May 12, 2008

Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to the Economic Club of Toronto

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Toronto, Ontario

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It's a pleasure to be here today. I would like to speak about our 2008 budget and to provide our government's views on the global economy and Canada's place in it. We are facing, of course, some external challenges. How we respond to those challenges will in many ways determine how our economy performs in the future.

Now Canada has a bright future. Let me start there. First of all, we know where we are going, and that's important for a government. And I wish all governments knew where they were going. It is important to know where you're going, otherwise, as Yogi Berra used to say, it's easy to get lost along the way.

We know where we are going. We have a plan, a mid- and long-term economic plan, for Canada called Advantage Canada. When we became the government in 2006, we had to do a budget fairly quickly, which we did by May of that year. But then in the preparation of the budget, it became apparent we didn't have in the Government of Canada a mid- and long-term economic plan. So we worked on that and created Advantage Canada.

As Oliver Wendell Holmes once pointed out, "The greater thing in this world is not so much where we stand as in what direction we are going." And this economic plan, Advantage Canada, which you can read on the website of the Department of Finance, is the prism through which we look at policy ideas, whether they're fiscal ideas, entrepreneurial ideas, post-secondary education, research and development ideas or tax ideas. This is the prism through which we look in order to determine whether these are policies or strategies that we should be adopting.

Our government is creating an environment that rewards hard work, encourages growth and spurs further job creation. In fact, as you saw, the job numbers of Friday were promising. There were 19,200 jobs created nationally in the month of April, 12,000 of which were created right here in Ontario. More than 80 per cent of these jobs nationally are full-time jobs in Canada. We are creating a pro-growth environment by providing broad-based permanent structural tax relief in Canada, significant and ongoing debt reduction, and a new Expenditure Management System for the Government of Canada to focus and control government spending. As a Conservative, I believe this approach is critical to the long-term success and strength of any economy.

Now there is a steady drumbeat of negative media coverage on the state of the U.S. economy. Sometimes I think this spills over into Canadian readership and influence on Canadians. Often when you pick up a newspaper economic forecasts are being adjusted downwards, and certainly there's been a psychological effect of the recession in the U.S. housing sector. But keep in mind, Canadian projections are on the positive side of the ledger. Canada has sound economic fundamentals. Our government budgeting situation is strong. We have the strongest economic fundamentals of all of the major industrialized countries in the world, in the G7, and I'll speak a little bit more about that in a moment.

We anticipated the slowing in the economy this year. Canada is not an island. There are the challenges from abroad, including of course the slowdown in the U.S. economy, particularly in the housing sector, the volatility in global financial markets since last August, and a strong Canadian dollar, which has left several sectors struggling in our economy, including of course manufacturing, the auto sector within manufacturing, and the forestry sector. Energy prices are at record highs. We're seeing increased competition from the large emerging economies-China, Brazil, India. Our population is aging. This is an important issue for us as Canadians as we go forward the next 5, 10 years of policy development. The reality of the demographics is one of the reasons that we're making fundamental reforms in immigration in the budget bill, C-50, that is before the House of Commons now. Our pool of skilled workers is shrinking.

So these challenges are by no means insignificant, but Canadians and Canadian businesses have been resilient in the face of economic adversity. As a result of our strong economic fundamentals, Canada is in a good position to weather this economic storm.

Let's look for a moment at the strong economic fundamentals. First of all, our budget is balanced despite the fact that we anticipated slower economic growth this year. And the budget will remain balanced. The Canadian economy has expanded for 16 consecutive years, which is the second longest period of growth in Canadian history, the longest period being the period right after the Second World War into the 1950s. The Canadian job market is the best in a generation, with unemployment at a 33-year low, with employment up in every region. There are more Canadians working in Canada today than ever before in the history of Canada. There are more Canadians moving from one part of Canada to another to work, to seek employment and better employment than ever before in the history of Canada. And, as I said, 19,000-plus jobs were created last month in Canada.

Interest rates are low. Inflation remains low and stable. Disposable personal income continues going up. Canada is one of the few countries in the world with sound public pension plans and, my goodness, I hear about that from my colleagues when I go to international meetings. It's not common in the world, regrettably, to have sound public pension plans. As I say, Canada's on the best fiscal footing of the G7. We have the largest budgetary surplus as a share of GDP and the lowest debt burden.

And of course we are an emerging energy superpower not only in oil and natural gas and uranium, potash, nickel, aluminum, iron ore, diamonds, all of those things, but also of course in the food sector. All told, 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 Canadian.

Now a few words about the Canadian economy and the U.S. economy. It is important to note that although of course our economy is closely tied to the United States, we are not the United States. The factors behind the current American malaise are not likely to be duplicated here. For one thing, Canada's financial institutions are well capitalized. They have a low exposure to the subprime market, which is currently, as you know, contributing to global market turmoil. Our financial institutions have not invested heavily in securities backed by U.S. subprime mortgages. In housing, Canada's housing market remains solid. It has not experienced the same stresses as in the United States, certainly not the same bubble. According to the IMF's recent Financial Sector Assessment Program Update, Canada's financial system is more than capable of weathering substantial financial stresses, and that is certainly the feedback I got in Washington the other day when I met with the leadership of the International Monetary Fund.

Work is being carried out to make our system better. The discussion with the bank CEOs that I had two weeks ago today here in Toronto centered around the Financial Stability Forum recommendations. This is the group that reported to the G7 ministers and central bankers in Washington about a month ago that was formed to respond with recommendations, headed by Mario Draghi of the Italian Central Bank, centering on disclosure, also dealing with the credit agencies, with due diligence by larger investors and smaller investors and so on. There were about 65 recommendations made to the G7 ministers, as I say, about a month ago and were endorsed unanimously by us, and I discussed those with the Canadian banking leadership and we're going to go of course in that direction. Canada's banks already have world-leading disclosure standards. As I say, we're going to move to be in compliance with those standards set out by the Financial Stability Forum and we'll monitor that progress going forward.

As I said last October 30th in the fall Economic Statement, the economic slowdown in the U.S., the troubled credit market, global financial volatility and a stronger Canadian dollar pose challenges for all of us. There are a number of ways to meet those challenges. One which is advocated across the way from us in the House of Commons by the opposition is to close our eyes and throw money at everything, and we've all seen this approach tried before, when economic times become a little more challenging. We've seen it tried before and we've seen it fail before. More spending, more taxes, more government, increase the GST, bring in a new gasoline tax, increase other taxes, run deficits, accumulate public debt. That's one approach. Oh, and of course, have some band-aids also at the same time for, you know, two months or three months of relief for a particular business somewhere in Canada. This kind of approach always leads to failure. We've seen this movie before. It is the approach continually advocated by the opposition parties in Ottawa. In our view it is not only misguided, it's expensive and it does long-term damage.

If you look at the spending in Canada in the 1970s and 1980s and the first half of the 1990s and what it takes now to recover from that deficit spending and that accumulated public debt-which we're doing now-it requires a huge effort for those decades of excess spending in Canada.

Right now the Official Opposition is advocating spending-an increase in spending of more than $60 billion, which would obviously put us into a substantial deficit in Canada. They're also considering a massive tax on gasoline and other fuels at a time of rising gas prices. As you know, we've reduced the taxes on gasoline because of the 2 per cent reduction in the GST, which is permanent and structural. Their idea of economic stimulus seems to be to max out the national credit card-borrow-and to reach even further into the pockets of hard-working Canadians-that is, higher taxes. By proposing this approach, Mr. Dion is not just throwing caution to the wind, he is tying it to an anchor and tossing it overboard.

History teaches that a balanced fiscal policy based on low taxes, paying down debt and disciplined spending lays a solid foundation for a strong, vibrant economy in the long term. Sir John A. Macdonald used to be fond of saying, you know, look a little ahead, my friends. And that's what we need to do in Canada. We need to look at the mid and longer term and not look at band-aid, ad hoc solutions. Get the fundamentals right, and the private sector, the people in this room, will make sure that our economy grows. Broader economic policy needs to be squarely grounded in the long term rather than in the short term. Now we've applied that approach since we took office about two years and three months ago.

On the debt burden, the federal debt, as I say, is the legacy of that spending mainly in the 1970s, 1980s and early 1990s. When I was Minister of Finance in Ontario, we reduced the public debt by $3.1 billion, which was the largest single reduction in public debt in the history of the Province of Ontario. I believe in reducing public debt. With the $10.2 billion in planned debt reduction for 2007-08, the fiscal year that's just passed-we don't have the final figures yet-we will have reduced the debt by more than $1,500 for every man, woman and child in Canada. We've done that in a little over two years. Our debt reduction will total $50 billion by 2012-13, with an ongoing commitment to reduce it on average by at least $3 billion each year after that.

As we reduce the debt of course we generate interest savings, and what do we do with the interest savings? How does one engage taxpayers in Canada in this issue of debt reduction? Well, every time we reduce the public debt there is an interest savings. We have a Tax Back Guarantee for individual taxpayers in Canada. With the savings in interest, every time we reduce the public debt we reduce the personal tax burden in Canada. That will amount shortly to about a $2-billion reduction in the personal tax burden.

Why reduce public debt? Well, it helps keep down interest rates, which is in the mid- and long-term interests of course of Canada. It better positions Canada to weather these economic slowdowns like we're going through now. And it reduces intergenerational inequity, which is the way they talk about this internationally. Intergenerational equity in Australia, in the UK, in France is discussed. It just means that it's not fair for us to live at a certain level now, is it, on borrowed money and then pass it on to the next generation and ask them to pay the bills. And, as I say, this is an international priority.

Spending is a challenge. I mean the Government of Canada is the biggest enterprise in Canada-more than 400,000 employees. Canadians don't want their tax dollars wasted. Our commitment is to limit the rate of government growth to the rate of growth of nominal GDP on average. I want to thank the private sector for helping us very substantially on this last year. The President of the Treasury Board, Vic Toews, and I invited some CEOs from the private sector but also a couple of our university people, presidents, to come and meet with us and talk to us in Ottawa about how they control spending in their large organizations.

We took their advice. We now have an Expenditure Management System in place which calls on all departments, programs, initiatives in Ottawa to be reviewed over the course of the next four years. It'll take us four years. We've already done about 15, 17 per cent of them, saved several hundred million dollars already. What we do is we ask each initiative, each program to prioritize its spending, to tell us what its bottom 5 per cent in spending is, what's the least important. Is the program, is the initiative still carrying out the purpose for which it was intended? Is there value for money? Can you demonstrate results? All things that you would do in the private sector of course. And this is a good discipline for government. As I say, it'll take us four years to do it but we'll get through every program during the course of that period of time. Of course, we take the funds back that are not needed by the particular program and use it for other government priorities or for debt reduction or for tax burden reduction.

There is an economic stimulus now that is working for Canadians. This is a large stimulus. As I say, we saw that this year would be slower, going into next year as well. The dramatic reduction in business taxes that we made on October 30th, some of which is already coming before us. We made retroactive some of the other tax reductions, including personal tax reductions, in order to make sure that we had a substantial stimulus this year in the Canadian economy. It is substantial. It's about $21 billion. It's entering our economy as we gather here this morning. It amounts to about 1.4 per cent of Canada's GDP. This is a substantial stimulus to the economy-more, relatively speaking, than the American stimulus, which is about 1.1 per cent. Cheques are going out now from the U.S. Treasury to more than 100 million Americans. But this is one-time. Here in Canada the change is structural. The tax reductions will continue going forward and continue to provide that structural stimulus to the Canadian economy.

In terms of tax relief, since coming to office just over two years ago, we have taken actions that will provide nearly $200 billion in tax relief over 2007-08 and the next five years. We haven't seen federal taxes this low as a share of the economy in nearly 50 years-since the Toronto Maple Leafs had a dynasty or the last time the Leafs made the playoffs. I think that was only 41 years ago. But we're back, you know, we're getting that tax burden as part of the GDP back to where it was when Prime Minister Diefenbaker was Prime Minister of Canada. And it's not easy. And it requires discipline. But that's what I think Canadians expect of their federal government in Ottawa.

As a result of our tax relief there's been some happiness, I hear, when people were preparing their tax returns. I certainly hear it in airports and so on. People are very happy who can split their pensions, I can tell you. You don't have to be a senior but you do have to be in a position where you can split a pension. A lot of the tax relief, as I said, is retroactive. There are new tax credits for fighting obesity with the children's fitness tax credit, encouraging public transit with the public transit tax credit. I heard about that on the GO Train going home on Friday evening through Union Station. Students get a tax credit for textbooks and their post-secondary education.

How does this work out? Well, the rebates are larger. I asked the Canada Revenue Agency about that and they tell me the average tax refund this year is about $1,420 compared to $1,250 last year, and that's a difference of about 13.5 per cent.

Our long-term financial health also requires having a nation of savers. And this is of some concern, savings rates. We are seeing-and this was reported the other day, I said something about it the other day-we are seeing in residential mortgages a tendency to go to longer amortization periods and smaller down payments. We are seeing some diminution in savings. So when we looked at the budget this year we thought, well, we had taken action on the personal income tax side-more needs to be done there; you don't have to remind me. The business tax side, dramatic reductions. The GST, dramatic reductions. We reduced excise taxes of course.

We created a tremendous stimulus for charitable giving in Canada, taking away the capital gains tax on the donation of publicly traded securities, first of all to public sector charities and now the foundations as well in this budget. This has had a fantastic effect all across Canada. I love it because it means that people who want to be generous and give money, make their own decisions about who they give it to, it doesn't have to go through the system in Ottawa to decide who should receive these charitable givings, and I think that's a good thing as well.

But we hadn't done anything significant on the savings side. So in this budget we brought in the Tax-Free Savings Account. This is similar to tax-free savings arrangements in the United States and the United Kingdom. Not much has been said about this so far. A lot more, I anticipate, will be said later this year because the banks and other institutions, the credit unions and so on are going to be trying to attract these Tax-Free Savings Accounts starting January 1, 2009. It is the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan in 1957. It is a flexible, registered, general-purpose account that will allow Canadians to watch their savings grow tax-free. All investment income in the account, including capital gains, will be exempt from any tax even when withdrawn, and there will be no federal clawbacks to make the system attractive and more fair for lower- and modest-income Canadians.

We expect-the Department of Finance certainly expects-the next 15 to 20 years with the use of this vehicle plus the RRSP vehicle, the RESP and the Registered Disability Savings Plan, which we introduced and which is now the law in Canada, that over 90 per cent of Canadian individuals will hold all of their financial savings-financial assets-in tax-free savings vehicles, tax-efficient savings vehicles, as I say, going out 15 to 20 years.

Starting next year, as I say, the Tax-Free Savings Account will be available. Family by family, the savings will add up to greater prosperity for the Canadian economy. There's a tax calculator on the website, which is at www.budget.gc.ca, and over 20,000 people have already been on there doing the Warren Buffett miracle of compound interest and what you can do.

I was at one of the universities the other day and I was actually impressed a few of the students came up to me and talked to me about this, and they had been on it. You know, if you're 19 or 20 years old, what you can do over your lifetime with this vehicle is fantastic and good for the Canadian economy.

Now in uncertain economic times such as these, every level of government must play their role-this is where I'm going to talk about other governments. So those of you interested can pay attention. There's much, much more we can accomplish with the cooperation of willing provinces. And, you know, we meet regularly. We talk regularly. The finance ministers have come together at least twice a year since I've been the federal finance minister. I've asked them to come together. We are coming together in a few weeks again to discuss issues like lower corporate income tax rates. This was an important part of our announcement on October 30, 2007, to try to get Canada to a 25 per cent business tax rate overall. But, you know, the federal rate, you go back a little while, used to be 38 per cent or so. When we took office it was over 22. We got rid of the capital taxes.

Now we want to get that business tax rate down to 15 per cent federally by 2012. We're on track to do that. We're committed to doing that. We're asking the provinces to get to 10 per cent by 2012. Alberta's already there. British Columbia will be there probably a year early, according to their budget plan. Manitoba's going in that direction. Saskatchewan, the new government there, probably will. New Brunswick's going in that direction. The other Atlantic provinces have given some encouraging signs of going in that direction. We need Ontario to go in that direction as well-important opportunity to brand Canada as a lower business tax jurisdiction.

We still have about five provinces in Canada that have not harmonized their provincial sales taxes with the GST. This is a direct burden on business inputs, and we're encouraging the provinces to work with us, which is code for we'll provide some incentive, some help, work with us to make this happen. We do work with the provinces. We encouraged those provinces in Budget 2007 who still had capital taxes like Ontario, Quebec, Manitoba, we incented them to accelerate the elimination of those taxes. All three of those provinces have done so, have used the federal incentive to do it. That's a good thing that was done in this year's budget in Ontario.

We want the provinces to work with us to create a common securities regulator. This is important. We just lost a priority position with the SEC in terms of their negotiations. They decided to go with Australia as their first negotiating partner for a common securities regulator rather than Canada because we have 13 regulators in this country. So we need to keep working on that to tear down interprovincial trade and labour barriers.

We do need to work cooperatively. As you know, I've been gently urging Premier McGuinty to reduce business taxes in Ontario and I am encouraged by the premier's comments last week. He actually has been talking about lowering business taxes, and this is a positive first step. This is critical to attract further investment and fuel job creation throughout Ontario. Having the highest business taxes in Canada and also high business taxes relative to the U.S. and many other countries does not help this province in dealing with its current challenges.

If we're to have a candid discussion on what some have called the Ontario gap, we need to make sure all of the facts are on the table. For instance, the gap does not represent a payment to the federal government from the Ontario government. Sometimes it tends to get said that way. Every Canadian pays taxes, including taxes to the federal government, and must pitch in to help fellow Canadians from coast to coast to coast. It is in line with the values we all cherish as Canadians of generosity, compassion and kindness. And Equalization is not some sort of initiative where one province sends money to another province. It is a federal program which is paid for with taxes paid by all of you and me to the Government of Canada. It is constitutionally mandated in our Constitution, our obligation to make sure that there are reasonably comparable services, social services and so on across the country.

Ontario taxpayers are treated no differently than any other Canadian taxpayers. We're all part of a progressive tax system, as you know. In this system, wealthier Canadians and more profitable business contribute more than those who are less prosperous. This reality has never been anything other than a reflection of Ontario's prosperity, that is the so-called gap. A province, you know, a great province, it's my home and your home, a province that is the epicentre of Canada's financial services sector, which has showed significant strength, the centre of the entertainment industry in Canada, a province with an abundance of corporate head offices, high tech firms, a province that is the media capital of the country. We want Ontario to remain a key engine of the Canadian economy. It's not in anyone's interest to see our most populous province, Ontario, slip into have-not status.

So what's the role of government? Well, it seems to me government policies need to encourage economic growth, need to encourage productivity growth. We need to make sure that the manufacturing sector in Ontario and Quebec emerges from this period of adjustment stronger, more sustainable, which means technologically sophisticated in order to be more competitive, more productive. And that's the end game. That's where we should be looking in terms of mid- and longer-term economic success here.

We have already responded to Ontario's concerns on immigration. As I say, we have some provisions in the budget bill now on training, on infrastructure. One of the greatest concerns, including my time in provincial government, was the concern in Ontario that the transfers for the Canada Social Transfer and the Canada Health Transfer were not per capita, and this disadvantaged arguably Ontario, although one hears rather a different story in other places in Canada on that subject. We addressed that issue when we resolved the fiscal imbalance in Budget 2007, and that was welcomed of course by the Government of Ontario. What it means is a total of $13.9 billion in 2008-09 for Ontario, which is a 20 per cent increase over transfers provided by the previous federal Liberal government.

In terms of supporting businesses, the real issue gets overlooked, it seems to me, from time to time, which is creating economic growth. Every level of government has a responsibility to help make Canada more competitive. A few things that we have done, I mentioned the dramatic change in business taxes. This will help brand Canada going out to 2012. I already hear about it outside of Canada. I've heard from business people that they're hearing about it soon so the branding's already starting to work. This will enable Canada to achieve the lowest overall tax rate on new business investment in the G7 by 2010 and the lowest statutory tax rate in the G7 by 2012.

We're also making investments to increase the productivity that I mentioned a moment ago. In Budget 2007, we introduced a temporary accelerated capital cost allowance 100 per cent writeoff over two years for business. We heard back from business, particularly the manufacturing sector, saying it's not long enough. We extended it by a further three years in Budget 2008 on a declining basis. And we're seeing evidence now that this is having some effect. We're seeing increased acquisition of machinery and equipment, and of course the appreciation of the Canadian dollar is helping that way because a lot of this machinery and equipment is priced in U.S. dollars.

We also established a $1-billion Community Development Trust to help communities and workers in areas highly dependent on struggling industries, primarily one-industry towns in the forestry sector but also some relevance to the auto sector. Of that $1 billion, $357 million flows directly to the Government of Ontario.

In the auto sector, again a sector that requires innovative technology, if we're going to come out of this slowdown with a strong, viable auto sector including auto parts. We created the Automotive Action Plan in the budget this year, $250 million over five years. This has been done before several years ago. When we were-Janet and I-were in the Government of Ontario we created a similar fund with the federal government. It results in the flex line at GM in Oshawa. That's why they're getting a new product mandate there. It resulted in the flex line at Ford in Oakville. These are practical results that take years to work out but it makes them competitive within their industry.

A more direct thing of course is the 2 per cent reduction in GST, which has made vehicles more affordable in Canada since January 1st. Canadian vehicle sales have been quite good in January, February and March, which is another marked contrast with what's been happening in the United States. And of course the GST makes a huge difference for anyone buying a house. Those 2 percentage points are thousands of dollars for anyone acquiring a house. And, as I say, our housing sector has remained strong.

Now I've gone on almost as long as it seems. I thank you for staying with me on this Monday morning. Let me conclude with a few final thoughts.

Canadians are confident and Canadians are confident for good reasons. Our economy is resilient. Our economic fundamentals are solid. Our budget is balanced and will remain balanced. Unlike the opposition in Ottawa, we do not believe in raising the GST. We do not believe in new taxes, including gas taxes. We do not believe in reckless spending and we do not believe in running deficits and accumulating public debt. On the contrary, we are reducing debt. We are providing broad-based permanent, structural tax relief. We are focusing and controlling spending in Canada.

And there are, it seems to me, three fundamental reasons to be optimistic about our great country of Canada: our economy is strong; our government is focused and has a plan; our country is united.

We have a brilliant future together.

Thank you for inviting me to be with you this morning.