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Chapter 2
Responsible Leadership: Actions to Strengthen Canada's Economic and Financial Fundamentals

Highlights

• Canada's strong fiscal position and sound financial markets are critical to maintaining economic stability in the short term and are the foundation of Canada's long-term prosperity.
• The slowing economic growth expected in Canada over the coming quarters will substantially reduce government revenues. Without action, the Government would be facing deficits over the next three fiscal years.
• This Economic and Fiscal Statement announces a number of steps to protect Canada's fiscal position and the ongoing stability of the financial system in Canada.
  • Important, measured action is being taken to ensure the effectiveness and reduce the cost of government operations.
  • The Government is introducing legislation that will ensure sustainable federal public sector wage rates for four years.
  • Equalization is being put on a sustainable growth path. The Canada Health Transfer and the Canada Social Transfer will remain unchanged and continue to grow as before.
  • Actions are being proposed that will enable the Government to meet its Group of Twenty (G20) responsibilities to ensure financial sector stability.
  • Measures are being proposed to provide temporary relief to seniors with Registered Retirement Income Funds and to private pension plans affected by the global financial turmoil.
• The Government is also proposing to modernize the pay equity regime.
• With these actions, and based on the average private sector forecast of November 14, 2008, the Government will continue to plan for balanced budgets.
• The economic situation remains volatile, with risks tilted to the downside. Surpluses are therefore not assured.
• In preparing for Budget 2009, the Government will consult with Canadians and provinces and territories to develop responses to short-term economic issues, while continuing to implement its long-term economic plan. In doing this, the Government will balance the economic benefit of such actions with the impact on the fiscal situation.
• To the extent that budget actions to protect the economy or a further deterioration in economic circumstances lead to a deficit, the Government will ensure that the deficit is temporary.

Introduction

This chapter describes the Government's approach to budget planning and actions it is taking to protect Canada's fiscal advantage. It also proposes actions to reinforce financial system stability in light of the current turmoil in global financial markets.

In addition to responding to current economic challenges, the Government is mindful of the need to put in place policies to boost long-term economic growth. To this end, this chapter also sets out areas for action in Budget 2009 on which the Government intends to consult with Canadians.

Protecting Canada's Fiscal Advantage

Strong fiscal management is the foundation of the Government's economic strategy. It is not an end in itself but a means to a stronger economy and a higher standard of living.

Approach to Budget Planning

The Government's approach to budget planning is built upon the principles of accountability, transparency and strong expenditure management.

• To ensure objectivity and transparency in forecasting, the budgetary fiscal projections are derived from the average of private sector economic forecasts.
• To allow for a comparison between different views on the fiscal outlook, each fall the fiscal projections of four independent private sector organizations are presented separately. The four organizations use their own economic assumptions to prepare their fiscal forecasts for the current and next five years.
• The Government provides an update of its current and expected future financial position twice a year, once in the fall and once in the budget. In addition, it provides updates twice a year on the expected outcome for the year underway in The Fiscal Monitor.
• The Government is committed to achieving the highest standards of public sector financial reporting.
  • The Government will soon table the Public Accounts of Canada 2008, confirming the surplus of $9.6 billion for 2007–08. Last year marked the 10th consecutive year the Government has received an unqualified audit opinion on its financial statements. Few countries have achieved this.
  • Few other countries report consolidated financial results on a full accrual basis of accounting. Under accrual accounting, revenue is recorded when it is earned or realized, and expenses are recorded as they are incurred, regardless of when the associated cash is received or paid. For example, the costs of employee pensions and veterans' benefits are recorded as they are earned, even if payments will flow in future years. These estimates are prepared and audited on an actuarially fair basis.
• By carefully managing spending, the Government will continue to reduce debt and keep the burden of taxation to a minimum.
  • The Government has introduced a new approach to managing spending. A core element of this approach is to review all spending over a four-year period to assess whether programs are achieving their intended results, are effectively managed, and are properly aligned with federal responsibilities and the priorities of Canadians. The results of the first round of reviews were reported in the February 2008 budget. The second round of reviews is now underway. As discussed below, this round of reviews is being expanded to include corporate assets. Results and progress on these reviews will be reported in Budget 2009.

Overview of the Fiscal Situation

The slowing in economic growth expected in Canada over the coming quarters will have a significant impact on the Government's fiscal position.

The fiscal position of the Government is reviewed in detail in Chapter 3. This section provides an overview of the changes in the Government's fiscal position since Budget 2008 and the Government's response to these changes.

With the slowing in real economic activity and the fall in commodity prices, budgetary revenues are expected to be considerably lower than projected in Budget 2008.
In 2009–10, revenues are expected to be $8.9 billion lower than projected and in 2010–11, they are expected to be $7.9 billion lower than projected (Table 2.1). Lower projected revenues are expected to be partially offset by lower projected public debt charges.

In total, recent economic developments imply that, without action, the Government would face deficits over the next three fiscal years. The Government is taking steps in three areas to protect Canada's fiscal position:

• Ensuring that departmental spending is effective.
• Ensuring that public sector compensation reflects the current economic situation.
• Putting the Equalization program on a sustainable growth path.

Taking into account these actions, as well as the net fiscal impact of the Insured Mortgage Purchase Program described later in this chapter, the Government is planning on balanced budgets or better for the current and the next five years. To the extent that budget actions to protect the economy or a further deterioration in economic circumstances lead to a deficit, the Government will ensure that the deficit is temporary.

Table 2.1
Summary of Changes in the Fiscal Outlook Since the February 2008 Budget¹

	Actual	Projection
	2007– 2008	2008– 2009	2009– 2010	2010– 2011	2011– 2012	2012– 2013
	(billions of dollars)
February 2008 budget   underlying surplus	10.2	2.3	1.3	3.1	4.7	5.3
Impact of economic and   fiscal developments2
Budgetary revenues	-2.1	-3.2	-8.9	-7.9	-6.1	-2.4
Program expenses	1.7	0.9	-1.1	-0.6	-0.6	-0.5
Public debt charges	-0.2	0.2	2.8	2.0	0.1	-0.5
Total	-0.6	-2.1	-7.2	-6.5	-6.6	-3.5
Budgetary balance before actions	9.6	0.2	-5.9	-3.4	-1.9	1.8
Actions affecting the   budgetary balance
Effective management   of government spending			4.3	1.9	1.6	1.1
Appropriate public sector   compensation		0.6	0.6	0.9	1.0	1.0
Insured Mortgage Purchase   Program		0.2	1.1	0.7	0.4	0.3
Temporary reduction in RRIF   minimum withdrawals		-0.2
Total		0.6	6.0	3.5	3.0	2.4
Revised budgetary balance	9.6	0.8	0.1	0.1	1.1	4.2
Note: Totals may not add due to rounding. 1 A positive number implies a decrease in spending and an improvement in the budgetary balance. A negative number implies an increase in spending and a deterioration in the budgetary balance. 2 Includes putting Equalization on a sustainable growth path.

Effective Management of Government Spending

Last year, the Government introduced a new Expenditure Management System designed to ensure effective management of taxpayer dollars and to help keep spending growth on a sustainable track. The Government is building on this new system in three important ways: continuing strategic reviews of departmental spending, launching a corporate asset management review and ensuring stronger departmental management.

In addition, all departments are being instructed to manage spending carefully, including limiting spending in areas such as hospitality, travel, conferences and professional services. As outlined below, the Government is also restraining wages for the federal public administration, including senior members of the public service, as well as Members of Parliament, Cabinet Ministers, and Senators.

Political parties now receive taxpayer support in three ways: (a) tax credit for contributions to political parties; (b) the reimbursement of eligible election expenses; and (c) a quarterly subsidy based on votes cast. In keeping with the focus on spending management, the quarterly subsidy that benefits political parties is no longer justifiable. The Government will eliminate this subsidy as of April 1, 2009.

The Government will report on its progress on these initiatives in Budget 2009.

Strategic Reviews of Departmental Spending

The Government is conducting strategic reviews of departmental spending to ensure that programs are achieving their intended results, are efficiently managed and are aligned with the priorities of Canadians. The Government's aim is to review all spending over a four-year cycle. The first cycle of reviews is underway and will be completed by 2010.

In the initial 2007 round of reviews, the Government examined departmental spending of $13.6 billion, accounting for 15 per cent of total direct program spending. Savings from the reviews were reported in Budget 2008. In 2008, 21 departments and agencies are under review, representing $25 billion in program spending, or about 27 per cent of direct program spending. The results of this review will be finalized this winter and announced in Budget 2009. The 2009 and 2010 reviews will account for about 60 per cent of direct program spending.

Corporate Asset Management Review

The Government is expanding strategic reviews to include an examination of the Government's corporate assets. These include enterprise Crown corporations, which principally depend on revenues from commercial activities rather than appropriations, real property and other holdings. The Government has not undertaken a comprehensive review of these assets since 1994.

In most cases, these assets were funded or acquired to address policy challenges rooted in specific economic circumstances. Corporate assets will be assessed systematically to make sure that the initial rationale for government ownership is still relevant, that their activities are still effective, and that their business plans are sustainable. Simply put, an asset purchased in the 1950s may no longer be relevant to the core responsibilities of the Government more than 50 years later.

The reviews, to be led by the Minister of Finance, will result in better management of the Government's assets and improved returns to taxpayers. In some cases, the most efficient use of taxpayers' resources may be to sell the asset to a private sector entity that is better placed to create economic value. The Government would also consider the sale of real property when this would result in important economic development. As with the strategic reviews of departmental spending, these reviews will be conducted on a multi-year cycle.

The Government will take a considered approach to the sale of any asset, including taking into account the condition of markets, to ensure that fair value can be realized by taxpayers and the transaction will generate additional economic activity. Assets will not be sold if such sales do not meet these tests.

Stronger Departmental Management

The Treasury Board has also initiated an examination of departmental appropriations as part of the annual departmental reference level update. The objective is to ensure that taxpayer dollars are spent wisely and to better align amounts appropriated with expected spending. This review will become an ongoing part of the annual departmental reference level update.

In recent years, spending authorities granted to departments at the beginning of the year have not turned out to be an accurate estimate of departmental program requirements. This has resulted in departmental appropriations being higher than needed and departments not spending the full amounts appropriated. For example, in 2007–08, departments spent $2.0 billion less than had been expected at the time of Budget 2008.

As a result of this year's review, the Government estimates that total spending will be lower than previously expected. Departmental appropriations will be adjusted to reflect these lower estimates.

This is not an expenditure reduction exercise. In some cases, departments have determined that the costs of delivering certain programs are lower than originally forecast; in other cases, they have determined that planned programs and capital purchases will take place over a longer time period than initially anticipated. Spending will continue to increase. But there will be a closer alignment of planned and actual spending, so the spending information provided to Parliament and Canadians will be more accurate. This should result in better, more careful management of departmental spending.

Departmental spending levels for 2009–10 are now being finalized. A detailed breakdown of departmental spending will be tabled in Parliament in the Main Estimates in February 2009.

Savings From Spending Management

Total expected savings from reviews under the new Expenditure Management System amount to $4.3 billion in 2009–10, $2.6 billion in 2010–11, $2.8 billion in 2011–12, $2.9 billion in 2012–13 and $3.0 billion in 2013–14 (Table 2.2). However, only expected savings from reviews underway this year are being recorded in this Economic and Fiscal Statement. Savings from reviews to take place in the 2009 to 2011 period will be recorded in future budgets once these processes are underway.

Table 2.2
Fiscal Savings Expected From Reviews Under the New Expenditure Management System

	2009– 2010	2010– 2011	2011– 2012	2012– 2013	2013– 2014
	(billions of dollars)
Stronger departmental  management	2.0	1.5	1.0	0.5	0.5
Departmental and corporate  asset reviews (2008 to 2011)	2.3	1.1	1.8	2.4	2.5
Total expected savings	4.3	2.6	2.8	2.9	3.0
Amounts accounted for  in this Economic and  Fiscal Statement	4.3	1.9	1.6	1.1	1.1

Appropriate Public Sector Compensation

Responsible fiscal management also means that public sector wage increases must be affordable. Since the beginning of the year, wage growth in the public sector has been leading that of the private sector. The Government believes that more moderate growth in public sector compensation is appropriate in the current circumstances. Recognizing these circumstances, some of the largest public sector bargaining agents have shown leadership by signing tentative settlements that provide reasonable wage increases for their members and are affordable for the Government.

As indicated in the Speech from the Throne, the Government is introducing legislation to ensure predictability of federal public sector compensation during this difficult economic period.

The legislation puts in place annual wage increases for the federal public administration, including senior members of the public service, as well as Members of Parliament, Cabinet Ministers, and Senators, of 2.3 per cent in 2007–08 and 1.5 per cent for the following three years, for groups in the process of bargaining for new agreements. For groups with collective agreements already covering 2008–09, the 1.5 per cent would apply for the remainder of the three-year period starting at the anniversary date of the collective agreement. In addition, the legislation would suspend the right to strike on wages through 2010–11.

Modernizing Pay Equity

The current approach to pay equity is a litigious, adversarial, complaints-based approach. Under the current approach, the Government in its capacity as the employer first agrees on wage rates with the bargaining agents and then years later is forced to top up those very settlements through pay equity complaints. Since the mid-1980s the federal government has paid over $4 billion in pay equity settlements. New complaints continue to be filed with the Canadian Human Rights Commission, sometimes for the same groups that have already received past pay equity settlements, representing large potential future costs to taxpayers.

Therefore, the Government will introduce legislation to modernize the pay equity regime for federal public sector employees, similar to the process now in place in Ontario and some other provinces. The new regime reflects the Government's commitment to pay equity. The new regime ensures that the employer and bargaining agents are jointly responsible and accountable for negotiating salaries that are fair and equitable to all employees and that are in line with wages in the internal and external workforces.

As a result of the new legislation, pay equity considerations will now be addressed in a more proactive, open and transparent manner. Making pay equity an integral part of collective bargaining will increase fairness, eliminate lengthy litigation processes and ensure progress made by women in the public service is maintained over time.

The new pay equity regime will make employee compensation more predictable, improve government fiscal planning and eliminate unpredictable retroactive payments.

Putting Equalization on a Sustainable Growth Path

The fiscal projections set out in Table 2.1 are based on the changes to the Equalization program outlined by the Minister of Finance at the November 3, 2008 Federal-Provincial-Territorial Finance Ministers Meeting. The Government will shortly table legislation to put these changes into effect.

To ensure the sustainability of the Equalization program, the Government proposes to put Equalization on a sustainable growth path. Driven largely by higher resource revenues, Equalization has grown by 56 per cent since 2003–04. This rate of growth is clearly not sustainable and without action would have created significant deficits over the next few years. The report by the Expert Panel on Equalization (the O'Brien report)–on which the current Equalization program is based–recognized the importance of keeping Equalization affordable, and set out a framework for action on how to control the cost of the program. The Government will therefore make targeted adjustments to the Equalization program consistent with the O'Brien report and within the principle-based structure set out in Budget 2007, which provided for long-term funding growth.

Specifically, Equalization will be put on a growth path that is in line with the economy. The growth path will be a three-year moving average of nominal gross domestic product (GDP) growth, which will help to ensure stability and predictability for both orders of government while still being responsive to economic growth. For 2009–10, the Equalization program will provide a total of $14.2 billion to the provinces, up from $13.6 billion in 2008–09. Without action, Equalization would have grown to $16 billion in 2009–10 and almost $20 billion in 2010–11. Such a rate of growth would have been unsustainable.

The Equalization program detailed in Budget 2007 strikes a balance between providing provinces with incentives to develop their resources and the need to ensure fairness among provinces. Up to now, the fiscal capacity of the lowest non-receiving province has been used as the measure to ensure fairness and provide equity and stability. With Ontario entering the Equalization program for the first time in 2009–10, a new benchmark is required to both ensure fairness and ensure that provinces continue to receive a meaningful net fiscal benefit from resources. This would be set at the average post-Equalization fiscal capacity of the Equalization-receiving provinces. This will ensure that Equalization-receiving provinces continue to benefit from their resource revenues. Transition payments will be provided for 2009–10 to ensure that a province that receives Equalization in that year does not see a decline in its payments.

In order to allow them to conduct their budget planning in these uncertain times, provinces have already received notice of their Equalization for 2009–10, two months earlier than normal.

Table 2.3
Equalization—$13.6 Billion in 2008–09 and $14.2 Billion in 2009–10

	P.E.I.	N.S.1	N.B.	Que.	Ont.	Man.
	(millions of dollars)
2008–09	322	1,571	1,584	8,028	0	2,063
2009–10	340	1,571	1,689	8,355	347	2,063
1 Figures for Nova Scotia include both Equalization and offsets, bringing the total in 2009–10 to $14,365 million.

The Territorial Formula Financing (TFF) transfer has been less affected by volatile resource prices and thus continues on its existing, sustainable growth path.

With these changes to Equalization, the Government is committed to ensuring the continued growth of federal transfers in a way that is fiscally responsible and sensitive to the volatile global economic environment. Federal support for provinces and territories is at an unprecedented level; major transfers are currently at $49.1 billion and they will continue to grow. This change in Equalization does not affect the Canada Health Transfer (CHT) or the Canada Social Transfer (CST). The CHT, at $22.6 billion in 2008–09, is growing 6 per cent a year, providing an increase of $1.4 billion next year. The CST, at $10.6 billion in 2008–09, is growing 3 per cent a year, providing an increase of $310 million next year.

The Government's actions will provide growing transfers overall, including sustainable growth for Equalization. This will ensure that the integrity of the transfer system is maintained by keeping it sustainable for all governments.

Risks to the Fiscal Plan

The economic situation is evolving rapidly and the full extent of the slowdown noted in Chapter 1 on both economic growth and commodity prices is not known. The risks to the fiscal projection flow from both economic developments and the interaction of economic developments and the tax system, particularly the magnitude and timing of losses claimed by businesses and capital gains or losses claimed by individuals. These factors are difficult to predict as they can be volatile, and businesses and individuals can apply certain losses against tax liabilities relating to the current and previous three years.

One measure of the degree of uncertainty is reflected in the range of private sector forecasts. Real GDP forecasts for 2009 range from a high of 1 per cent growth to a low of a 0.7 per cent contraction (Chart 2.3). Reflecting the added uncertainty of commodity prices, forecasts for nominal GDP for 2009 range from a contraction of 2.5 per cent to an expansion of 2.5 per cent.

To illustrate the degree of uncertainty associated with the current fiscal outlook, Chart 2.4 shows the fiscal projections based on the average of the two highest and the average of the two lowest private sector nominal GDP forecasts for 2008, 2009 and 2010. The low scenario includes a lower average effective tax rate, reflecting lower capital gains income and higher losses claimed by corporations to reduce tax liabilities. The projections vary considerably over the next three years, ranging from small surpluses to large deficits, with the risks clearly tilted to the downside.

Although the Government continues to plan on balanced budgets, given the volatility of the economic situation, particularly the rapid decline in commodity prices, a deficit cannot be ruled out. If the Government does run deficits, it will ensure that they are contained and temporary. The actions in this Economic and Fiscal Statement help avoid a deficit and, more importantly, help ensure that on a structural basis (i.e. absent the temporary, cyclical weakness), the Government remains in a surplus position.

Benefits of Debt Reduction

Since coming to office, the Government has reduced the federal debt by $37 billion. The Government is focused on protecting Canada's fiscal position because sound management of public finances provides significant benefits to Canadians and businesses in Canada.

Reductions in public debt have given the Government flexibility to deal with the current economic situation while maintaining its capacity to address long-term challenges such as population aging.

A major benefit of lower debt is that less revenue is absorbed by interest charges, freeing up resources for more productive uses, such as tax relief (see the box entitled "Tax Back Guarantee"). In 1990–91, the Government spent almost 38 cents of every revenue dollar on debt service charges. This ratio has been falling steadily since 1996–97 and is expected to fall to 13 cents in 2008–09, the lowest level since the 1970s.

Debt reduction also benefits Canadians and the Canadian economy by helping to keep interest rates low. Long-term interest rates (adjusted for inflation) have fallen to about 2 per cent today from over 6 per cent in the early 1990s.

Lower interest rates also reflect the view in financial markets that the Government of Canada's debt is the safest in the world as measured by credit default swaps (Chart 2.5). Low levels for these swaps for Canada, compared to other sovereign countries, reflect a decade of consecutive federal budgetary surpluses, Canada's relatively low debt-to-GDP ratio and the soundness of Canada's banking sector.

Reinforcing Financial System Stability

The global financial crisis that began in the United States has spread and deepened. It has now touched every country in the world, revealing serious weaknesses in many aspects of the international financial system.

In some countries, certain non-bank institutions that were heavily reliant on borrowed money were inadequately regulated, which resulted in devastating impacts on financial markets when credit markets rapidly contracted. As well, many regulated financial institutions quickly found that they did not have sufficient capital to withstand the unexpected persistence and breadth of the financial market turmoil. Exacerbating the problem was a lack of transparency in many of the complicated financial products at the core of the turmoil, which made it difficult to value assets and assess counterparty risk. Given the long period of economic growth that preceded the turmoil, it has become clear that many financial institutions and regulators simply underestimated financial risks. It has also become evident that international coordination and surveillance was inadequate and did not provide a second line of defence against global imbalances and excessive risk taking.

The Canadian financial system, in contrast to those of other countries, has weathered the turmoil well, but Canada is not immune to international events. The Government has taken a number of steps to ensure that the global turmoil does not hinder access to affordable credit for Canadian consumers, homebuyers and businesses.

Canada has worked diligently with its international partners to implement the April 2008 recommendations of the Financial Stability Forum. These recommendations are aimed at strengthening prudential oversight of capital, liquidity and risk management, enhancing transparency and valuation, changing the role and uses of credit ratings, strengthening governments' responsiveness to risks, and putting in place more robust arrangements for dealing with stress in the financial system.

The Government is continuing its responsible leadership by proposing precautionary authorities to strengthen its ability to respond to unforeseen events that could threaten the stability of the Canadian financial system. The proposed authorities reflect our international commitments under the G7 and G20 Plans of Action and provide the Government with the same flexibility and responsiveness as our peer group of countries. The Government is also working with our international partners to develop best practices in this area and benchmark our world-leading system against those standards.

Strengths of the Canadian Financial System

The underlying strengths of the Canadian financial system have been evident during the profound disruption in global credit markets since September.

• Canadian capital requirements for financial institutions are well above minimum international standards. At the start of the crisis, Canadian banks had average risk-adjusted capital buffers of about 9.5 per cent of risk-adjusted assets, while many global banks had capital ratios of only 6 or 7 per cent. Canadian banks are also less leveraged than many of their international peers. Canadian banks typically had overall assets amounting to less than 20 times their capital, while major U.S. banks had 30 times more assets than capital and some European banks were levered up to 50 times.
• Large Canadian investment dealers have been bank-owned since the late 1980s, and are therefore not as dependent on wholesale funding as dealers elsewhere in the world. They are regulated on a consolidated basis by the Office of the Superintendent of Financial Institutions.
• The Canadian housing finance market is sound. It does not have a large sub-prime component and has not witnessed the proliferation of products and marketing practices that have led to the serious problems in the United States. In Canada, lenders must insure against default any mortgages made without large down payments and that insurance is backed by the government. Prudent lending standards must be met to qualify for government-backed insurance. These insured mortgages provide a reliable backstop for Canadian mortgage-backed securities, which are well accepted around the world.

In October, the World Economic Forum assessed Canada's banking system to be the world's soundest and ranked our financial market sophistication and investor protection among the world's best. Likewise, the International Monetary Fund (IMF) concluded earlier in the year that Canada's financial system is mature, sophisticated, well managed and able to withstand sizeable shocks.

Measures to Maintain Access to Affordable Credit

The worldwide credit contraction is challenging the ability of even the strongest financial institutions to raise funding. The financial sector is a key enabler of economic growth, channelling savings to productive investment. The Government has taken action to ensure the borrowing needs of Canadian households and businesses continue to be well served by the financial system. Importantly, these actions have been taken on commercial terms and have not put Canadian taxpayers' money at risk.

• Budget 2008 legislation modernized the authorities of the Bank of Canada to support the stability of the financial system. Consequently, the Bank has been able to widen the collateral it will accept and add more than $35 billion in liquidity to the Canadian financial system at a time when global credit markets have been severely stressed.
• The Canada Mortgage Bond (CMB) program has been expanded, including a record $12.5-billion CMB issue in June and the introduction in November of a CMB with a 10-year maturity to allow the program to attract a broader pool of investors.
• The Government is supporting the availability of longer-term credit in Canada by purchasing up to $75 billion in insured mortgage pools through Canada Mortgage and Housing Corporation under the Insured Mortgage Purchase Program (IMPP). This action will provide Canada's financial institutions with significant and stable access to longer-term funds that they can then make available to consumers, homebuyers and businesses in Canada. The IMPP will earn a modest rate of return for the Government with no additional risk to the taxpayer.
• The Canadian Lenders Assurance Facility, launched in November, will ensure that Canada's financial system is not put at a competitive disadvantage by similar guarantee programs in other countries. The Facility will further help to secure access to term funding so that Canadian financial institutions can continue lending to consumers, homebuyers and businesses.

These measures are producing results. To date, $25 billion of insured mortgage pools have been purchased through the IMPP, and the remaining amount of up to $50 billion will be made available by the end of 2008–09, ensuring federally regulated financial institutions continue to have reliable funding. As set out in Table 2.1, the net fiscal gain for the Government from the IMPP is projected to be approximately $1.1 billion in 2009–10.

The role of private sector financial institutions is to make loans to creditworthy people and businesses and to support capital markets. The Government is fulfilling its role by intervening with extraordinary measures when markets are profoundly disrupted so that private sector lenders can maintain access to the funds they need to keep lending, and by providing liquidity to capital markets in support of economic growth. Financial institutions have indicated that the IMPP and the Bank of Canada interest rate cuts were key to their decision to lower prime rates and mortgage rates.

While the private sector is and should remain the primary source of credit, the Government is also ensuring that the complementary forms of credit provided through its Crown agencies—Export Development Canada (EDC) and the Business Development Bank of Canada (BDC)—are available to counter the effects of the credit crunch. BDC and EDC have been responding to the needs of their clientele by maintaining and enhancing their existing suite of financing solutions. Recently the Government approved a $2-billion increase in the borrowing authority of EDC as well as a $1.8-billion increase in BDC's borrowing capacity, which enables them to offer additional flexibility to existing clients.

EDC is well positioned to continue to help Canadian companies grow internationally. It will facilitate nearly $80 billion in exports and investments from Canadian companies in 2008, including some $4 billion for the automotive sector. To help address emerging stresses and financial gaps in Canada's export sector, most notably in auto-related and other manufacturing enterprises, the Government is providing EDC with an additional $350 million in capital to support up to about $1.5 billion in increased credit capacity for those most affected by the financial crisis.

BDC is playing an active role in supporting the growth of Canadian small and medium-sized companies, with about $3 billion in new financing this year. The Government will provide BDC with an additional $350 million in capital so that it can increase its credit capacity by about $1.5 billion for term lending activities and a new time-limited facility providing guarantees to financial institutions for their lines of credit for viable small and medium-sized companies.

Enhancing Flexibility and Responsiveness

The Government of Canada stands ready to take whatever further action is necessary to protect the stability of the Canadian financial system. Given the speed at which new market developments can unfold, the Government needs the flexibility to respond quickly and decisively. This necessity is clearly seen in the experience of countries that did not have sufficient tools to respond to the financial crisis when it affected them.

Accordingly, the Government is proposing that the Minister of Finance and Governor-in-Council be granted additional flexibility to support financial institutions and the financial system in extraordinary circumstances. This additional flexibility is a precaution that would bring Canada's regulatory toolkit in line with international best practices. The proposals would also equip Canada to fulfill the commitment to implement the G7 and G20 Plans of Action to stabilize financial markets, restore the flow of credit, and foster global economic growth. And they would ensure that Canada's strong financial system is not put at a competitive disadvantage by developments in other countries.

The proposed new powers, which include appropriate provisions for transparency and accountability, involve standby authorities that include additional options for resolving difficulties in financial institutions should they arise. These powers would also provide the Government with new means to support systemically important financial institutions and ensure that they can raise capital and continue lending to households and businesses.

These proposed measures will provide authority for:

• Funding in the unlikely event that there is a draw on the Canadian Lenders Assurance Facility.
• The Canada Deposit Insurance Corporation (CDIC) to establish a bridge bank as a further resolution tool to help preserve banking functions.
• An increase in the borrowing limit of CDIC to $15 billion to reflect the growth of insured deposits since the last increase in 1992.
• The Minister of Finance to provide the CDIC Board of Directors broader scope of action when systemic risk concerns may result from the potential failure of a member institution.
• The power to direct CDIC to undertake resolution measures when necessary to prevent adverse effects on financial stability.
• The provision to CDIC of greater flexibility in the timing of preparatory examinations.
• The Government to inject capital into federal financial institutions to support financial stability, with appropriate provisions to protect taxpayers.

Retirement Savings

Canadians are understandably concerned about the impact of the recent deterioration in market conditions on their financial security and retirement savings.

The global credit crisis has led to a sharp decline in global equity markets that has reduced the funded status of federally regulated private pension plans. If the situation remains the same at the end of the year—when valuations are conducted for most plans and funding requirements are set—the decline in the market value of plan assets would result in many sponsors being required to make large special payments. The magnitude of these special payments could damage the financial condition of the companies that sponsor these pension plans and divert available funds away from investment in the growth of those companies. These problems would be especially pronounced given current conditions in credit markets.

Under the present extraordinary circumstances, the Government proposes to allow plans to extend their solvency funding payment schedule from 5 to 10 years in respect of solvency deficiencies as at December 31, 2008, subject to certain conditions. In particular, both members and retirees would need to agree to the extended schedule, or the difference between the 5- and 10-year payment schedule would need to be secured by a letter of credit. One of these two conditions would need to be met by December 31, 2009. If buy-in by plan members or a letter of credit were not secured by the end of 2009, the plan would be required to fund the deficiency over the following 5 years.

The Government also intends to address the evident issues in the solvency funding rules and other structural concerns about the legislative and regulatory framework pertaining to pension plans subject to the Pension Benefits Standards Act, 1985. Accordingly, the Government will be initiating a consultation process on issues facing defined benefit and defined contribution pension plans with a view to making permanent changes to the framework in 2009. As pension plans are regulated either federally or provincially and the regulatory regimes are closely related, the Government will coordinate its work in this area with provincial and territorial governments. In November, Federal-Provincial-Territorial Finance Ministers agreed to make this a priority and it will be discussed when they meet again in December.

Temporary Reduction in RRIF Minimum Withdrawals

Many seniors are concerned about the impact of the deterioration of market conditions on their retirement savings. In particular, seniors have expressed concerns about the reduction in value of their retirement savings and whether they will be required to liquidate their Registered Retirement Income Fund (RRIF) assets to meet minimum withdrawal requirements. The Government understands these concerns.

In recognition of these exceptional market conditions and their effect on retirees' savings, the Government proposes to reduce the required minimum withdrawal amount for RRIFs by 25 per cent for 2008, so that retirees may keep more of their savings in their RRIFs. This measure will apply to all RRIF holders regardless of age.

RRIF holders who withdraw more than the reduced 2008 minimum amount will be permitted to re-contribute the excess to their RRIFs, until the later of March 1, 2009 and 30 days after this proposal is enacted (up to the amount of the reduction provided by this measure). Re-contributions will be deductible for the 2008 taxation year.

Similar rules will apply to those receiving variable benefit payments under a money purchase Registered Pension Plan.

This measure is expected to reduce federal revenues by $200 million in 2008–09. Draft legislation to implement these proposals, together with explanatory notes, may be found in Annex 2.

While seniors may also be concerned about an obligation to liquidate assets in order to satisfy the RRIF minimum withdrawal requirement, the income tax rules, in fact, permit "in-kind" asset transfers to meet the minimum withdrawal requirements—they do not require the sale of assets. The in-kind distribution of assets allows individuals to meet the RRIF minimum withdrawal requirements and keep their assets intact, so that the assets may benefit from future market growth.

The Government has asked all financial institutions to accommodate the in-kind distribution of assets from a RRIF, as permitted under the tax rules, at no cost to clients, or to offer another solution that achieves the same result.

These measures to support retirement savings complement previous action by the Government to ensure that Canadians have adequate opportunities to save. Most recently, in Budget 2008, the Government introduced the Tax-Free Savings Account (see box).

Forward Agenda

While Canada is clearly affected by the current international economic challenges, it is much better prepared than most countries. Canada has benefited from a clear economic plan, Advantage Canada: Building a Strong Economy for Canadians, and a resolute commitment to its implementation. Much progress has been made since 2006, and this is reflected in the country's resilience in the face of economic and financial market turbulence.

The Government has taken extraordinary measures in response to the current situation, and will continue to seek opportunities for providing economic stimulus within a tight fiscal framework.

Overcoming our current challenges will require coordinated action. The Government is consulting with provinces and territories, the private sector and Canadians to develop responses to short-term issues, while continuing to implement the long-term economic plan to create a competitive advantage for Canadians. Immediate priorities include:

• Accelerating infrastructure investments.
• Improving opportunities for workers.
• Strengthening financial markets.
• Improving competitiveness.

The Government's priorities for action in these areas are outlined below.

Accelerating Infrastructure Investments

Canadians need to continue building a modern and reliable infrastructure. Investing in a 21st century infrastructure will create a competitive advantage that pulls business and jobs into a vibrant national economy and brings our skills and goods onto the world stage efficiently. It will also stimulate the economy and put people to work.

The Government is significantly boosting its support for provincial, territorial and municipal infrastructure. Next year's increase will be the largest and will push the total amount available in that year to about $6 billion.

Given current economic circumstances, the Government is actively looking at ways to accelerate the roll-out of anticipated infrastructure projects. At their November 10th meeting, First Ministers agreed to work together to speed up infrastructure projects. The Government will work with provinces and territories to identify, by January 2009, specific projects in each jurisdiction that would contribute to stimulating the economy in the next two years. Further, it will work with the provinces and territories to tackle regulatory and administrative barriers to moving these specific projets forward.

The Government is also pursuing public-private partnership opportunities in order to lever private capital and expertise to help meet our infrastructure needs. This will be accomplished through PPP Canada Inc., a new Crown corporation which will be fully operational in the new year.

Further, the Government is working with its partners to build a new Windsor-Detroit border crossing as soon as possible, ensuring businesses have secure and timely access to U.S. markets and suppliers.

Improving Opportunities for Workers

A strong and vibrant workforce is key to Canada's prosperity, and to the well-being and security of workers and their families. The Government will continue to work in cooperation with the provinces and territories and Aboriginal leaders to reduce barriers to labour mobility, enhance skills development, and encourage the full participation of immigrants and Aboriginals in the economy.

Despite the economic slowdown, skills shortages remain a significant challenge across Canada. The Government is implementing the comprehensive labour market training architecture announced in Budget 2007, including the $3 billion over six years provided to provinces and territories for new Labour Market Agreements to address the gap in programming for those who currently do not qualify for training under the Employment Insurance Program. This will ensure that Canadians are able to access the training they need, when they need it.

The Government is moving forward with the improved processing of immigration applications to ensure Canada has the skilled workforce needed to remain productive and competitive. At the same time, the Government will continue to explore ways to ensure the immigration program is aligned with labour market needs. Efforts will be made to improve the recognition of credentials that foreign workers bring with them. This could be achieved through the development of a comprehensive and consistent approach across the country, starting with regulated professions where shortages are the most acute. More will also be done to attract top international students to Canada and to increase the uptake of immigrant settlement programs.

Removing restrictions to labour mobility is even more critical during the current period of global economic instability. The Government encourages the premiers and territorial leaders to achieve their goal of amending the Agreement on Internal Trade by January 1, 2009 so as to achieve "full mobility for all Canadians" by April 1, 2009.

Increasing labour market participation, especially of under-represented groups, continues to be a government priority. In particular, the Government will seek opportunities to reach out to a growing Aboriginal population to match the demands created by resource development and the overall tightening of the national labour market over the next decade.

Strengthening Financial Markets

The Government has a high priority agenda in the area of financial sector policy to address the causes of the current international financial crisis and to reform the global financial system to prevent a similar crisis from happening again.

On November 15, the leaders of the G20 countries met in Washington, DC, for the Summit on Financial Markets and the World Economy. The discussion focused on the causes of the global financial crisis and weakening economic growth across all countries, actions required to stabilize financial markets and growth, and reforms to prevent future crises. The causes of the crisis include both microeconomic factors, such as weak national regulatory regimes, and macroeconomic influences, such as inconsistent monetary, fiscal and exchange rate policies that led to significant global current account imbalances. G20 Leaders committed to a further easing in monetary and fiscal policy to promote economic growth, while maintaining a policy framework conducive to fiscal sustainability.

Canada pushed for progress in four key areas: action to address both the micro and macro causes of the crisis, a commitment to strengthen domestic financial regimes, agreement to conduct transparent international assessments of national financial systems, and a commitment to resist protectionism and maintain open markets. All four were supported by G20 Leaders. Canada was able to lead from a position of strength, as our sound macroeconomic policy framework and regulatory system has helped us weather the crisis better than many other countries. Finance Ministers were tasked with implementing a detailed action plan, with a Leaders Summit expected to take place by April 30, 2009. (see the box entitled "Excerpt From the Declaration of the Summit on Financial Markets and the World Economy").

As noted earlier, the Government is taking immediate steps to strengthen its ability to respond to unforeseen events that could threaten the stability of the financial system, by ensuring that it has the same range of powers as other G7 countries.

Looking forward, the implementation of the G20 agenda will involve work by an array of federal government entities, which will need to be undertaken in close cooperation with other governments and regulatory agencies in Canada and abroad. Canada will be able to provide leadership in this process from a position of strength, given its sound financial system, solid experience and prudent regulatory practices.

However, the current turmoil has highlighted a clear deficiency in the Canadian framework: securities regulation. The securities regulation framework urgently needs reform for several reasons.

First, our current system of 13 securities regulators is simply too cumbersome and unwieldy when quick and decisive action is needed. In a recently completed review of Canada's financial system, the IMF concluded that "a single regulator would allow policy development to be streamlined, allowing Canada to respond more quickly to local and global developments." Securities regulators must be able to respond rapidly to risks to the financial system as they arise, such as abusive short selling of the stocks of financial institutions, or the lack of transparency in the asset-backed commercial paper market. But this is not possible in Canada at the moment.

Second, the lack of a strong national financial stability mandate for securities regulation is another major gap in the regulation of Canada's financial system. Experience shows that systemic risks can arise from all parts of the financial sector, not just federally regulated financial institutions.

Third, in times of crisis, Canada needs to be able to move in a coordinated and expedited fashion with the international community. This is impossible with 13 securities regulators in Canada. Canada is at a disadvantage internationally by not having a single securities regulator with a mandate to speak for Canada on securities matters.

The Government will soon receive the report of the Expert Panel on Securities Regulation on the best way forward to improve the content, structure and enforcement of securities regulation in Canada. The Government is determined to move forward with those recommendations expeditiously and invites all participants to join this important initiative.

Improving Competitiveness

The Canadian economy currently faces extraordinary challenges as a result of global financial volatility. Restructuring was already underway in a number of sectors in response to rising international competition, volatile energy prices and currency fluctuations. This has made for some difficult adjustments by workers and businesses across the country, particularly in the manufacturing sector. The Government will consider measures to ensure that firms are able to compete, keeping in mind the need to ensure that any measure improves the long-term viability of firms, is provided on commercial or near-commercial terms, and serves the interests of Canadian taxpayers.

The Government will consult with Canadians on policies to address cyclical economic challenges while improving the long-term competitiveness of the economy. In a period of global restructuring, Canada has an opportunity to capture an increasing share of investment by proving itself to be a world-leading location for doing business. In order to be successful in increasing investment that will create better prospects for economic growth and help the country emerge from the global economic downturn as an even stronger force, Canada must continue to improve the competitiveness of the tax system, improve support for business investment and expansion at home and in the international marketplace, and lever our investments in public research into business opportunities.

Competitive Taxation

Competitive taxes help Canada foster new investment and attract the highly skilled workers that are essential for building a stronger economy and raising standards of living. They are more important now than ever, during these times of economic uncertainty.

The tax reductions implemented by the Government since 2006 mean that in 2009–10, Canadians and Canadian businesses will pay $31 billion less in taxes—the equivalent of nearly 2 per cent of our gross domestic product. As resources permit, the Government will implement further broad-based tax relief—with an emphasis on personal income taxes.

The Government is encouraging provinces to help enhance Canada's position as a country of choice for new investment, by replacing harmful provincial retail sales taxes with value-added taxes harmonized with the federal goods and services tax (GST) and reducing provincial corporate income tax rates.

Again, working with provinces and territories, the Government will consider options to further lower the "welfare wall" by building on progress made with the Working Income Tax Benefit.

The Government will consider the recommendations of the Advisory Panel on Canada's System of International Taxation, expected in December, to improve the fairness and competitiveness of Canada's international tax rules, and will further reduce the tax compliance burden, which will free up resources for businesses to spend on more productive activities.

Supporting Business Investments and Opportunities in New Markets

The Government recognizes the profound challenges confronting the manufacturing sector and the significant restructuring that is occurring, and is acting to improve the conditions for investments and jobs. Manufacturers are taking steps to secure their long-term success, and the Government has provided substantial support to assist them. The Government will continue to take actions that will help viable firms position themselves for long-term competitiveness.

The Government is taking action to support continued investment by businesses in all sectors by:

• Providing $700 million in additional capital to increase the credit capacity of Export Development Canada and the Business Development Bank of Canada to better serve the needs of Canadian businesses during a period of constrained credit availability.
• Implementing a new private-sector-managed, later-stage venture capital fund, with $75 million from Budget 2008 for the Business Development Bank of Canada to increase investments in leading-edge, growing companies.
• Eliminating tariffs on imported machinery and equipment as soon as possible to encourage capital investment and increased efficiency.

Actions have also been announced that will assist the automotive industry, where innovation is critical for long-term competitiveness, through an increase in support available under the Automotive Innovation Fund. Future actions will be coordinated with other governments, companies and workers to secure a viable industry in Canada.

Future actions have also been announced that will assist the aerospace sector, traditional industries, and regional economies.

In the coming months, the Government will take action to improve the conditions for investment in Canada and help create opportunities in the international marketplace by:

• Moving ahead quickly to respond to the recommendations of the Competition Policy Review Panel to modernize and improve the effectiveness of Canada's competition laws and policies for business.
• Aggressively opening markets abroad for Canadian goods, services and investment through the conclusion of ongoing trade negotiations and the launch of new initiatives such as an economic partnership with the European Union.

In these tougher economic times, businesses are demanding that governments work in more efficient ways. Canadians need regulatory environments that encourage entrepreneurial risk taking, while ensuring stability, a clean environment and safe products. The Government will continue to seek input from businesses on ways that it can reduce unnecessary costs and delays.

• Federal regulatory departments and agencies are reducing the paper burden by 20 per cent.
• A Major Projects Management Office is providing a single window on the federal regulatory process for large resource projects.

Productivity gains derived from the development and application of innovative ideas and practices will be critical to ensuring that the economy continues to grow. Companies that invest now in research and leading-edge processes will be better positioned to take advantage of the recovery. Actions in the last three budgets will have raised support for science and technology by $2 billion by 2009–10. The Government will continue investing in world-class science and technology projects and centres, and improving the linkages between public research and private sector needs to create business opportunities.

The Government is taking decisive action now to address challenges faced by Canadian businesses as they restructure in response to changes in the domestic and global economy. Priorities for future action are accelerating infrastructure investments, improving opportunities for workers, strengthening financial markets, and improving competitiveness, including competitive taxation. The Government will consult with Canadians on these priorities as it develops measures for Budget 2009.

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