January 28, 2008

Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, at the conference entitled "The Hollowing Out and Transformation of Corporate Canada: Myth or Reality?" organized by The Conference Board of Canada

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Toronto, Ontario

I am delighted to be here to discuss an issue of considerable debate in this country: the so-called "hollowing out" of corporate Canada.

Let me just say this, before I talk about the issue at hand, in terms of perspective and context, which are vitally important to an issue as important as this.

I was finance minister in Ontario during the time of the last economic slowdown in 2001-02, when real GDP grew 1.5 per cent. We balanced the budget, which we'll continue to do federally. So I have been the finance minister of the two largest governments in Canada.

I understand a bit what ministers of finance go through both at the provincial and the federal level. One of the responsibilities is-particularly at budget time, where we are now preparing the budget federally, our third budget in Stephen Harper's government-to say no, not only to the Opposition but to our colleagues, which is a difficult task that all of us do.

I see these things provincially as well as from a federal perspective. Also, I just spent the last eight or nine days in the Middle East in the Gulf States, in Davos for the World Economic Forum, having discussions about regional economies in the Gulf, in Jordan, about the global economy, about the substantial amount of capital that's moving around the world.

Those meetings and discussions are important. You know, people talk to me about London and the financial centre that it has become. The "Wimbledonization," as they put it to me, of London. That is, like Wimbledon, they host the greatest tournament in the world but they don't pretend that they own it and that all of their people are the best players at it.

In Mexico, 80 per cent of the banks are owned by foreigners, including a very substantial presence by Canadian banks. Global Canadian investors are in Chile, certainly in Asia, in transit and mining. There is major participation by some of the Canadian financial institutions around the world. I participated in a meeting on Saturday night in Davos with my colleagues from two other Western industrialized countries, dealing with a particular company that has an issue with another government in Asia.

It shows the nature of the global type of concerns that we have and the participation of many successful Canadian companies abroad. I appreciate the efforts of The Conference Board in raising this subject, arranging this conference and bringing all of you together today. It's important to increase our knowledge of this particular issue.

I was going to talk a lot about whether hollowing out is a myth or a reality. I know from what I've heard from this morning's discussion that you've looked at some of the reports and heard some of the comments about that. It's an issue that is deserving of public debate. But we have to be conscious of what's happening in other parts of the world, certainly in the United Arab Emirates. Last week I had meetings with the people in charge of those places and in charge of their sovereign wealth funds, which are growing at a torrential pace. They are combing the world for new and innovative opportunities to invest.

During my visit in the UAE, I certainly had discussions about that and about our country, and our position with respect to important issues like sovereign wealth funds, about which I'll speak in a moment.

But let there be no doubt that increasing foreign direct investment has certainly been a priority of our government and that it is imperative, if we are going to expand and strengthen our economy.

Now over the past couple of years-it has been almost two years now since Prime Minister Harper became Prime Minister and created his government-we've gone to a lot of effort to create a business environment that encourages innovation and growth, rewards hard work and improves our quality of life.

We're making broad-based long-term tax reductions. We are reducing record amounts of debt. We are controlling our spending. All of these things are law now. If someone had said to me two years ago, when we became the government, that we would do two budgets and two fall economic statements, that we would create a medium- and long-term economic plan for Canada, that with only 125 members of the House of Commons out of 307, I think it is, that all of these things would pass through the House of Commons, become law, receive Royal Assent and get through the Senate, I wouldn't have believed it.

So I am proud of that record of achievement because it's good for the country, that we have a good way to approach things, that we've not only talked about it and talked about good intentions, they've actually become law.

Now turning to the specific issue that is before us today, this hollowing out issue, I think we need to take a good look at the facts. Some of our large Canadian companies have been bought by foreign companies. At the same time, we know and you know about the stories of Canadian companies that have been active in acquisition abroad.

In our increasingly global and competitive economy, companies are constantly evolving and adjusting, just as we need to adjust as a government, merging and acquiring, buying and selling. In this context I can understand the concerns that so many Canadians have on this subject. It's important to realize, though, that these concerns are not uniquely Canadian.

I'm reminded of an American billboard protesting a planned sale of a local bank to a large foreign bank. The large foreign bank happened to be one of Canada's major banks. "Sweet Home Alabama" was written in large letters across the top of the billboard. Alabama had been scratched out and replaced with Canada. So it read: "Sweet Home Canada." I'm not sure if this acquisition ignited a wider debate about hollowing out in the United States.

But it does demonstrate that the concern around hollowing out is not unique to Canada. And I can tell you, I hear this issue among my colleagues when we meet at international fora, as we just did at Davos for the past several days.

Canada isn't always viewed as the "hollowee," but sometimes as the "hollower." There is a growing body of research: The Conference Board of Canada report of this morning that I've had an opportunity to review only briefly; and the work done by Roger Martin's group, the Institute for Competitiveness and Prosperity, which as you know would make the argument statistically that we actually don't have any significant consequences from this alleged hollowing out in Canada.

Roger Martin's group said: "We now have 72 or more than twice as many global leaders as in 1985. In fact, we are growing globally competitive Canadian firms at a rate that wildly exceeds the rate of foreign acquisition. Net, we simply are not being hollowed out. We are thickening up." And I know there are other points of view and statistical evidence that might not entirely agree with the position that Roger Martin's group has.

But I personally believe that we need to move beyond the debate on hollowing out and look at the type of businesses that we have in Canada and how we can help them grow and expand. It's time to look a little farther and reach a little higher. Being the best in a town or region is no longer good enough. We must strive to be the best in Canada and beyond Canada.

We need to recognize and seize opportunities. There are lots of stories. One of those is in Andrea's book, that I actually like. And that is of the two shoe salesmen sent by their company to establish a market in Africa-one in the East, the other in the West. The first salesman comes back and says there's no way we can open a market in Africa because no one wears shoes. The second salesman comes back and says, Africa is a perfect market for us because no one wears shoes. The potential is limitless.

So as Canadians we need to augment, improve our outlook. We have to try to eliminate barriers, as a government, that stand in the way of businesses' ability to succeed. And to that end, our government has established a Competition Policy Review Panel headed by Red Wilson, which is doing important work and will report back to Jim Prentice, the Minister of Industry, by June 30, 2008.

So what have we done in the meantime? I just returned, as I said, from Davos. The consensus certainly is that 2008 is shaping up to be a tough year. There has been significant turbulence, as you know, on the capital markets, not only here in Canada but abroad. Growth projections globally are being adjusted downward.

But I can tell you this. As Canada's finance minister, I take great pride in going to meetings like that and going to G7, G8 meetings, which I will in 10 or 12 days in Tokyo, with the central bankers and with economists from around the world. And when they look at Canada, they are amazed at how right we are in terms of our economic fundamentals, and how favourably we compare with our large neighbour to the south.

We are experiencing the second longest period of economic expansion in Canadian history. The only longer period was immediately after the Second World War. Business investment in this country is expanding for the 12th consecutive year. Our unemployment rate is at a generational low-it's 33 years since it's been that low.

Canada, and this is important, is one of the few countries in the world with sound public pension plans. In fact, we're on the best fiscal footing of any of the G7 countries. We're the only member of the G7 with both ongoing budget surpluses and a falling debt burden.

We're also a leader on the commodities front. This is in terms of foreign investment in and out, of course. As the Prime Minister is fond of saying, we are an emerging energy superpower. Canada's natural resource wealth, the total value of energy, mineral and timber reserves, has more than doubled in less than 10 years to more than $1 trillion, or more than $30,000 per capita.

We have the second largest petroleum reserves on the planet. The only larger ones that are known are in Saudi Arabia. We are the largest exporter of oil to the United States. We rank third in the production of global natural gas. We're the world's second largest producer of hydroelectric power, the world's largest producer of potash, the world's largest producer of uranium, the second largest producer of nickel, the third largest producer of aluminum, the third largest producer of diamonds, and the largest exporter of forest products in the world.

So that gives us some solid economic fundamentals. We're facing some challenges, of course: The Canadian dollar vis-à-vis the depreciation of the US dollar, the US housing situation, the credit market turbulence, increasing economic competition with the BRIC countries and others, an aging population, a shortage of skilled workers, aging infrastructure and increased gridlock-which we all know well here in the Greater Toronto Area.

In response to that, we did create the long-term economic plan for Canada called Advantage Canada, dealing with an Infrastructure Advantage, a Knowledge Advantage, an Entrepreneurial Advantage, a Fiscal Advantage and a Tax Advantage for our country.

What are we doing as a government as we move forward? And this relates to this issue of letting business breathe in Canada so that we can attract foreign direct investment and so that Canadian business can move forward into a global economy.

On the tax side, we've reduced taxes of all kinds. We've done all of this, by the way, in less than two years. Overall, the tax reductions that we've brought in approach $200 billion over this and the next five years. Total federal revenues as a share of the economy will be 15.1 per cent by 2011-12. That's the lowest in almost 50 years.

Taxes will be lower as a share of the economy since the last year of the government of Prime Minister John George Diefenbaker, or if you want to be bipartisan, the first year of Prime Minister Lester Pearson-1963.

The aid to manufacturers, of course, is part of tax relief that we brought in in March last year-a $1.3-billion two-year total write-off on new machinery and equipment. Why did we do that? Because it's obvious that we have to have greater productivity if we're going to be competitive in the manufacturing sector in Canada.

We anticipated the economic slowdown. That's why we brought in massive business tax reductions on October 30, 2007, a few months ago. Some of them have already come into place as of January 1, 2008.

When we became the government, the corporate tax rate, including the surtax, was in excess of 22 per cent. By 2012 it will be 15 per cent, the lowest rate of business taxation in the G7. The cumulative tax effect of this-from the time we came into office almost two years ago through the October 30th announcement, working it out over this and the next five years-is a $50.5-billion cumulative tax reduction for businesses in Canada.

Now we need the provinces to step up to the plate on this. Alberta leads the way, as it often does on tax matters. Its corporate tax rate is 15 per cent federally, 10 per cent there-a 25 per cent corporate tax rate, an opportunity to brand Canada as a low business tax jurisdiction.

We need Ontario especially to get on board. The taxes on new business investment in Canada are the highest right here in Ontario. And I served ten and a half years over there in that building. And if we're truly worried about business in Ontario-and I am-and if we're truly worried about sustainable manufacturing here in Ontario, then the provincial government, Premier McGuinty, needs to reduce that tax burden on new business investment and pay less attention to short-term band aid ad hoc initiatives.

On debt reduction-and this is part of the Fiscal Advantage in Advantage Canada-we've reduced debt dramatically: $37 billion, including $10 billion in the current fiscal year. That comes with a Tax Back Guarantee. That is, the interest that we save every year because we're reducing the public debt is passed back to Canadians through reduced personal income taxes.

Just looking at the numbers, the federal public debt in 1996-97-10 years ago-was $562.9 billion. Today it is $457.3 billion, which is a reduction of over $105 billion. Just in the last two years, we've lowered the federal debt burden on every Canadian man, woman and child-per capita-in Canada by $1,570.

In 2006-07 the government spent 14.4 cents of every revenue dollar on interest on the public debt. If you go back to 1990-91, 37.6 cents of every tax dollar was being spent on servicing the public debt. So we've come a long way in Canada, and that's why abroad we're viewed as having such sound economic fundamentals.

On expenditure management, our commitment is to control the rate of growth of spending to nominal GDP, the rate of growth of the economy. We're doing it through an expenditure management system that I've spent a huge amount of time on in the last six months.

We are looking at every government department, every government agency, every Crown agency, at their "A base" as they call it in government, asking them to say why is that program continuing, to justify the program to us. This is not a cost-cutting exercise. This is a reallocation exercise. If the bottom 5 per cent of your spending is ineffective, what other ideas do you have? And if you don't have any good ideas to make that effective spending on behalf of the people of Canada, then we'll use it for the consolidated general revenue fund to reduce taxes, to pay down debt or for other important initiatives in the Government of Canada for Canadians.

On infrastructure, as you know, we have a huge commitment, the largest since the Second World War, on behalf of Canadians: $33 billion-not only $33 billion over this and the next seven years but also a public-private partnership office, which is being done through the Department of Finance in Ottawa and which is about to be opened. This is an opportunity to leverage that $33 billion to more than $100 billion over that period of time.

We're investing in science and technology, of course. We're investing in the centres of excellence in Canada, the Perimeter Institute in Waterloo and the Canada School of Sustainable Energy in Alberta. And as you know, the Prime Minister just announced $1 billion for some single-industry communities in Canada, like Dalhousie, New Brunswick, and others that suffer disproportionately when a specific industry shuts down-in the case of Dalhousie, the local mill.

As I say, these are longer-term initiatives by the Government of Canada. We believe that nothing stimulates the economy better than increasing our access to foreign markets. Canada is a trading nation and we believe in free but fair trade. I made this point repeatedly in the past week in the Gulf States and at Davos, that the wealth that we have as Canadians is because we are a free trading nation.

We welcome trade. Our prosperity is founded to a large extent on our ability to tap into the global marketplace. We've developed a new Global Commerce Strategy, which my colleague David Emerson, the Minister of International Trade, works with. In fact, he was in Davos on Saturday to sign a free trade agreement with the four nations of the European Free Trade Association-Norway, Iceland, Switzerland and Liechtenstein.

That's the first free trade agreement Canada has signed in six years. And negotiations are ongoing with Peru and others. Open investment across borders is vital to a healthy global economy.

The importance of foreign investment was on display recently with capital injections in large international banks. We have to realize that legitimate concerns exist regarding the transparency of foreign investment. And this brings me to the topic of sovereign wealth funds. Last week, I met with the director and managing director of the Abu Dhabi Investment Authority, the largest sovereign wealth fund in the world.

We had a candid discussion about the way forward. There is no doubt that sovereign wealth funds provide numerous economic benefits, not only for the country of origin but for the countries they invest in. And, as we have seen, during the recent credit turbulence, sovereign wealth funds can be a constructive source of investment in financial markets at times when capital is at a premium.

We talked about five principles with respect to investing by sovereign wealth funds: the importance of the investment being commercial in nature and not political; of maintaining high standards of international integrity; of competing fairly with the private sector with respect to interest rates, for example; of promoting international financial stability; and of respecting host country rules.

Now the OECD and IMF are working on some best practices with respect to sovereign wealth funds, and I expect that we will review preliminary reports on those in Tokyo in 10 or 12 days when the G8 finance ministers meet with the central bankers.

There's an excellent article, by the way, by Rob Kimmitt, the Deputy Secretary of the Treasury, on foreign policy, on this issue of sovereign wealth funds.

National security comes up as an issue. Unlike other G7 countries, we don't have a mechanism in place in Canada to review investments for national security implications. That's why our government is carefully considering the creation of a national security test to give Canada the tools we need to safeguard our security and our sovereignty. And I can tell you, in my meetings last week there was no objection to Canada taking that step.

We have also released guidelines for state-owned enterprises wishing to invest in Canada to provide clarity on how the Investment Canada Act will be applied. The guidelines were issued by my colleague Jim Prentice, the Minister of Industry, some time ago.

The guidelines underscore that sound principles of corporate governance and commercial orientation are considered when reviewing investments by foreign state-owned enterprises under the Investment Canada Act based on several factors: the nature and extent of control by a foreign government; the corporate governance, operating and reporting practices of the state-owned enterprise; and whether the acquired Canadian business retains the ability to operate on a commercial basis.

Let me state unequivocally here the same thing I said to my investment audience in Dubai last week and that is, these new guidelines will in no way create new obstacles or signal any change in the government's openness to foreign investment in Canada. Their intention is in fact to provide clarity to investors around the world so that we can continue to attract foreign investment that benefits Canada.

Now let me conclude with a few final thoughts.

Whether the investor is from another country or our own, their expression of faith in our economy brings lasting benefits to Canadians. We will not achieve our goals by slamming the door to investment or by lacking the courage to face up to our challenges, by doubting that our visionaries and entrepreneurs have everything it takes to be future leaders in the global economy.

I'm fond of quoting Canada's first Prime Minister, Sir John A. Macdonald, who was fond of saying, "look a little ahead, my friend." His vision of Confederation was inspiring. It was about seizing new opportunities, about broadening our horizons in the creation of Canada.

Last week in the UAE, I attended a dinner hosted by the Canadian Business Council of Dubai and the Northern Emirates. I can tell you how impressed I was with the young professional Canadians who were there. There are a lot of Canadians around the world, including in these very strong emerging capital markets, who are leading the way. And it's very encouraging.

These Canadians are building bridges. They're pursuing relationships with global companies and business people, including those in Canada. They're not only embracing the spirit of Sir John A. Macdonald's words, they are taking them to heart. So we must encourage that same kind of entrepreneurial spirit right here at home. That's what building a better Canada is all about. And there's nothing hollow about that.

Thank you for inviting me here today.