Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to the International Economic Forum of the Americas/Conference of Montreal
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People always say: Where are we in terms of this crisis? Are we partway through? Are we halfway through? Are we two-thirds of the way through? The best expression I've heard so far was by a British banker who said we are closer to the bottom. And you can interpret that however you want. It's an all-purpose term that you can use in economic circumstances.
I do want to say that the first-quarter results in Canada, which were released about 10 days ago, showed negative real GDP growth. If you take the auto sector out of those numbers, it's positive real GDP growth in Canada in the first quarter. This is not to underestimate the challenges that we face but it is to say that the auto sector, which is Ontario-centred, my home province, is in significant difficulty and the numbers overall reflect that.
I am delighted to be here today to share some thoughts about the Canadian economy: our economic success, our potential and our challenges going forward. Perhaps the most daunting challenge facing all of us today is "mastering change." Change is a constant in the global marketplace.
Sir Winston Churchill said "Change is the essence of life. Be willing to surrender what you are for what you could become." And certainly this is a time, as Dominique Strauss-Kahn said, of substantial change globally. The pace and magnitude of the changes today are forcing us to become more innovative, productive and competitive. Let me talk a bit about some of the challenges that we have:
- The housing crisis in the U.S.;
- The depreciating U.S. dollar;
- Volatility in global financial markets;
- Record energy prices;
- The struggling manufacturing and processing sector, including the auto sector;
- Increased competition from emerging economies; and
- An aging population and a shortage of skilled workers.
Here in Canada, the government of which I am a part is taking steps to
meet and overcome these challenges. We are reducing taxes, eliminating debt,
controlling spending and maintaining balanced budgets.
Now let me say at the outset that Canada has a bright future. Our economic fundamentals are sound. In fact, we have the strongest economic fundamentals in the G7:
- Our budget is balanced federally. I can assure you that our budget will remain balanced federally.
- The Canadian job market is the best it's been in a generation, including here in Quebec. Unemployment is near a 33-year low. Just this past month in May, we had a net gain of 8,400 jobs-in the past year, nationwide in Canada, 339,000 net new jobs, 80 per cent of them full-time jobs.
- Interest rates are low.
- Inflation is within our targeted range.
- Our public pension plans are sustainable and sound, which cannot be said in many other countries in the world.
- Disposable personal income continues to rise as well.
On the energy side, as Prime Minister Harper is fond of saying, Canada is an emerging energy superpower. We have the second largest known petroleum reserves in the world-only Saudi Arabia has more. We're the largest exporter of oil to the United States. We rank third in the production of natural gas. We're the world's second largest producer of clean hydroelectric power, thanks to Quebec. We are the world's largest producer of potash and the world's largest producer of uranium. We're the second largest producer of nickel in the world, the third largest producer of aluminum, the third largest producer of diamonds in the world, and the largest exporter of forest products globally. All told, 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 Canadian.
The OECD spring Economic Outlook for Canada says "Canada has entered the current period of weakening global growth from an enviable position. First, both employment and final domestic demand were buoyant in 2007, helping to offset a substantial drag from net exports, and they have remained fairly strong thus far in 2008."
As Dominique Strauss-Kahn said, Canada is not an island. We are affected obviously by the slowdown in the United States, in particular the recession in the housing industry in the United States. But there are substantial differences here in Canada. Our households are well capitalized. We did not have a housing bubble in Canada. Our financial institutions are also well capitalized and they have a low exposure to the subprime market.
We have to of course remain vigilant. I met with the CEOs of Canada's leading banks this morning in Toronto for yet another meeting about the challenges that we have. We talked about the 65 recommendations in the Financial Stability Forum report. I'm pleased to say that the large Canadian banks are in their second-quarter reporting. We're quite compliant with the recommendations of the Financial Stability Forum, and I have their assurances that they will continue on that path. So they're reporting increasingly. We'll follow the disclosure recommendations by the Financial Stability Forum.
Quite frankly, Canadian banks are already global leaders in the area of disclosure. Canada will continue to play its part at home. The Bank of Canada-I'll be speaking to the Governor today-will be setting rates tomorrow. The Bank of Canada has reduced interest rates by 150 basis points since December. It has also been very active in providing liquidity to financial markets, including actions that it has taken concurrently and in cooperation with American, European, British and Swiss banks.
My department-the Department of Finance-and the Bank of Canada have worked together to review the range of instruments the bank has for providing liquidity. The bill that I'm going to vote on this evening or late this afternoon, Bill C-50, has in it some increased powers for the Bank of Canada in terms of the securities that the Bank will be permitted to accept. This is important in putting the Bank of Canada on the same footing as other comparable central banks.
Canada is also demonstrating leadership in dealing with the adversity that we had starting last August with non-bank-backed asset-backed commercial paper. As you know, the Montreal Accord was crucial in trying to create a private sector solution to what after all was a private sector issue. A large majority of investors, 96 per cent, voted in favour of the restructuring plan, which was approved by a judge last week, and this is to be applauded. This is a market-led workout without a government bailout using taxpayers' dollars.
So in terms of federal budgeting and the economy, what are we doing, where are we coming from and where are we going? When we became the government two years and three or four months ago, we had to do a budget fairly quickly, which I did in May of 2006. It became apparent the Government of Canada did not have a medium-, long-term economic plan, so we developed one called Advantage Canada. Advantage Canada is our prism through which we look at policy ideas to decide whether the policy idea makes sense in terms of the overall plan.
Advantage Canadaseeks to mobilize the most compelling research, innovation, investment and competitive forces in our society. It is the roadmap that sets out a bold new course for a strong and united Canada. Everything we do as a government is done with Advantage Canada in mind. It is the prism through which issues are viewed and policy decisions are made.
There are five advantages that we look at to say: Where do we need to move the economy going forward? Of course, governments don't create jobs. We know that. Governments create the right environment for the private sector to create jobs.
A structural advantage, infrastructure, is very important. I know the infrastructure efforts ongoing in Quebec are very substantial, and we are a part of that. We've set aside $33 billion, the largest set-aside of budget money since the Second World War, for infrastructure. And we look forward to implementing that through the framework accords with the various orders of government in Canada.
A Knowledge Advantage is vitally important, particularly in post-secondary education, scholarships and research chairs.
An Entrepreneurial Advantage: We're reducing federal red tape, the number of forms by 20 per cent. We have been working on this for some time-Diane Ablonczy, the Minister responsible, has-and we will accomplish that by November this year.
An advantage relating to taxation, of course: We have to respect taxpayers. We know, as I said, that governments don't create jobs. We have to be realistic and pragmatic. We need to have a strong national economy.
And a Fiscal Advantage: On the fiscal side, our goal is a simple one. We want to eliminate the total government net debt in Canada in less than a generation, that is, by 2021. Net debt is the international gold standard of measuring debt by countries around the world. We already have the lowest net debt relative to GDP in the G7, but we think we can do better than that. Certainly, this has been done in Australia, in New Zealand, in Sweden. All of those countries have eliminated their national net debts.
So that's the direction we're going. Right now, if you want to look at governments across Canada, about 14 cents of every dollar that you pay in taxes is being used to pay interest on government debt. That's about $55 billion this year. To put that in some kind of context, that's equivalent to the combined total being invested by governments in primary, secondary and post-secondary education in Canada.
And this legacy of debt comes from the 1970s, 1980s and first part of the 1990s-the Keynesian economics of it's okay for governments to run deficits year after year after year and accumulate large public debt, which is what happened in those years. In fact, it's one of the primary reasons why I got involved in politics. So now that I am Minister of Finance, at least I can pay down some public debt. I did it in the government of the Province of Ontario-$3.1 billion in one year, the largest payment against the public debt in the history of the province. And now we're doing it federally.
Part of that, as you know, is the issue of intergenerational equity. In government financing, we ought not to live at a certain standard of living now and expect our children and their children to pay the price for the standard of living, for the spending that we do now.
So it's only been a couple of years and we've reduced the federal debt by about $1,570 for every man, woman and child in Canada. And every time we reduce the public debt, we reduce the personal tax burden in Canada. We reduce it by the same amount as the interest savings. You know, from having mortgages and so on, that when you pay down that principal amount, you have that interest savings. Well, every time we do that, we pass that on to Canadian taxpayers, which will amount soon to about $2 billion a year.
The other thing that one runs into in large organizations like the Government of Quebec and the Government of Canada-I'll only speak for the Government of Canada-is how do you control the spending side of the ledger? And we sought some private sector advice last year about that. The private sector was very helpful, including a couple of university presidents, one from Quebec, giving us advice about how you do this. How do you control the rate of growth of spending in a large organization?
We developed an Expenditure Management System. What it basically is is that we say over the course of the next four years-we're already about 15 per cent into this and we've already saved about $400 million-we're going to look at every department, every agency, every program and every Crown agency in the Government of Canada and say: Are you still in all your programs fulfilling the purpose for which you were created? And is there value for money?
Governments are very good at creating programs. They're not so good at stopping programs that were created years ago. And what we say to each department, initiative, program and Crown agency is: Show us your least important 5 per cent of spending. This creates a substantial discipline in government, and that 5 per cent can be used by that department if they have an initiative that they would like to have funded that fits into Advantage Canada, which I was talking about a few minutes ago. If not, then we take it back into the consolidated general revenue fund. We'll use it for other government priorities or to reduce taxes or to pay down public debt.
So that's the Expenditure Management System that we're doing now. As I say, we're well into it. It will take us four years to complete all of that process.
On the tax side, on October 30, 2007, in the fall Economic Statement, we made a bold challenge to our colleagues and other governments in Canada. We said we want to brand Canada as a low business-tax jurisdiction. We're going to continue to reduce the federal business tax, the basic tax rate. If you go back to the 1980s, it was up around 38 per cent. When we took office, it was a little bit over 22 per cent. We will have it to 15 per cent by 2012.
We challenged the provinces and territories to get to 10 per cent in their rates by 2012, which would give us a marvellous opportunity to brand Canada as a low business-tax jurisdiction at 25 per cent. I'm very pleased that many of the jurisdictions, including Quebec, are moving in that direction. I think it's a great opportunity to brand Canada, as I say, internationally.
It's often said that the only sure things in life are death and taxes, but as a fiscal conservative, I do not believe that people should be taxed to death. And what we've done so far: dramatic reductions in business taxes. As you know, 2 percentage points off the GST. This is huge, especially for infrastructure and so on. Just think, when you see an announcement of $200 million for this project or $112 million for that, what's 2 per cent of that? This is substantial, it's substantial for Canadians buying houses, so that 2 per cent is gone.
These are not temporary tax changes that we're doing federally. These are structural tax changes. They're permanent tax changes. Reduce personal income tax, reduce business tax, reduce the consumption tax, reduce excise taxes. We've done all of that and then we did something else in the budget this year. When we looked at all of this, we said what's the missing link? And the missing link was a savings plan for Canada. The United Kingdom has one, the United States has one. We have, as you know, RSPs for retirement savings, but what about other savings?
So starting January 1, 2009, we will have something called the Tax-Free Savings Account, which is designed to permit any Canadian 18 years of age or over to put aside $5,000 a year. The money going in is tax-paid, everything coming out is tax-free. Somebody who's in the banking business said to me the other day-he's calling it a Swiss account for average Canadians. So whatever you put into it, as I say, is tax-paid, but the capital gains, dividends, whatever accrues inside, you can take out and then you still have that limit. You can go back in year after year after year.
I was at one of our universities the other day and the business students, 18, 19, 20 years old, they know all about this plan. And they've looked at it, the miracle of compound interest-Warren Buffett would love this-of what it means over time in terms of accrual of tax-free savings. In fact, our anticipation is that in 15 to 20 years in Canada, 90 per cent of the savings of individual Canadians will be sheltered, either by RSP or TFSA or one of the other plans.
The business tax reduction that we made in the fall, along with the other tax changes we made, some of which were retroactive, have had a couple of immediate consequences. The average refund on federal tax returns this year has gone up by 14 per cent. The stimulus entering the Canadian economy this calendar year, 2008, is about 1.4 per cent of Canada's GDP. As I said a moment ago, this is not a temporary stimulus. This is a permanent structural change in the Canadian tax system, and it's at a time that we need it, as we anticipated when we took those steps last year.
I do want to speak a bit about one other provision that's in Bill C-50, and that's dealing with immigration. From an economic point of view, this is very important for Canada. We have a system right now that is broken. It's a mess, quite frankly. If you walk into a Canadian consulate or embassy around the world, you apply to immigrate to Canada, you fill in the forms, they give you a number, you're number 912,410, or whatever. We're up over 900,000 now, and they'll tell you that you need to be interviewed and you'll say well, when's my interview? And they'll say we interview people in order. That's the way the system works right now.
We need to fix that. And we need to make sure that immigration decisions take into account the economic priorities of Canada and the various provincial jurisdictions within Canada. This is important in terms of one of the great challenges that we face over the the medium term, and that is the demographic challenge in Canada.
I met with my colleagues, Madame Forget and others, a couple of weeks ago in Montréal. As Monique will testify, as we went around the table, we kept hearing about labour shortages, not enough people. Not just in western Canada. You hear that all the time about Alberta, but everywhere in Canada. And this is a major demographic change. And this will continue. Immigration is part of the answer, but it's only part of the answer, and it's certain immigration cannot fulfill the demographic needs that we're going to have over the course of the next 10, 20 years in Canada.
So we've done some other things. We've streamlined the Temporary Foreign Worker Program, which enables employers to bring in workers more quickly on a temporary basis. We changed the rules allowing skilled workers and foreign students to remain in Canada as permanent residents. This is important in terms of attracting the best and the brightest from around the world. And as I say, we're making a couple of fundamental changes in the budget bill that is in the House of Commons today.
Now let me conclude with a few final words. I expect that we'll have more discussions in Osaka at the end of this week about economic performance around the world. I'm pleased that our lead financial institutions in Canada have been responsive to the Financial Stability Forum recommendations with respect to disclosure. We've looked carefully at the issue of reporting agencies, and there are recommendations about that in the Financial Stability Forum report as well.
I met on Friday with capital markets people in Canada to talk about their response to issues like the credit rating agencies. There is a concern about governance and the reluctance of some to invest given the difficulties that some of our corporations had with respect to that non-bank-backed asset-backed commercial paper. But the fundamentals are strong and we have reason to be confident in the Canadian economy going forward.
I look at things like autos, and despite the difficulties in the auto sector, the auto purchases in Canada were at near-record levels in January, February, March, April and May this year. So we have consumer confidence here despite the fact that some of the reports look rather pessimistic. Sometimes people here are watching and listening to American media, where indeed their auto sales are quite weak, and their housing market is in recession, while ours remains strong.
The first father of Confederation, Sir John A. Macdonald, used to say to his cabinet and friends: "Look a little ahead, my friends." That is what we're trying to do in the federal government: to create new opportunities, to broaden our horizons, to follow our plan called Advantage Canada. We are focused and we are disciplined. The Canadian economy is resilient. Our economic fundamentals are strong. Our budget is balanced and will remain balanced. We have a brilliant future together, and I thank you for inviting me here this afternoon.