every province and territory who, through hard work and determination, have overcome the odds to develop successful and innovative new businesses.

Carla and the other BDC award winners are just some of the young leaders who are helping to shape Canada’s future. These young Canadians – confident, well-educated, globally sensitive and technologically savvy – are our best hope for making Canada represent not only what is good, but what is best in the world.

Madam Chair, Canadians will be asked by this committee to offer their views on the priorities the Government should focus on in its next budget. Over the coming weeks you will hear from groups and individuals across Canada who will have a wide range of opinions. Like you, I will be travelling across the country in the days ahead to hear the views of Canadians. Undoubtedly, you and I will hear many good ideas.

But you know, just as I know, that the business of government is about making choices. If all of the ideas that we will hear over the coming weeks were to be implemented, our small surpluses would rapidly become large deficits once again. We cannot allow this to happen. And so, choices will have to be made.

With this in mind, I would ask the committee to provide input to the Government on the following questions:

• In June I asked for the committee’s views on how the Government can best control expenditures and focus priorities. Further to this issue, I would seek the committee’s input on how the Government can best realign its spending to meet the highest priorities of Canadians.
• As I mentioned earlier, the Government has restored the $3-billion annual Contingency Reserve. To further guard against going back into deficit, what additional amount of economic prudence should be included in the upcoming budget?
• The idea of making Canada a Northern Tiger has captured the imagination of citizens across the country. What policies do Canadians think we need to make our country a magnet for investment, for skilled knowledge workers, and for cutting-edge research and innovation?

Madam Chair, the consultations this committee is pursuing with Canadians are not just about what should be contained in the next budget – they are also about the kind of Canada we want.

I believe the Canada we want is fiscally healthy, so that we are free to choose our own path and to shape our own destiny.

It is a Canada where economic and social policies work hand in hand.

It is a Canada that is more productive, more innovative and more competitive than ever, so we can generate the resources needed to invest in our future priorities – health care, the environment and our children.

It is a Canada that embraces a fair and competitive tax system.

It is a Canada that plays an important role on the world stage, helping to build a more stable and more just global community.

It is a Canada that is a magnet for talent and investment, a Northern Tiger, confident it can take on the world and win.

In short, it is a Canada that strives to give its citizens not only a better standard of living, but the best standard of living in the world.

Not only a better quality of life, but the best quality of life in the world.

A Canada that continues to earn its reputation as one of the most compassionate, inclusive and progressive nations on earth.

Madam Chair, I began my remarks today by referring to the debt that the present generation of Canadians owes to those who passed through this building on their way to a new life in a new land.

Just like the hundreds of thousands of Canadians who came through Pier 21 believing that tomorrow can be better than today, I, too, believe in the great potential of this great place called Canada.

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