April 23, 2008

Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to the Canadian Association of New York

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New York City

It's a great pleasure to be here today. I'm going to talk a bit about our third budget.

And for those of us who have been in Ottawa the last couple of years, I never expected, when the Prime Minister asked me to be Finance Minister two years and two or three months ago, that in a minority government situation we would actually do three budgets and that three budgets would pass, and that we would be able to create an economic plan and we would be able to implement it, not completely, but certainly get quite far down the road of implementing it. And I'm going to talk a bit about that this morning.

In the course of the past couple of years, we did do one thing at the beginning in the first year which will probably bore those of you who are not Canadians: we restored fiscal balance in Canada, which is this odd thing in the federation where the provinces and territories were of the view that their share of the taxation from the federal government was not fair, and they used to call that the fiscal imbalance. Well, we actually had some people look at that, an expert panel, and we fixed that in the first budget.

There was some resistance to the formula that we brought in to restore fiscal balance in Canada, but the real test to me now is that when the Canadian premiers meet, as they do together once or twice a year, they no longer talk about this subject of fiscal imbalance because we were able to arrive at a formula that is fair and is predictable for the provinces. This is very important in the Canadian federation, so that they can plan ahead knowing what their transfers will be based on a formula from the Government of Canada.

We also created our economic plan for the country, which is called Advantage Canada. And we look at that plan as our prism. That's how we decide our public policy issues when someone brings forward an idea that they think is a great fiscal idea, an economic idea for Canada. We look at it through the prism of our economic plan. We created a global market strategy, a science and technology strategy, two Throne Speeches, two fall economic statements, three budgets and five budget bills, the last of which is before the House of Commons right now.

This is all in the context of a minority government. We have 125 or so members in a 307-member House of Commons. And we have in the other three parties no friends, I can assure you. We are the fiscal conservatives and they're not. And so we bring forward our proposals and the one clear failure we've had as a government is we have failed to engender our own defeat.

Eventually we will be, I assume, defeated-probably over something like a budget because of some philosophical difference. But we have a clear direction. I made that clear this morning when I met with The Wall Street Journal editorial board about where we're going in Canada and why we're doing this. We are making broad-based, permanent tax reductions. These are structural tax reductions in Canada. We believe in reducing debt. We've reduced debt already by about $50 billion as we move out over the course of the next several years. We also believe in controlling the size of government, which means controlling the growth of government spending, and we brought in, with the advice of the private sector, a program to do this. It'll take us four years to look at every government initiative, every government program, and examine every one of them and look at the bottom 5 per cent of spending in every one of them and control the size of government growth by doing that.

When I was here in 2006, I spoke mainly about optimism and the solid economic fundamentals that Canada has, of the plans by our government to move forward with a sense of purpose and determination. In that speech, I strongly encouraged the audience to think about investment opportunities in Canada, and while that is still the case, much has changed, of course, in the past two years. Canada, like other nations, has come face to face with global challenges, economic uncertainty including international financial turmoil and the U.S. slowdown that is affecting important sectors of the Canadian economy.

The slowdown here is proving to be perhaps somewhat longer and deeper than some had anticipated. The U.S. authorities have responded. I commend both Secretary Paulson and the Federal Reserve for the comprehensive actions they've taken to restore economic and financial stability.

Canada has also responded through the actions of our government and the Bank of Canada. We are in a better position than most to overcome the external economic risks ahead.

As I emphasized in our discussions at the G7 Finance Ministers Meetings earlier this month in Washington, Canada will work with the G7 nations and others to restore stability to the global economy and to financial markets. On Monday, in Toronto, I'll be meeting with our Canadian bank CEOs to discuss ways to further improve financial sector regulations.

A few words about strong economic fundamentals. The IMF came up with a forecast just before our meetings of a couple of weeks ago in Washington predicting much lower growth for the global economy, leading to a U.S. recession this year. Some quite clearly feel that the IMF was a bit pessimistic. They also reduced their growth estimate for Canada for 2008.

None of this should come as a surprise. Certainly, from a Canadian perspective, Canada is not an island. Challenges from abroad impact us at home and 2008 is a challenging year. The United States is our largest trading partner, of course, so an economic slowdown here has a profound impact on our exports. As I mentioned there is, of course, increased volatility in global financial markets. We have a relatively strong Canadian dollar and that has left several of the sectors of our economy struggling-manufacturing, agriculture in some sectors, tourism and forestry, some challenges in the auto sector certainly. Energy prices are at record highs and are rising, as you know, at a rapid pace. We are seeing increasing economic competition from the emerging economies-China, Brazil, India. We have a demographic challenge with an aging population and a shortage of skilled workers.

That being said, let me assure you that Canada is well positioned to weather this economic storm. Our economy has proven to be resilient. Today we are working from a position of strength. Our budget is balanced and I assure you will remain balanced. Unemployment is near its lowest point in a generation. Interest rates are low. Inflation remains low and stable. Canada is on the best fiscal footing of the major western industrialized countries with the largest budgetary surplus as a share of GDP and the lowest debt burden in the G7.

Canada, as you know also, is a leader on the commodities front. As Prime Minister Harper is fond of saying, Canada is an emerging energy superpower. We have the second largest petroleum reserves known on the planet next to Saudi Arabia. We're the largest exporter of oil to the United States. We rank third in global natural gas production. We're the world's second largest producer of hydroelectric power. We're the world's largest producer of potash, the 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. Canada's natural resource wealth, the total value of energy, mineral and timber reserves, has more than doubled in the last 10 years to more than $1 trillion or more than $30,000 per capita.

Now thanks to these solid economic fundamentals and our government's long-term economic plan, we have been ahead of the curve. We saw the challenges coming on the horizon and made historic broad-based tax reductions in our fall Economic Statement on October 30th. The economic stimulus, as I mentioned earlier, is structural. That is, we are reducing business taxes long term, permanently and sustainable, and I'd say timely.

As a result of our cumulative actions, the stimulus that we have already entering the Canadian economy and which will continue throughout this year is about 1.4 per cent of Canadian GDP.

Now we're at the height of tax season in Canada for many. April 30th is filing time in Canada. For many people, this should be a time of some consternation. Instead, we're getting a fair amount of celebration because of the tax reductions that we've made on the personal side in Canada including income splitting for pensioners.

We've provided tax relief-just to talk about taxes for a moment-we believe in low taxes. We think Canadians pay too much tax. We want to reduce taxes. We decided this some time ago. So we've reduced personal income taxes-not enough but we've started. We reduced the major consumption tax, the GST, in Canada by two full percentage points. These are permanent tax reductions. We've reduced excise taxes. And now we're moving on to business taxes.

On the federal debt in Canada, you know, we went through a period of time-many of the western economies did-in the 1970s, 1980s and early 1990s, Keynesian economics, it's okay for governments to run deficits, cumulative deficits, big debts, that's okay. We don't agree with that. We think that's wrong. We think intergenerational equity requires that we make sure that we don't live at a certain standard of living in our generation and pass on the cost of that to the next generation to pay that bill. My children remind me of that.

We have three sons who have views on these matters, I can assure you. And they don't want Christine and I to leave them any debt, either personally or as government people.

It's difficult when you pay down debt though to communicate that, quite frankly, to people who pay taxes. They say what's the benefit of paying down debt to them? So one of the things we've done is we've created something called the Tax Back Guarantee. So every time we pay down public debt in Canada-as I say, about $50 billion-we take the interest savings and we reduce personal income taxes in Canada. In that way, people can see directly the value to themselves of paying down public debt.

Our total tax relief is about $200 billion over 2007, 2008 and the following five years. Where this will take us over the course of the next several years is to a point where the level of taxation will be where it was in the 1960s when John Diefenbaker was Prime Minister of Canada, for you Canadians, and John F. Kennedy was President of the United States. So this is a major taxation reform in the Canadian context. We're doing it, of course, because we want to encourage economic growth, prosperity, entrepreneurship, investment, reinvestment in Canada.

On the business side, we started off a couple of years ago with the corporate tax rate federally at in excess of 22 per cent. We're going to reduce that to 15 per cent by 2012. That will give us the lowest corporate tax rate in the G7. We need the provinces to cooperate with us on this to get their corporate tax rates down to 10 per cent-15 per cent federally, 10 per cent provincially, 25 per cent-an opportunity to brand Canada as a low business tax jurisdiction. Alberta is already there, which is no surprise to anybody I'm sure. British Columbia is going to be there. Manitoba has indicated they'll be there, and New Brunswick. So we are developing a Canadian consensus that, as I say, will take us to the lowest business tax rate, 25 per cent, by 2012.

We have eliminated some bad taxes. Corporate surtax for all corporations-we got rid of that. Capital tax on some corporations-we got rid of that two years ahead of schedule. And we've provided an incentive to encourage those provinces that still have capital taxes to eliminate those taxes. We reduced small business taxes and increased the accelerated capital cost allowance because we need to increase productivity, of course, in the manufacturing sector.

Another priority for us, of course, is the Canada-U.S. tax relationship. There were negotiations going on by the previous Canadian government for almost 10 years about the Fifth Protocol to the U.S.-Canada Tax Treaty. Secretary Paulson and I dealt with this. We signed the Fifth Update to the Canada-U.S. Tax Treaty at Meech Lake, Quebec, last fall. And that has been passed by the Canadian House of Commons, and we hope it will be ratified by the U.S. Congress before the end of this year. And there's some reason to be optimistic about that. It will increase venture capital availability in Canada and, perhaps most relevant to you, it will eliminate the withholding tax on both arm's length and non-arm's length cross-border interest payments.

We have a panel looking at our international taxation system. Peter Godsoe, the former CEO of the Bank of Nova Scotia, is heading up that panel for us, looking at both inward and outward bound investment and our taxation policies with respect to that. And we'll have a look at that when his panel reports at the end of this year.

So we have a timely stimulus in our economy. We have some positive reviews these days from KPMG. Competitive Alternatives found Canada had the second lowest business costs among the 10 countries studied and the best ranking in the G7. The Economist now has just ranked Canada as the fourth best place in the world to conduct business, citing the quality of Canada's infrastructure, market opportunities, moderate taxes getting better and lack of restrictions on trade and foreign exchange.

We did one other thing in the budget this year which hadn't been done. I know that it's been addressed here and in the United Kingdom and that is deal with personal income taxes, business taxes, consumption taxes. What about encouraging savings? So we created something in the budget this year called the Tax-Free Savings Account. It is similar to the Lifetime Savings Account proposed in the President's budget. The measure rounds out, as I say, our tax relief package for Canadians. It's not complicated. It's designed to be really simple. Individuals 18 years of age or over can put away $5,000 per year every year, lifetime. Money can move in and out of the account. Capital gains can be sheltered. Anything can be sheltered within the account.

We anticipate in Canada that within 15 to 20 years, 90 per cent of savings will not be taxed. And that's fine. We believe in reducing taxes. We don't want to be taxing savings. It helps keep interest rates down. It's good in terms of investment and reinvestment, home ownership and many other issues.

Let me talk a bit about the turmoil currently affecting global financial markets. We were at the G7 Finance Ministers Meeting a couple of weeks ago in Washington. We received the unanimous recommendations of the Financial Stability Forum's report, largely dealing, as you know, with risk management practices within financial institutions in the G7, dealing also with disclosure requirements and leading practices with respect to disclosure, dealing also with credit rating agencies. These recommendations were unanimously supported by the G7 Finance Ministers, and we look forward to implementing them in our respective jurisdictions.

Our strong economic fundamentals are helpful in Canada. Our relatively small exposure to the subprime market is also quite helpful. Our banks have not invested heavily in securities backed by subprime mortgages. Our subprime market in Canada is less than 3 per cent of outstanding mortgages, and Canada did not have any sort of spike-like housing bubble.

Our housing market, in fact, remains sound. It has not experienced the same stresses as in the United States. Housing starts and existing homes sales in Canada remain good, reflecting both affordability and positive economic conditions.

Now on monetary policy, the Bank of Canada yesterday lowered its rate by 50 basis points. We have also moved forward with legislation, which is currently before the House of Commons, in the budget bill to enable the Bank of Canada to be more flexible in providing liquidity to financial markets. It became apparent during the recent months that the Bank of Canada needed more flexibility in that regard, primarily looking at the range of instruments the bank has for providing liquidity.

On asset-backed commercial paper-which is a term I didn't know a year ago but now we all talk about it as if it's part of day-to-day life-the banks worked out their issues initially in Canada. And then we had the issue with non-bank backed asset-backed commercial paper, and one is hopeful that when the proposed plan is voted on at the end of this week that it will be supported.

This is potentially quite a good model. It is a private sector issue, as you know, that the private sector has been working out in Canada at the Montreal Accord table. And, as I say, it's nearly complete-not there yet but it is a good example of the private sector sorting out a private sector issue without government money.

On capital market reform, the U.S. has taken bold steps to deal with financial market pressures. I've spent a fair amount of time on the blueprint for a modernized financial regulatory structure issued by Secretary Paulson, which deals with both immediate and longer-term proposals. We are going to have to, of course, look at a comprehensive financial strategy that emphasizes the importance of reduced overlap and clear accountability, modernized regulatory structures and an objectives-based approach. We've placed significant importance on that in the Canadian context, and we're reviewing our own particular circumstances and structures so that we can create our own package for regulatory reform within Canada. So this is necessary. It's something that one anticipates coming out of the recent difficulties.

Our 2007 plan focused on a number of areas. Let me highlight a few of them. One is efficient, flexible and principles-based securities regulation. This is a challenge unique to Canada in the western industrialized societies that we still have provincial regulation of securities. So we have 13 securities regulators, which is impractical in a time of free movement of capital. So we plan to move forward and propose changes to the structure of our system. This means moving toward a common securities regulator in Canada. I've said repeatedly that our current situation is out of step with the world. We are the only major western industrialized country without a national securities regulator. So this is something that we want to move forward on.

We have a panel consulting now. They are also going to, at my request, draft a bill, a draft law that we can make use of after they report toward the end of this year.

Another subject that I wasn't going to talk about but I will talk about briefly because it's topical right now is NAFTA, the North American Free Trade Agreement. Over the past couple of days, as you know, President Bush and President Calderón and Prime Minister Harper have been meeting in New Orleans. One of the issues they talked about was the future of free trade. Our position is clear. We fully support the objectives of the Security and Prosperity Partnership of North America, including our unqualified support for free trade.

This year marks the 15th anniversary of the implementation of NAFTA. Trade and commerce among our three countries have grown exponentially. Trilateral merchandise trade has tripled from pre-NAFTA levels to just under $900 billion in 2007. Now this significantly contributes to the economic growth, of course, and standard of living in all three countries. As a result, we will strengthen cooperation protocols, create new mechanisms to secure our common borders, while facilitating legitimate travel and trade. Our view, of course, is that it's not necessary to reopen NAFTA but if it is reopened, of course, there would be issues that Canada would want to put on the table as well including energy issues, given our commodities strength in that area.

Now let me conclude with a few final thoughts. You know we've had these challenges in the past number of months about credit crunches and financial institutions and marking to market and all these various issues. Let me assure you that Canada is well positioned to weather this storm. Our economy is resilient. Our economic fundamentals are strong. Our budget is balanced. We're reducing debt. We're providing broad-based tax relief and we're focused and making sure that we control our spending. We believe in free trade. Since coming to office over two years ago, Prime Minister Harper has reached out to all of our neighbours in the Americas including, of course, in this great country. He has replaced the record of friction and antagonism with a government that is cooperative and collaborative. We're taking an approach that is forward-looking. Canada is a country that is a land of great opportunity not only for Canadians but for those seeking sound investment opportunities. As I say, our economic fundamentals are rock solid. Canada's resources are vast. Canada's government is financially and fiscally conservative. Canada is united. Canada has a brilliant future.

And I thank you for inviting me to be here today.