February 27, 2008

Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to the Empire Club of Canada and the Canadian Club of Toronto

Toronto, Ontario

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Good morning.

I want to talk about our budget in Canada and where we are going.

We made a very important step, a permanent step, in Canada yesterday when we announced that the sharing of the federal gas tax will be permanent. This is a major step forward. The mayor of Montréal, Mr. Tremblay, in the pre-budget consultations talked to me specifically about how important it was to the municipalities to have permanence so they could plan ahead. It's just like business. It's the ability to plan ahead with certainty in terms of funding for municipal infrastructure in Canada. And we provided that certainty yesterday to our municipalities large and small across Canada.

It's a pleasure to be here to reflect on our government's third budget.

It's a balanced budget that prepares Canada and Canadians for the economic challenges ahead. In fact, it's our third balanced budget in a row.

If somebody had asked me two years ago, would you do three budgets and two economic statements, I would have bet against that. I would have thought it was unlikely. They asked me this morning, "Are you surprised that the Official Opposition party is going to support the budget?" Yes, I am, I suppose, because they brought me a shopping list and they said we want you to spend billions of dollars on A, B, C, D, E and F. And we're not doing it. But they're supporting the budget anyway. I thank them for their support. It's important that they think this through and that they support the important steps that we're taking in terms of our economic plan for Canada. And it is a plan.

We took office in 2006, and there was not an economic plan for Canada. And we developed an economic plan for Canada in 2006. It's called Advantage Canada. For those of you who wonder where we're going, it's on the website. It sets out exactly what we intend to accomplish in office as the Government of Canada: an Entrepreneurial Advantage, a Fiscal Advantage, a Tax Advantage, an Infrastructure Advantage and a Knowledge Advantage for Canada.

And the steps we took yesterday were just additional steps in implementing that plan for our country. It will result in our country having a higher quality of life and a higher standard of living as we go forward.

So then, what did we do yesterday? The most important thing we did yesterday was the continuity, the cumulative effect. We saw the slowdown coming in the United States. This is important. There is also global credit insecurity. We have our own challenges in Canada with asset-backed commercial paper. As you know, Purdy Crawford is leading the table in Montréal that's been working on that issue with some degree of success, which is important. But we also see the slowdown in the U.S. housing sector in particular, which is in recession. We saw it early on. We saw it last year. That's why we acted last year in order to create stimulus for the Canadian economy.

What is that stimulus? The stimulus is 1.4 per cent of our GDP. It's huge. It's about $21 billion. When does it take effect? It takes effect now. It started January 1st. On October 30th, in the Economic Statement, we made retroactive many of our tax reductions, and we made historic business tax reductions for Canada on October 30th, which began on January 1, 2008. We're going to reduce the federal business taxes in Canada to 15 per cent by 2012. We encourage the provinces to get to 10 per cent by 2012. I'm thrilled that Carole Taylor, the Minister of Finance in the province of British Columbia, and Premier Campbell have moved in that direction last week. The province of Alberta is already there. I encourage, I plead the Government of Ontario to move in that direction.

The Government of Ontario today has the highest taxes on new business investment in the country. This is at the same time that the current premier of Ontario says that he's worried about business. Well, if you're worried about business, business doesn't need band-aids. Business needs long-term structural change like they're doing in British Columbia, like they're doing in Alberta. My goodness, the taxes on new business investment in Quebec are 50 per cent lower today than they are in the province of Ontario. So this has to be fixed. And I'm going to continue to plead with the province in their budget, when they do their budget this spring, to provide some relief to businesses in the province of Ontario, if they're sincere in their concern about this province, my home province, the province in which I was treasurer for a time, thanks to Premier Harris.

And it was a time of some limited economic growth, about 1.5 per cent, as I recall, real growth in GDP in 2001-02 in the province of Ontario. So when I heard yesterday some of the critics saying you're running the surplus close to the line, I've seen this movie before. We've done this before. We have the ability in government-some might not believe this-but we do have the ability in government to control spending. We do have the ability to reduce taxes. We've done both in the Government of Canada under the leadership of Prime Minister Harper over the course of the past two years. And this is important in terms of preparation.

As I say, we knew that there would be an economic slowdown in the United States eventually. It is now happening. And we took the important steps in terms of reducing taxes, paying down debt, making sure that we in Canada were prepared for this economic slowdown.

In fact, when I was in Tokyo two weeks ago at the G7 finance ministers meeting and when I was in Davos at the World Economic Summit, and when I meet with my colleagues internationally in the emerging economies, I'm proud as a Canadian to be able to say that we have the strongest economic fundamentals in the G7. We're the only country in the G7 that is running a surplus, that is reducing taxes at the same time and that is paying down public debt. When I describe this to my colleagues, the other finance ministers in the G7, I can tell you they look at Canada with tremendous respect because we have our economic fundamentals in order. All of that is important as we go through a time of some economic slowness.

So I can assure you that we will stay in a balanced budget position in Canada. We'll continue to run a surplus, albeit a smaller surplus for the time being.

Then there are those that say you should use the surplus for something else. The opposition critics came to me when we were preparing the budget, you know, and I met with them, as one is supposed to do. And each one of them, the NDP, the Liberals and the Bloc, all came with shopping lists. And this is the old-fashioned way of looking at how governments run. How much more money can we spend on A, B, C, D, E-big long lists? How much? billions of dollars, of course, billions and billions of dollars.

And I said to them, you know, we're close to the line the next couple of years. Have you heard about the world economy, the global economy? Have you heard about the housing recession in the United States? Do you recognize that that has certain effects upon our economy and our economic growth in Canada?

Nevertheless, here were the presentations of large spending demands. Had I agreed to any of the demands of any of the opposition parties, our budget would be in deficit this year and next year in Canada. So we didn't agree with any of them, but I thanked them despite that for their support of our efforts in the budget that I announced yesterday.

Why are we reducing debt? It's a good, legitimate question. I'm happy to see the students here from Riverdale. Let me talk for a moment about reducing debt and why it's important for our country. It's not important in today's terms or tomorrow morning's terms. It's important in the long run. If we look at Canada and we look at Canada's future, Sir John A. Macdonald used to say, "Look a little ahead, my friends." And if we look a little bit ahead, we see how morally deficient it is for us to live high on the hog now and pass our debts on to the next generation. That's you. Why should you pay-students from Riverdale-why should you pay for benefits that we have today because governments are living above their means?

Well, we're not doing that anymore. The IMF and the OECD and so on write reports that call it intergenerational equity. Well, it is intergenerational equity, but it's another way of saying it's not fair to pass on today's debts to the next generation. So we're moving against that.

We've paid down so far in two years about $37 billion of debt. That's a little bit more than $1,500 for every man, woman and child in Canada. And every time we reduce the public debt, we use what we call the Tax Back Guarantee. And that is, for the interest we save every time we reduce public debt, we reduce taxes on individuals, families in Canada. That amounts to a significant amount, about $2 billion now, given what we've done so far. So that's reducing debt, reducing taxes.

Yesterday we did something that I'm very proud of, and that is the Tax-Free Savings Account. I know it's going to take a while for the importance of this initiative to strike people, but in 1957 the government of the day introduced something called the RRSP, which we all take for granted now. There has not been a significant savings initiative tax-wise in Canada since 1957.

So we did this yesterday. As I say, it's very significant. It's also not inexpensive. It starts off being inexpensive but as savings accumulate tax-free in Tax-Free Savings Accounts in Canada it becomes quite expensive over time-20 years out, something like $3 billion a year.

Why are we doing it? We're doing it to encourage savings in Canada. It's sound, conservative fiscal policy. The United States and the United Kingdom have these types of accounts available, and we did not in Canada. Over time it will be very significant not only for young people accumulating tax-free dividends, accumulating tax-free capital gains, accumulating tax-free interest. I tell you Warren Buffett would love this. It's the miracle of compound interest, tax-free in Canada, as we go forward. This is going to become a very popular measure for all Canadians. We estimate that within the next 10 to 20 years, 90 per cent of savings by Canadians will be tax-free in Canada. This is a tremendous impetus toward saving.

In terms of other tax measures, yesterday we made an important decision and announced a huge capital project with respect to the environment. It happens to be in Saskatchewan with respect to carbon sequestration, $240 million that is going to be paid in 2007-08 in order to move forward with this important project there.

In the auto sector in Ontario-we're mindful of the concerns in the auto sector and in the forestry sector. The U.S. recession in the housing market harms those two sectors of our economy dramatically. The Prime Minister in January announced a $1-billion fund, the Community Development Trust, to assist communities and workers.

We extended yesterday for three more years the targeted initiative with respect to older workers. This is to help older workers between the age of 55 and 64. The initiative helps older workers adjust between the time that they are required to retire and move toward receiving benefits in our Old Age Security system. So we extended that by $90 million over the course of the next three years.

In the auto sector, this is a matter of some concern, we reduced taxes in October on business generally. The effect on the auto sector is about $1  billion over this and the next five years. That's $1 billion.

In addition, yesterday we announced $250 million for the Automotive Innovation Fund. This is not particularly new, quite frankly. The province of Ontario, when it had Conservative governments several years ago and I was the Minister of Economic Development, and Allan Rock was the federal Minister of Industry-we did the same thing essentially back then in order to encourage innovation in the auto sector because you know and I know that in Canadian manufacturing, if we're going to succeed, we're going to succeed because we become more competitive. And we're only going to be more competitive if we're more productive. And we're only going to be more productive if we're more technologically sophisticated. So we have to be more innovative. It's as fundamental as that.

That's why yesterday we created that fund of $250 million over the next five years to assist the manufacturing sector, in addition to $400 million for the new access road at Windsor-Detroit, in addition to $34 million for research into automotive technological issues in Canadian universities. So the total stimulus to the auto sector in Canada is more than $1.5 billion from the Government of Canada. This is important. It's an important industry for us-not only the assemblers but also the parts manufacturers in Canada.

This is a time of restructuring in the forestry sector. This is a sector that affects not only Ontario but British Columbia, Quebec and other parts of New Brunswick, certainly other parts of Canada. We are helping, as I say, through the Community Development Trust. We're helping with older workers. But it is a time of restructuring in that industry. The industry will survive. The industry will become again a strong Canadian industry. But in the meantime, we're offering that kind of support through research and innovation and development, so that it will become a more competitive, a more productive, a more innovative industry in Canada.

Now moving back for a moment and looking at the big picture, we have a strong economy. Our fundamentals are strong. We have the lowest unemployment rate in 33 years in Canada. We also have the highest rate of participation in the Canadian workforce ever. We also have the highest rate of labour mobility ever in Canada, that is, people moving about our country seeking employment and gaining employment. And, yes, we've had some job losses in some sectors of the economy, particularly manufacturing. But what we've seen is that those persons who have had to adjust have adjusted. And they're getting jobs, particularly in Ontario in the expanding financial services sector, that are high-paying jobs, good jobs, and that's why the unemployment rate now is at its lowest level in 33 years.

As I say, our economic fundamentals are solid. Inflation is low. Interest rates are low. Because of our strong economic fundamentals, in terms of monetary policy, the Bank of Canada has room to exercise its monetary jurisdiction with respect to interest rates. As you know, in the last setting of interest rates by the Bank of Canada, Governor Dodge at that time indicated that it was likely that there would be some movement with respect to interest rates, further movement by the Bank of Canada in the future and the new governor, Governor Carney, I'm sure will use his discretion as he moves forward with respect to monetary policy for Canada.

Having said all of that, I do want to say in conclusion that we live in a great country. Our economic fundamentals are strong. We have great universities. I see some of the university presidents here today, some of the community college leaders. We have to move forward with a knowledge economy. The strength of Canada in the future, the economic strength, is not going to be to compete in low-level, low-paying jobs with emerging economies. It's going to be to build on our strengths, to build on our people, on the best and the brightest through our universities, through our colleges.

We moved forward again yesterday with that Knowledge Advantage. We have to recognize that the future of our country is in its people. We have to build the infrastructure we need in this country, which is why we have the largest infrastructure program federally since the Second World War-more than $33 billion. It's why we created an office of public-private partnerships, so that we can lever that to more than $100 billion in Canada. It's why we've reduced taxes dramatically in our country. It's why fiscally we're being conservative and cautious in our predictions and in our prognostications, so that we make sure that our country has balanced budgets. And it's why we're encouraging entrepreneurship in Canada by reducing the tax burden, by reducing the paper burden, by reducing the regulatory burden on small and medium-sized businesses in Canada.

So it's all part of the plan. We are fortunate in this country that our economic fundamentals are solid. We are fortunate that our country is united. My friends, my fellow Canadians, we have a brilliant future together.

Thank you.