October 29, 2008
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to a Joint Meeting of the Empire Club of Canada and the Canadian Club of Toronto
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I'd like to thank you for the opportunity to be here today. It's always a pleasure to address this audience of innovators and entrepreneurs, people who through thick or thin have contributed so much to our country's prosperity and success.
That prosperity and success should never be taken for granted. The Canadian economy is under the same pressures and challenges as the rest of the world. In recent weeks, I have had the opportunity to work with our international partners to find ways to address those challenges collectively.
More of those meetings are approaching very soon—a meeting of APEC finance ministers in Peru, a meeting of G20 finance ministers and central bank governors in Brazil, and a summit of G20 leaders in Washington just a couple of weeks ahead of us.
It's a good thing I don't have a fear of flying.
But before I leave for distant shores, I would like to give you a preview of what I'll be telling the people I'll meet about Canada's prospects, and how well we're overcoming our economic obstacles.
Today I'll discuss where we are as a nation, and how we got to the place we're at today—the steps our government has taken to prepare Canada for rough times, and what that means for Canadians as they work to put food on the table, pay down their mortgage and save for their kids' future.
In times like these, when countries are coming together looking for answers on how to deal with an international crisis—and prevent it from ever happening again—I believe Canada has much to contribute.
We are definitely not alone in facing challenges. In fact, the challenges we face originate overwhelmingly from outside our borders. Still, to address them, we will need prudence, discipline, and a steely-eyed focus on the things that matter to Canadians.
But at the same time, other countries are grappling with even more critical concerns. And given Canada's relative strength, those countries would do well to consider how Canada prepared for an international situation no one had considered possible, and why we will come out of this uncertainty stronger than ever.
How We Got Here—Tax Reductions and Strategic Investments
Long before this global credit crunch and gut-wrenching market volatility ever appeared on the radar screen, our government began preparing for the possibility that the stability of our financial institutions, and the will of Canadian consumers and businesses, would be severely tested.
In fall 2007, we recognized that times would get tougher. We knew we had to make sure Canadian families and businesses would have an edge in those tougher times. Measures announced in advance of the economic downturn—up to and including our 2007 Economic Statement—are providing $21 billion in incremental tax relief this year. That is equivalent to 1.4 per cent of our GDP, and representing a substantial stimulus to help us deal with what was to come.
Unlike the temporary measures the U.S. took earlier this year, and which some are now calling to be introduced again, our tax relief was permanent: tax reductions Canadian families and businesses can count on, year in, year out.
While we were reducing the tax burden on each and every Canadian, we were also relentlessly paying down the debt, and passing on the interest savings to Canadians.
And we invested strategically in areas critical to this country's future success: in job training, in science and technology, in infrastructure and, as part of record transfers to the provinces, in post-secondary education. Investments, in other words, that would be essential in dealing with and overcoming harder times ahead.
By acting when fiscal prospects were brighter, we avoided a situation where we would have been compelled to take panicked and undisciplined measures when times were tougher—measures which, by themselves, would have resulted in a deficit.
Instead, because of the choices this government made, we have the best fiscal record in the G7. By any objective measure, in the eyes of the international community, and in the eyes of scores of economic experts, we have put Canadian families and businesses in the best possible position to deal with today's global uncertainty.
How We Got Here—Financial Stability
Instead of the rear-view mirror approach now on display in other parts of the world, this government has been focused on the horizon. This extends to how we acted in advance of international financial turmoil.
As just one example, our last budget provided additional powers to the Bank of Canada to provide liquidity to the market when required. In the past few months the Bank has been using those powers—powers that have allowed it to respond quickly and decisively to a global credit market at risk of grinding to a halt.
Canadians may not wish to immerse themselves in subjects like statutory authorities and acceptable collateral—and I don't blame them. But they can take comfort in the fact that their government acted in these areas. And we did it so that Canadian borrowers and lenders would continue to have access to credit markets—for home and business mortgages, for car loans, and for other forms of credit that are essential to keeping our economy moving. As most here know, in many other countries that hasn't been the case.
Our forward-looking approach included efforts to prevent mortgage bubbles like the one in the U.S. from happening here. In the U.S., families have lost value in their homes, or are tragically losing their homes completely as the system collapses. Changes we announced this summer to the rules for government-guaranteed mortgages are helping to prevent that kind of damage from happening here.
These improvements, most notably a maximum amortization period for new government-backed mortgages to 35 years and a minimum down payment of 5 per cent, are in effect right now. These measures took a Canadian financial system and housing market that was already strong, and made them stronger.
Over the past month, however, we have seen a dramatic and sudden collapse of financial institutions in the United States, deepening the global credit crisis and raising the risk that Canada's system could be sideswiped. So we acted again.
We announced an innovative way to encourage more longer-term credit in Canada—with no additional risk to taxpayers—with a plan to purchase $25 billion in insured mortgage pools by the Canada Mortgage and Housing Corporation. This made-in-Canada approach involves purchasing high-quality assets, already guaranteed by the Government of Canada, so as to make loans and mortgages more available and more affordable to Canadians—all at no fiscal cost to Canadian taxpayers.
This initiative, which is in addition to the regular Canada Mortgage Bond program, is an efficient, cost-effective and safe way to provide support for lending in Canada at this time of unprecedented global financial turmoil.
Less than a week ago we created the Canadian Lenders Assurance Facility, a temporary program that will offer insurance on the wholesale term borrowing of federally regulated deposit-taking institutions.
In plain English, that's a backstop to ensure the Canadian banks—which have weathered the global credit crunch better than their competitors—are not put at a competitive disadvantage because other countries have provided borrowing guarantees to restore or protect the stability of their own financial systems. And also at no expected fiscal cost for taxpayers.
These changes are keeping our banks competitive and strong, and they're keeping credit flowing—things that Canadian families and businesses rely on.
Where We Are Today
Since we took office two and a half years ago, that is what our government has done to ensure long-term growth and reduce economic risk. Our government's economic plan has helped sustain that economy.
Today it means Canada is in a much better position than virtually any other major country to withstand the economic and fiscal storms working their way around the globe.
It has led to the IMF predicting Canada will have the best economic growth in the G7 next year. That forecast, along with the others we are seeing recently, is modest, especially compared to recent Canadian growth. But I can tell you that, under current conditions, if you asked other countries whether they would like to trade places with us, the line-up of volunteers would be long.
As for Canada's financial system, the World Economic Forum recently concluded it is the soundest in the world, with financial market sophistication and investor protection among the world's best. The IMF has also judged our system to be mature, sophisticated and well managed, and able to withstand sizeable shocks.
This praise reflects a stable Canadian system that is now being rewarded for its prudence and its high standards. Canadian capital requirements for financial institutions are well above minimum international standards, and higher than in other jurisdictions.
Even with all of the challenges we are facing, Canada remains on track to balance its budget this year. Last week's Fiscal Monitor indicated a surplus of $1.2 billion over the first five months of the current fiscal year. Once again, it's a Canadian track record far beyond the fiscal prospects of major industrialized nations.
What Has Changed
All of these efforts put Canada in an advantageous position today.
And that's a good thing, since what is going on around the world today is far beyond what anyone could have predicted even two months ago.
In a remarkably short period of time, the collapse of financial institutions in the U.S. and the seizing of international credit markets have taken financial markets down sharply and have resulted in a worldwide economic slowdown.
In the U.S. alone, the list of financial institutions damaged by the meltdown is a long one: Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, Washington Mutual, AIG and Wachovia. All of these institutions have collapsed or required a bailout or takeover within a matter of weeks. Our American neighbour has been joined in its banking rescue efforts by countries throughout Europe.
Without question, these are uncertain economic times. And after the extraordinary developments that have taken place in a matter of weeks, no one can reliably predict what will happen next.
This is the new reality Canada faces today—wild swings in financial markets, increasing attempts to keep credit flowing, and economic forecasts that have grown more pessimistic by the day.
We are entering an extremely difficult period for Canadian families, who are counting on their governments to get down to work and follow a sensible, realistic plan to protect their earnings, their savings and their jobs.
In this new reality, that is exactly what this government will do.
Strong Finances in an Uncertain Future
While Canada may be doing better than most, we must still prepare ourselves for the challenging times we face now and in the period ahead.
That means using our strong starting position to our advantage. Our balanced budgets have already allowed us to do the things needed to keep our economy strong:
- Healthy funding for health care, post-secondary education and infrastructure;
- Investments in science and technology, as well as training people for a brighter future;
- Tax reductions for all Canadians; and
- Efforts to create the investment climate that will lead to more jobs and greater prosperity.
We've focused on all of these early on because we realize that, while surpluses themselves are important, what's more important is what those surpluses make possible: better lives for Canadians.
Ongoing, unsustainable budget deficits are quite rightly unacceptable for Canadians. These structural deficits must never return.
Yet also unacceptable is a devotion to surpluses simply for the sake of saying you've achieved them. That view refuses to take into account the long-term damage that can result from misguided attempts to balance the books during a historic global downturn.
No one should ever expect us to be complacent about the risk of a deficit. We will do what we can—despite challenging economic circumstances—to keep the budget balanced.
However, as Canada, like all countries, enters a new and unknown economic cycle, we recognize that we work for Canadians, not fiscal forecasters.
What we will never do is engineer a surplus at any price, because that price would ultimately be paid by Canadian families.
What We Will Do
What we will do, in this fiscal year and the years that follow, is continue to manage spending responsibly. We will not spend now to tax our children and grandchildren later.
For nearly three years, we have focused on this responsible approach.
Our focus is to keep spending in check—to practise restraint, and look at every dollar we spend with a critical eye.
This approach includes a renewed Expenditure Management System, a review of every cent of spending by government departments over a four-year cycle. In the first year of this system, we examined department spending of $13.6 billion, which is worth 15 per cent of total direct program spending.
That restraint exercise will continue. And we will redouble our efforts for the year ahead, to ensure the spending of taxpayer dollars is as efficient and effective as possible.
Grants, contributions, capital, wages, other operating expenses—all will be placed under the microscope of responsible spending. Departments will have what they need to fund essential programs and services—and no more.
While being more rigorous in spending by departments, we will extend that review to Crown corporations and other key corporate assets. By doing so, we will ensure that the original purpose for setting up each corporate entity is still relevant in today's world, and that dollars are being spent wisely.
This commitment to responsible fiscal management will also extend to public sector compensation.
We all recognize that public sector employees work hard for Canadians, and that they must be adequately compensated. It is in the public interest that public sector compensation be determined responsibly in a manner that does not add pressure on businesses that are already feeling the pinch of an economic slowdown.
We are confident that every stakeholder involved in the process of setting public sector compensation will show commitment and accountability to act in the public interest and strike the proper balance. We will be guided by these considerations as we prepare the fall Economic and Fiscal Update.
In overseeing federal spending, we will also be mindful of the steps this government has taken to restore fiscal balance through long-term, fair and predictable transfers to provinces and territories.
Under our government, transfers for health and social programs have grown, and they'll continue to grow. Federal support for provinces and territories has reached unprecedented levels, almost $54 billion in federal support this fiscal year alone. That funding helps ensure that provincial governments can provide health care, education and other essential social services—critical government services that your families count on.
We will be diligent in protecting this transfer growth. We will not abandon the commitment we have made to provinces and territories—and by extension to Canadian families.
As part of our fiscal balance commitment we renewed and strengthened Equalization, with a principles-based approach and long-term, equitable and growing funding. We will continue to ensure growing support for those provinces that need it.
The Equalization program has to adapt to developments that nobody could have foreseen. In particular, the enormous volatility of resource prices—with recent high energy prices—are putting pressure on Equalization.
Equalization remains an essential component of the Canadian federation, but it has to be affordable and fair. Equalization has grown by 56 per cent since 2003–04. Clearly, in this time of fiscal uncertainty, we cannot sustain that rate of growth.
As part of our commitment to responsible fiscal management, and in the spirit of fiscal balance, we will ensure the program continues to grow, but growth must be closer to the growth of the economy to be sustainable.
Without change, Equalization is not sustainable, and threatens the integrity of the program.
In these challenging times, it is more imperative than ever that governments work together to further strengthen the Canadian economy.
The time is right to put an end to interprovincial trade barriers that unnecessarily restrain our economy right here at home. And given the unprecedented turmoil in international financial markets, it is also a good time to move toward a single securities regulator that reflects regional interests, yet can quickly respond with a single voice to market developments.
As part of our efforts to ensure all governments work together in the interests of all Canadians, this government is organizing meetings of the federal-provincial-territorial finance ministers and first ministers in advance of the G20 events. These meetings will lay the groundwork for what we hope to achieve in the international summits, as well as build on the spirit of cooperation that will be crucial to responding to the economic challenges every government in Canada is facing.
As Canadians have managed to do throughout our country's history, we will get through this global turmoil together. And we will come out of it in a very competitive position.
How We Will Move Forward
We certainly have our work cut out for us. We've prepared well for this approaching storm, but endure it we must.
And endure it we will.
Within the next month, after consulting my federal and provincial counterparts and my international colleagues, I will set out the economic and fiscal projections we will rely on as we prepare the next budget.
Given the sudden onset and imposing depth of this crisis, forecasting its effects on the Canadian economy will be daunting. Managing its effects will be even harder.
But what I can assure you is that our responsible, disciplined and forward-looking strategy will not waver.
We will continue to work alongside the provinces, sharing our assessment of international and domestic conditions, explaining what we intend to do and asking for their cooperation to ensure future economic growth.
We will keep taxes low, to benefit Canadians.
We will keep investing in Canadian priorities.
We will do whatever is necessary to prevent the soundest financial system in the world from being put at risk by global events.
And we will budget prudently and with restraint, consulting with Canadians every step of the way.
What Matters Most
None of this will be easy, and our approach will include some tough measures. Good times or bad, hard choices are just part of the job description.
So, too, is understanding what matters most as we steer our nation's finances through the turbulent waters ahead. It's not lines on a spreadsheet, or calculations on a fiscal projection.
Surpluses, as integral a part of the planning process as they might be, are not an end in themselves, and they never will be.
What matters most is people. Our ultimate goal is to ensure we spend wisely on the things that will bring a direct and lasting benefit to Canadians.
If we keep our sights set on protecting jobs, enabling Canadians to save and businesses to grow and thrive, and creating a better future for our children, we will take our healthy head start and emerge from this difficult economic cycle stronger than ever—and better off than the countries that compete with us every day.
I can tell you now that, in the global discussions I will soon attend in between airport lounges, my colleagues will do what they always have: marvel at what Canada has accomplished, and predict that there will be more success to come.
A stronger Canadian economy is our goal.
The well-being of Canadian families, throughout 2009 and the years that follow, is how we know we'll have reached it.