April 10, 2008
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, at a conference entitled "Business Tax Reform in Canada: The Unfinished Agenda" organized by the C.D. Howe Institute
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It's great to be here in Toronto.
If someone had said to me in 2006 that since January of that year, when we got the most seats in the general election, that we would go ahead and have five budget bills, two major economic statements, and of course the economic agenda of the country, Advantage Canada, about which I will speak in a moment, I would not have believed them. One of our government's failures, of course, is that we have failed to engender our own defeat.
So we remain in Ottawa and carrying on with our economic plan. It is an important time now: tomorrow are the G7 finance ministers meetings in Washington, followed by the IMF/World Bank meetings over the weekend. Tomorrow evening the G7 finance ministers are meeting with some of our bank CEOs from around the world, including Canada. We're going to have some significant discussions in the next few days about the credit situation internationally and balance sheets, and what steps should be taken in response to the report of the Financial Stability Forum, which we received this week as finance ministers.
I thank the C.D. Howe Institute and all of you involved in it. We rely on this institute, among others, to give us advice, for commentary, for the research that is done by the Institute. We need the C.D. Howe Institute in Canada. I thank Bill and others for participating frequently in our advisory sessions with Finance. We get together, we try to regularly meet with people, smart people, across Canada from different walks of life, including of course the C.D .Howe Institute, to give us advice about where we ought to be going.
And this isn't wheel spinning. I can tell you that the substantial historic tax reductions that we announced on October 30, 2007, would not have happened without the advice that we received from Canadians and business, and in the professions and academia, about where we ought to be going in terms of branding Canada as a destination of choice for investment and encouraging reinvestments in Canada.
So let me say a few words about where we are. These are happy times. I can say anecdotally, when I go through the airports and on the street in Ottawa the other day and even in the House of Commons, some of my colleagues are very happy with something called pension splitting. They're doing their tax returns now. I heard in Moncton the other day that there was a shriek of joy in the H&R Block office when someone discovered they were up $6,000 because of pension splitting.
Families are happy. A young immigration officer said to me at the airport the other day, you know this $100 for our kids means something to us when we get that every month. My mother, who is 92 now, says it's nothing but the old family allowance system. And I said, was that good? She said it was very good. It paid for the shoes every fall for eight kids. So everything old is new again in terms of the child benefit, which is, as I say, popular.
Rebates are higher than people anticipate they would be because on October 30, as you also know, we made retroactive some of the tax reductions to January 1, 2007, and people were deducted at source at a higher rate.
So what's the plan? We're reducing taxes. We intend to continue reducing taxes. We think Canadians pay too much tax. We have reduced excise taxes, business taxes of course, consumption taxes, the GST by 2 full percentage points, and we've taken some steps on the personal income tax side. I would like to do more, certainly, in the future on the personal income tax side when we have the resources that will permit us to do that.
There are a number of steps we have to take to make sure that we are able to manage that as we go forward. We need, and I agree with what was said 10 years ago-I guess it is Jack and the report of your Technical Committee on Business Taxation-that Canada needs an internationally competitive business tax system that is economically efficient and as neutral as possible. That was said back then but it's as true now as it was then. We agree with the objectives of the technical committee, which were to create better prospects for economic growth and job creation in today's global economy, improve fairness so that businesses pay for a fair share of the benefits they receive from public goods and services, and reduce compliance and administrative costs incurred by taxpayers and governments.
And the goal of all of this is that elusive concept of tax fairness. It is central to our approach to fiscal management. We have set out to rebalance the relationship between government and the productive engine of our economic growth and competitiveness, and that is the private sector.
For too long Canadians and Canadian businesses have been overtaxed. In fact, the Mintz committee said the high corporate tax rate "has created incentives for business to shift income and jobs to countries where tax rates are lower." Now we've made progress in this regard, but we are still of the view that Canadian taxes are too high and that we have yet to achieve that balance that I'm referring to.
But we know where we are going. And we have a plan to get there. Our economic plan for Canada is called Advantage Canada. When we became the government more than two years ago, there was not an economic plan in place. We had to go ahead and do the first budget fairly quickly, which we did in May 2006, and then we worked through the summer on developing the economic plan called Advantage Canada, which was published in October 2006. I encourage those of you who wonder from time to time why government is taking certain actions or going in a certain direction to refer to that plan that's on the Finance website, because we use that plan as our prism in which to view policy ideas. And countless ideas come up every budget, and so on. But if they don't fit within the Advantage Canada plan, then we don't do them.
And that plan involves creating five advantages for Canada:
- An Infrastructure Advantage.
- A Knowledge Advantage, particularly with respect to post-secondary education, of which the federal government has a significant role.
- An Entrepreneurial Advantage, reducing red tape. I was just in a session yesterday with some of my colleagues looking at how we're doing getting the federal red tape down 20 per cent by November this year, which is the commitment we made two years ago. I can tell you we're on track, and that's good news, and I hope we can do even better than that 20 per cent by November this year.
- And then the two advantages that I'll speak about today: a Tax Advantage, reducing taxes for all Canadians, establishing the lowest tax rate on new business investment in the G7, and the Fiscal Advantage, eliminating Canada's total government net debt in less than a generation, by 2021.
So on February 26th I presented our third budget. That needs to be read with the Economic Statement of October 30th because we had, as I say, the many significant tax measures in the October 30th statement, because we were concerned about reduced economic growth in 2008.
Budget 2008 is realistic, it's responsible, it continues to pay down substantial public debt, it continues to reduce taxes. We're focusing on controlling government spending in Ottawa, which is a task not without difficulty. The budget makes further investments in infrastructure. We created a federal public-private partnerships office through the Department of Finance. And we provided further support for sectors of the economy that are struggling, including the auto sector, forestry and manufacturing.
We also created, and I'm quite proud of this, a bold new savings plan for Canada. It seems every economist I know recommended it now that we've done it. I know that Jack wrote about it, lots of people wrote about it, I'm not going to attribute it to anybody, but I'm very proud of the fact that we actually have gone ahead with this important change in public policy. We addressed personal income taxes, not as much as we'd like to, but we did address them and reduced them.
And we've addressed business taxes, consumption taxes and excise taxes, but we were double-taxing savings in Canada. So now we have created the Tax-Free Savings Accounts. I have all of the supportive quotes here from the C.D. Howe Institute on TSFAs, if you'd like to read them. My favourite was an absolute beauty in The Globe and Mail.
The purpose of the Tax-Free Savings Account, of course, is to encourage savings and to encourage savings by not taxing them twice. We think that over the course of the next 15 to 20 years that about 90 per cent of savings in Canada will be tax-sheltered either through the RSPs or through the new tax savings account.
This budget takes us further down the road in implementing the advantages that we're seeking to implement as part of Advantage Canada, to shoring up our strong economic fundamentals, which is all the more important as we go through this turbulence now in global markets. We are working from a position of strength in Canada, and this is as a result of sensible planning and decisions that have been taken over time.
Our budget is balanced, our budget is in surplus. Unemployment is still at its lowest rate in a generation-about 33 years. Interest rates are still low. Inflation remains low and stable. Canada is on the best fiscal footing of any of the G7 countries, with the largest budgetary surplus as a share of GDP and the lowest debt burden in the G7. And I'll go through these Canadian numbers again tomorrow in Washington. I see the other ministers just stare at me and say, how could that be in Canada? But they know that we've taken prudent decisions over time.
Canada is not an island, of course. We have challenges from abroad that impact our situation here at home. As I say, we anticipated some of those challenges in October, and that's why we brought in fairly quickly the stimulus that we did, which is entering our economy now.
Yesterday the IMF World Economic Outlook for April 2008 was published. I'm pleased to tell you that what they said about Canada is "a package of tax cuts has provided a timely fiscal stimulus." The Canadian "government's structural policy agenda should help increase competitiveness and productivity growth to underpin longer-term prospects." That was the good news. The bad news is their prediction with respect to real GDP growth this year is lower than mine in the budget. But we'll manage.
And now the other factor we're concerned with, of course, is the slowdown in the US and the appearance now that it will likely be longer and deeper than anticipated, the volatility in global financial markets, the sectors of the economy that are struggling here in Canada, including manufacturing, forestry and autos. And some economists, including the IMF economists, are adjusting their growth predictions downwards.
As a government, what we can do is foster conditions where individuals and businesses can reach their full potential. We can create an environment that welcomes investment and encourages businesses to flourish.
In terms of a Fiscal Advantage for Canada, we are reducing debt dramatically. As you know, most of this debt was accumulated during the 1970s, 1980s and early 1990s. Our debt reduction program will total $50 billion by fiscal year 2012-13, with an ongoing commitment to reduce the public debt by at least $3 billion on average each year after that.
So far we've reduced the national debt by about $1,570 for every man, woman and child in Canada. At this rate, the federal debt will fall below 25 per cent of our GDP by 2011-12, which is three years ahead of the original target date, marking the lowest debt burden since the early 1980s.
As we pay down the national debt, interest savings, of course, are being returned to Canadians through our Tax Back Guarantee, where we will reduce the personal tax burden by the amount of the interest savings every time we pay down public debt in Canada. As of 2009-10 the personal income tax reductions provided under that Tax Back Guarantee will amount to about $2 billion.
And I do say to Canadians: why do we reduce public debt, what's the purpose of reducing public debt? We went through all those years of deficit spending, of conditions, and public debt was thought to be a good thing.
Reducing debt, of course, keeps our interest rates down or helps to do that. It puts us in a sound position when we get into troubled waters, as we are now, and perhaps most important is intergenerational equity.
We have a demographic challenge in Canada, as you probably know. Our government is in favour of procreation. For those of you who are interested in growing the Canadian economy, I encourage you to go forth and procreate and we'll send you $100 a month per child.
Regarding intergenerational equity, why should the next generation pay for the money that we borrowed and spent in this generation? And this is a move afoot not only here but in most of the western economies to deal with this as we are dealing with it here.
In spending, this is quite a challenge. We went to the private sector last year and asked some CEOs in Canada to come to Ottawa and meet with Vic Toews, who is the President of the Treasury Board, and me and our deputies to talk to them about how they control spending in their organizations. The federal government is the biggest organization in Canada-it has more than 400,000 employees. And it does not have a sterling record of controlling spending over time.
We took their advice after we listened to them and we've created, with Treasury Board, an expenditure management system. And we got started on it last year-we've looked at about 15 per cent of government spending so far. The idea is that we say to every government agency, department initiative in government, we pick the bottom 5 per cent of your spending, the least important 5 per cent of your spending, and we look at it in terms of value for money. Is the program still fulfilling the expectations for which it was created?
Treasury Board, and I sit on Treasury Board, goes through each one of these situations and we either reallocate the 5 per cent within the department or the initiative or the program or we use it for something else in government like reducing taxes, reducing debt or some other priority of the government. It's going to take us four years to get through all of this, but we are certainly dedicated to getting that job done over the course of the next four years.
We're reducing debt, we're controlling spending and we're also lowering taxes significantly. The technical committee said that "the business tax structure that best supports economic growth, job creation and fairness is one that includes taxes with broad bases and rates as low as possible." We couldn't agree more. In fact, we have implemented or are in the process of implementing many of the technical committee's recommendations.
We made a fundamental decision last autumn that we would move forward with dramatic business tax reductions in Canada. We put the business tax reductions on a five-year track out to 2012. The federal business corporate tax rate, statutory rate, will be 15 per cent by 2012-that's 5 percentage points below the 20 per cent recommended by the technical committee a decade ago. Consistent with the aim of the technical committee's report of reducing profit-insensitive taxes, we have abolished the federal capital tax. We also provided an incentive in Budget 2007 to the provinces with capital taxes to reduce, eliminate their capital taxes. That has happened now yesterday in Manitoba in their budget-they went in that direction. It's happened in Quebec. And it's even happening here in our home province of Ontario, and I give the premier full credit for that. But I'm going to come back to that subject.
They are going in the right direction on eliminating capital taxes. It's amazing what happens when we work with the provinces and we incent the provinces, which has a lot to do with budgeting.
We made structural improvements such as aligning capital cost allowance rates with useful life of assets and improving the efficiency of the system. The consequences of all of that will allow Canada to have the lowest overall tax rate on new business investment, the so-called METR, among G7 countries by 2010, the lowest statutory tax rate in the G7 by 2012, and a significant METR advantage over the US of 9.1 percentage points by 2012.
To create a true business tax advantage for Canada, to really brand Canada as a 25 per cent business tax jurisdiction, we do need the cooperation of the provinces to get their business tax rates down to 10 per cent by 2012. I'm very happy with the indications yesterday in Manitoba and previously in Manitoba, which has an NDP government. The Liberal government in the province of British Columbia is going there, and the Conservative government in Alberta is already there, at 10 per cent. Premier Graham in New Brunswick, a Liberal government, has said they're going there. For those who think this is partisan, it's not. This is just branding, where we want to be by 2012 with a 25 per cent business tax rate.
Now recently, as you know, I have been gently prodding Premier McGuinty to reduce corporate tax rates in Ontario. Our long-term goal is to get to that 25 per cent rate by 2012. Ontario's Institute for Competitiveness and Prosperity, on April 2nd in their most recent report, which is a panel appointed by the Government of Ontario, said: "The federal government is taking dramatic action to give Canada an environment more conducive to business investment. Its fall 2007 economic statement puts in place significant reductions in corporate income tax rates. Ontario-and other provinces-need to follow suit."
We will continue to raise this subject, certainly looking for more stimulus in the Ontario economy in particular. We've done our stimulus at the federal level but we really needed the province to do its part, and of course we're also calling on the remaining provinces that have not harmonized their PST with the GST to work with us to accomplish that goal of harmonization. That would be a great tax burden relief for businesses in Ontario that's certainly needed. We're doing the capital tax side, and Ontario has moved on that front.
The other thing we did last year that got less attention is we dealt with this issue that has been around for years in Ottawa, that is, negotiating the fifth update to the Canada-US Tax Treaty. Secretary of the Treasury Henry Paulson and I signed that at Meech Lake last September. The new protocol will extend treaty benefits to limited liability companies to increase venture capital availability in Canada and eliminate the withholding tax on both arm's length and non-arm's length cross-border interest payments. It's the law in Canada now, and we hope that and expect that the US will ratify this, the fifth protocol to the tax treaty, by the end of this year.
Even before the protocol enters into effect, we in Canada have moved to extend one of its key benefits-the exemption from withholding tax for arm's length interest payments to residents of all countries, not just the United States. This means that Canadians can borrow from arm's length Irish lenders, for example, and pay interest that is free from Canadian tax.
To further improve the competitiveness and fairness of Canada's international rules, I have appointed an advisory panel on Canada's system of international taxation-the panel chaired by Peter Godsoe. Thank you for undertaking this. This is another one of these projects we call on great Canadians to do-I don't even think you're getting one dollar for this. I know you're doing it voluntarily, and it's great to have this group of experienced, knowledgeable, expert Canadians undertake this advisory panel, looking at the taxation of direct investment in Canada from other countries and the taxation of direct investment by Canadian companies abroad-so inbound and outbound. It is scheduled to report by December 1st of this year. So there's a lot of work to be done.
The sum of what we've done so far in terms of tax relief is about $200 billion over this year and the next five years. This will take federal taxes to a place where they haven't been since John Diefenbaker was the Prime Minister of Canada nearly 50 years ago. Close to 75 per cent of the tax relief is for individual Canadians and their families, including personal taxes, including the Working Income Tax Benefit. It's designed to help people who are discouraged by the current system of clawbacks from going into the workforce. This program is designed to alleviate that. We also created another program that I think is very important: the Registered Disability Savings Plan, which is the law in Canada on January 1, 2008, permitting families with children with severe disabilities to save money for them, $200,000 lifetime.
We've done the pension income splitting, as you know. We eliminated the capital gains taxation on gifts of listed securities to private foundations and we created the Tax-Free Savings Account in the budget this year.
I won't go through the details of the Tax-Free Savings Account because I'm sure that you're familiar with them. I would point out that there are no federal clawbacks to the Tax-Free Savings Account, because that's important to making an effective tool for lower- and modest-income Canadians.
Reducing our overall tax burden at the federal level is providing a stimulus to the Canadian economy now. That stimulus is about $21 billion, which is about 1.4 per cent of Canada's GDP. And it's a structural change here in Canada. In the US they're going to be sending out cheques, I think the first ones will go out in May, according to the Secretary-their stimulus is not a structural change-an amount closer to 1 per cent of their GDP.
So we were ahead of the game on that, and I'm certainly happy that we're seeing that stimulus in the economy now. I was saying just at lunch, our auto sales, for example, are quite strong in January, February and March in Canada, not only because of reduced prices, reduced GST, but also more money due to tax reductions that were retroactive.
Now the Report of the Technical Committee on Business Taxation was instrumental in helping us in the development of our tax policy. These words were written by Jack Mintz's committee 10 years ago but I think they're just as applicable today: "Lower taxes on business investment can encourage growth and employment in Canada-just as lower taxes on individuals may encourage Canadians to work harder, to save and invest more, or even to remain in Canada." These are certainly words to live by and they're words that we plan by as a government.
We know that in government we don't create jobs, we don't enhance productivity. What we can do is create conditions that encourage job creation and encourage productivity growth.
Governments are supposed to lift the excessive tax burden, and liberate our entrepreneurs, our innovators and our risk takers in Canada. We turn to them to make the investments, to create the products and hire Canadians. Our approach to fiscal management is pragmatic. It is based upon fairness and balance. We've made progress over the past couple of years with respect to lowering taxes, reducing debt and controlling spending, but we certainly have more to do.
The rebalancing between government and the private sector is not yet complete. Taxes are still too high. The scale is tipped in favour of big government. But you have my commitment that I will reduce taxes further as resources permit. I will also continue to encourage my provincial colleagues to do the same thing.
There's nothing this country can't do if we put our minds and energy to it. There's nothing Canadians can't do when we mobilize and focus our creativity and our talent. There are three good reasons to be optimistic about our great country: our economic fundamentals are strong, our government is focused, our country is united. We have a brilliant future together in Canada.
Thank you for inviting me to be here today.