June 25, 2008

Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to the Canadian Chamber of Commerce

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Mexico City

Check against delivery

It's great to be here and it's a surprise to me that it's taken me two years and several months to come and visit here in Mexico, because of the importance of Mexico as a trading partner and a friend and a neighbour of Canada in the Americas.

I will talk a bit about our economy, about the world and where we are, and about some of the challenges that we face.

I had the pleasure in the last 36 hours of spending time with the Ministers of Finance of the Americas and the Caribbean. It has been a very good turnout at Cancún. It was entitled "First Encounter." It was the first time in several years that the Finance Ministers of North America, South America, the Caribbean and Central America were gathered together, and I thank my friend and colleague Agustín Carstens for his encouragement of that project and for hosting us in Cancún. It was very successful. As a number of the Ministers said to me last night over dinner, the atmosphere was very collegial and cooperative, which is encouraging in terms of our trading relationship.

It's good to see so many people from the Toronto Stock Exchange. As you know, the MSX and the TSX are together now, and it's great to see that, a brilliant future for the TSX, and I'm glad to see them here talking about Canadian capital markets. I just came back from Osaka. I was there for the G8 Finance Ministers Meeting. I recently met with a lot of folks from the capital markets in Canada. We had a capital markets forum in Toronto a couple of weeks ago. I've been meeting more than I usually do with the Canadian bank CEOs because of our mutual concerns about the integrity of our global banking system.

And I also had the benefit recently of meeting with our Finance Ministers from all of the provinces and territories in Canada. We met in Montréal a couple of weeks ago. We have an unusual situation, if I can put it to you this way. We have a slowing economy in Canada, which we anticipated. At the same time that we have a slowing economy, we have labour shortages across the country. This is an interesting phenomenon that we're looking at in Canada. As you know, we've suffered the brunt of the rapid depreciation of the US dollar. Canada has borne the brunt of about one-third of that change. The European Union has borne the brunt of about one-third. Our trading relationship is so large with the United States that it affects us disproportionately. We are only 34 million people; there are more than 300 million people in the EU.

But I'm encouraged by the resiliency of Canadian business. As we've seen this rapid depreciation of the US dollar and the appreciation of the Canadian dollar, business has adapted. It is certainly a struggle in manufacturing and in the forestry sector, but as I say, what is remarkable to me is the resilience of the manufacturing sector, the adaptability of the manufacturing sector in Canada.

The US economy in the housing sector is in recession. Now this is a challenge for us. We saw this coming last year. It's particularly difficult for our forestry industry. I was in northern British Columbia and Prince George on the weekend and saw some of the challenges there, and mills have closed down. That is, the US housing sector is not likely to recover abruptly, certainly. A housing recession is a difficult recession to come out of, so we can expect to see some continuance of this challenge in the United States. The diminution in market value continues. We can expect that to continue for some months yet until the market begins to clear, which has not begun to happen yet. This is a regional phenomenon largely in the United States, particularly in California, Nevada and Florida. So it's not countrywide.

It is of concern in Canada because it affects our forestry industry, of course, and more than that, it affects consumer confidence in the United States, which we see has weakened significantly, and that affects our exports to the United States, our manufacturing exports and in particular our auto sector. About 85 per cent of the motor vehicles assembled in Canada are exported to the United States, so this is a challenge for us. It has certainly affected our first-quarter real GDP results because of that difficulty in the auto sector, although our nominal GDP growth was about 4.6 per cent, so in terms of budgeting, on the revenue side we're in good shape, we're on track in Canada.

On the international scene, the international credit turmoil that we've dealt with, I look on this with some reflection. I was at the G20 meetings with our colleagues last July in Australia, and then we all came back to North America and we ran into this sub-prime situation, and none of us knew where the trouble would come from, but it was anticipated there would be some credit difficulties, which there were. And now we're dealing with that issue, of course. We're in a situation in Canada where fortunately we do not have a substantial sub-prime market. We're less than 5 per cent of our banking market, but we are watching the housing sector to ensure that we don't get too much credit in the housing sector. We're seeing more long-term amortizations, which we're watching, and we're watching the level of down payments as well. So that's where we are.

We have an exceptionally good relationship with Mexico, and we look forward to continuing that relationship. Mexico City is the economic, industrial and cultural centre of the country. It is not only the second largest metropolitan area in the world, it has become one of the most important economic hubs of Latin America. The economic influence of this city and this country has increased considerably on the world stage. As you know, Mexico is the world's 12th largest economy and it is growing significantly. As President Felipe Calderón has said, "More of Mexico in the world, and more of the world in Mexico."

As I mentioned, Mexico's influence was in evidence yesterday as Secretary Carstens hosted the Finance Ministers of the Americas and the Caribbean in Cancún. It was a good meeting, providing us with an opportunity to exchange views on a variety of subjects including what I just spoke about, the global economic outlook, the role of international financial institutions in this region, and further opportunities for cooperation within the hemisphere. Mexico is a key player at a time when the international spotlight is shining brightly on Latin America. Not only did we just have a meeting in Cancún, but the G20 is meeting in Brazil within a few months, and APEC is meeting in Peru also within a few months.

The Americas, from a federal government point of view in Canada, are a key priority for our government. Canada is renewing its presence in the region. We are re-engaging, we are strengthening our relationships with Mexico and partners throughout the Americas. Over the past 26 years, the Canadian Chamber of Commerce in Mexico has been working to further the relationship between our two countries. Your mission is our mission, that is to promote bilateral business opportunities and investment between Mexico and Canada. So I applaud you for your efforts, and you are making a positive difference.

A few words, if I may, about NAFTA, which is important to all of us. As you know, and there's some discussion in political circles in the United States from time to time about NAFTA—it is an election year—our Prime Minister has made it clear that our view on NAFTA is that it is an excellent agreement for Canada, Mexico and the United States as partners, that it has been successful, that it has resulted in major investment, and that it has resulted in employment gains in all three of our nations, so our view is that we don't need to reopen NAFTA. But were it to be reopened, as the Prime Minister has said, we would want to put a couple of issues on the table relating of course to energy.

Our focus is free trade and fair trade. The North American Free Trade Agreement has resulted in a competitive, open and connected marketplace. It's a marketplace of about 430 million people, that is, the largest marketplace in the world. NAFTA has proven to be one of the most successful trade accords in history. Since NAFTA was signed 15 years ago, the results have been dramatic. Trilateral merchandise trade has tripled from pre-NAFTA levels to about $900 billion in 2007. In 2007, Mexico was Canada's fifth largest customer. We exported nearly $5 billion worth of goods, including Canadian-made cars and trucks, electrical machinery, steel, cereal and meat. In reciprocity, Mexico was Canada's third largest supplier last year. Mexican exports to Canada were valued at more than $17 billion, including cars and trucks, machinery parts and equipment, and furniture and bedding.

And behind these numbers there are some significant Canadian players, as was mentioned earlier this morning: Magna, of course, TransCanada Pipelines, Bombardier, and many medium and smaller businesses. Mining is important. The Toronto Stock Exchange is the premier mining exchange in the world. Mexico is also a major destination for Canadian investment in mining. There are more than 150 Canadian mining companies in Mexico representing 75 per cent of total foreign mining exploration investment.

A couple of words about our financial institutions. I must say, the other Finance Ministers in the G8 look somewhat in envy at me when I talk about our banking industry at these international meetings. Our banks are well capitalized. This is important, particularly given what we've gone through since last August. They remain well capitalized despite some challenges during the course of the past year. At the same time, Canadian households are well capitalized, which is important in terms of the housing issue that I mentioned earlier. The banks in Canada were responsive last August and September when we bumped into this challenge with respect to asset-backed commercial paper. As I say, the banks were responsive with respect to their own responsibilities.

We then had this issue about non-bank-backed asset-backed commercial paper. And yesterday in Cancún, and I've heard it before from my colleagues, Canada is looked at with some envy in that we've been able to accomplish a private sector solution to the non-bank-backed asset-backed commercial paper issue. The table in Montréal was set up. I encouraged the process as did the Bank of Canada, and it has turned out so far to be successful. We hope that the final appeals in the courts will be dealt with before too long. And it is a good example of how a difficulty that arose in the private sector can be resolved in the private sector without taxpayers' money being engaged. So on that score, I applaud those, particularly Purdy Crawford, who led that effort.

On the energy side, as you know, the Prime Minister is fond of saying that Canada is an emerging energy superpower:

  • We have the second largest reserves of petroleum in the world. Only Saudi Arabia has greater reserves.
  • We are the largest producer in the world of hydroelectric power, which is important, because it's clean power.
  • We're the largest exporter of oil to the United States.
  • We rank third in global natural gas production.
  • We are the world's largest producer of potash and uranium.
  • We're the second largest producer of nickel in the world, the third largest producer of aluminium, now the third largest producer of diamonds in the world, which is something that has happened in the past 10 years, and the largest exporter of forest products in the world, despite the challenges there.

And our economic fundamentals are solid:

  • We balance our budgets in Canada. Our budget this year is balanced. I can assure you as Finance Minister it will remain balanced this year. We have tools, and we will make sure that that happens.
  • The Canadian job market-I mentioned labour shortages-is the best in a generation. Unemployment is at its lowest rate in about 33 years.
  • Interest rates remain low.
  • Inflation remains within the targeted range that we have with the Bank of Canada.
  • Importantly, our public pension plans are well financed, and as you know, that is a challenge in many places in the world.
  • And disposable personal income continues to rise.

So the economic fundamentals are good, but Canada is not an island. Mexico is not an island. We share a neighbour, the United States, that is having a significant economic slowdown, certainly the housing part of the American economy is in recession. As I say, it's not likely that the American stresses will be repeated in Canada, given the capitalization of our banking sector and of our housing market. The IMF looked at Canada recently in their Financial Sector Assessment Program. Their opinion was that Canada's financial system is capable of weathering substantial financial stresses, and I certainly support that view, given the capitalization that we have within our financial institutions.

So where are we going? We became the government in Canada almost two and a half years ago now. We're a minority government. We're still there, despite our efforts to encourage the opposition to, by doing unpleasant things to defeat us, but we're still there, and it looks like we'll be there for a while.

When we became the government, it became apparent to me fairly quickly that we did not have a plan, and any large organization like the Government of Canada without a plan, an economic plan, can easily stray, so we developed a plan called Advantage Canada. It's on the website of the Department of Finance.

We are emphasizing an Infrastructure Advantage, a Knowledge Advantage, an Entrepreneurial Advantage, a Tax Advantage and a Fiscal Advantage. This is important in this sense: we look at government policy and we look at ideas and we look at our relationships internationally through the prism of our economic plan for the country, and if the idea fits within the policy initiative, fits within the economic plan, then we'll consider it. But if it doesn't, then we don't consider it. This is important in terms of giving the country direction over the medium and long term in terms of our economic policy.

We are implementing the plan. We certainly have done so on the fiscal side. I believe in reducing debt. I believe in reducing government debt. I did it when I was Finance Minister in Ontario, and I'm continuing to do it now as the Finance Minister for Canada.

We have a goal. We intend to eliminate net government debt in Canada, all the governments in Canada, by 2021. We're on the right track. We already have the lowest net debt relative to GDP in the G7. We can eliminate the net debt. It will take us, as I say, another 13 years or so but already, in two and a half years, we've reduced the debt burden for Canadians, for each man, woman and child in Canada, by $1,570. So we reduced debt. That's fundamental.

Every time we reduce debt, of course, we reduce the interest payments. We return the interest savings to Canadians through the Tax Back Guarantee. Every dollar we save in interest, we reduce personal income taxes by the same amount, and in that way, there's an investment by Canadians and a reduction of public debt.

Why reduce debt? There are three reasons. One is to help keep interest rates down, which is very important in terms of the health of the economy. Secondly, to put us in good shape to go through difficult times like this when we're faced with economic challenges, to be well prepared. And thirdly, to deal with what is usually called intergenerational equity, that is, being fair to the next generation. We ought not to live at a certain standard ourselves with borrowed money, and expect the next generation to pay for it.

Now, on the expense side the big organizations tend to grow on their own, and the Government of Canada is no exception. So we have created something called the Expenditure Management System. We based it on advice we got from the private sector. I asked some of Canada's leading CEOs to come and talk with me and the President of the Treasury Board, which they did last year, and based on that advice, we developed the Expenditure Management System.

What we say to every government department and agency, every Crown agency, and there are lots of these, is to come to us in management board, in the Treasury department, and show us where you're spending your money and convince us that the program that is being advocated still fulfills the purpose for which it was created. And more than that, we say show us your least important 5 per cent of spending, which is a great discipline to make people think in that way, and we've already been through somewhere between 15 and 20 per cent of government spending, saved several hundred million dollars that we can use to pay down debt, reduce taxes or for other spending priorities.

On taxes, we've reduced every way in which the government taxes the people. We've reduced personal income taxes. We've reduced excise taxes. We've reduced the federal consumption tax by 2 full percentage points. One of those percentage points came in January 1st, which is helpful in terms of stimulus in the economy this year.

We've also reduced business taxes. Last October 30th I announced what is probably the most dramatic reduction in business taxes that we've seen, certainly since the Second World War, in Canada. If you go back to the 1980s, the federal business tax was in the high 30s, about 38 per cent, I think, at its peak. Now, when we took office, it was a little bit over 22 per cent. Now we have it down to 19½ per cent. By 2012, we'll have it down to 15 per cent. I challenged my provincial colleagues to get to 10 per cent. That will give us a combined business tax rate in Canada of 15 plus 10, 25 per cent, which is a good branding opportunity for Canada as a low business tax jurisdiction by 2012, and it's going well.

Alberta's already there. British Columbia will be there a year early. Manitoba's going in that direction. Saskatchewan, the new government there, is going there. The new green paper in New Brunswick is going in the same direction as well. There's a bit of a challenge in my home province in Ontario, so I'm gently encouraging the Premier there to move in that direction. And I think we're making some progress in that way. This is important in terms not only of branding the country, but of attracting investment in Canada.

We have provided, as I say, relief in every way that we tax people in Canada, and then we came to the budget this year and looked at the tax reductions that we had in place, the ones we announced October 30th of last year, the business tax reductions that will continue to take hold. The fact that we have reduced personal income taxes and so on, the net stimulus in Canada in 2008 is about 1.4 per cent of our GDP, about $21 billion. This foresight is important, that this is entering our economy now because of the slowness, and this is a structural change.

The Americans have a one-time stimulus that I've talked to Secretary Paulson about yesterday in Cancún, which will help the second half of the year in particular in the American economy. But it is one-time, whereas the changes we have made to our tax structure, as I say, are structural and continuing.

This year, when we looked at budgeting, we looked at the savings side, and the United States, the United Kingdom and others have savings plans. We have a Registered Savings Plan, as you know, for retirement, which came in in 1957. What we did in the budget this year is the most significant savings change in the tax system since 1957, that is we created the Tax-Free Savings Account. Someone described it to me on the weekend in Prince George as your own personal Swiss bank account, which is really what it is. It's a tax-free account for everything you can save for outside of retirement. The money going in is tax-paid. The money coming out is tax-free. And it's a $5,000 a year maximum, starting January 1, 2009. I know it's a product that our financial institutions will be selling as we move toward the end of this year. You know, Warren Buffett is fond of talking about the miracle of compound interest. That's what this is. Over a lifetime this will be a dramatic tax savings change. We anticipate in Finance that 15 to 20 years out, about 90 per cent of savings by Canadians will be free of tax through this plan and the RSP plan. So that's an important change to encourage savings, again, to help keep interest rates down.

Dealing with financial volatility, the escalating price of oil, the rising cost of food, all of these things are items that we discussed in the past day at Cancún and that we also discussed in Osaka. Canada has stepped up on the international food front, the World Food Programme. We've increased our donation immediately and substantially. The first priority has to be to feed the hungry in the world. And so Canada is now the third largest donor to the World Food Programme, and we continue to watch that carefully, because this is a food inflation challenge in many parts of the world, and it does hit the poorest of the poor the most. So this is a matter that we discussed yesterday and that we continue to monitor through CIDA in Canada.

Turning to the global financial situation, the Financial Stability Forum reports to the G7 Ministers. It's headed by Mario Draghi, the President of the central bank in Italy. They came back at our spring meetings with 65 recommendations with respect to financial institutions, including the banks, credit agencies and others. I'm pleased to tell you that the Canadian banks are being quite cooperative in implementing the recommendations of Mario Draghi's Financial Stability Forum. The disclosure by Canadian banks, the transparency has been good and is getting better, and all of the financial institutions, the banks have agreed to design plans that will bring us in compliance with the 65 recommendations there. This is important for us in terms of maintaining the integrity and the very good reputation of the financial institutions in Canada and the strides that the financial institutions have been making in the Americas and elsewhere in the world.

Now, I've gone on almost as long as it seems. I want to repeat to you that NAFTA is important to Canada. It has allowed us to broaden our horizons. It has strengthened the economic, social and political ties between Mexico, the United States and Canada. It has allowed us to seize new opportunities and realize greater prosperity. There is much more we can achieve. Canada and Mexico have become strong allies. We are good friends. By working together with groups such as the Canadian Chamber of Commerce in Mexico, we can build on our progress and move forward with confidence.

Thank you for hosting me here this morning.