October 24, 2008
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to the Niagara Falls Chamber of Commerce
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Niagara Falls, Ontario
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It’s a pleasure to be here again in Niagara Falls and at this venue in Niagara Falls. I do want to thank you for inviting me here today. I’m happy to be here for the Achievement Awards in Business, which is vitally important of course for the economy of Niagara Falls, of Ontario and Canada. The leadership and vision and determination demonstrated by those receiving the awards bodes very well for this community, particularly when these traits are needed so much in the world today.
I’m also grateful to be here on behalf of the newly re-elected Government of Canada, on behalf of Prime Minister Harper, and I bring his greetings to you. We are thrilled to have a renewed mandate from Canadians to steer our country through global financial storms the likes of which no one in this room, including me, has ever seen. We certainly have our work cut out for us with challenges that demand what today’s honourees represent, that is leadership and vision and determination.
Now as we prepare for the return of Parliament and my Finance Department works on an Economic and Fiscal Update setting out how we will meet these challenges, we will continue, I can assure you, the approach that we’ve taken for the past almost three years, and that is responsible, prudent, squarely focused on the priorities of Canadians and Canadian businesses.
A few words now about the global challenges. You all watch television and are aware and read, and as business people are acutely aware of the economic challenges, some of the global credit crisis challenges that we’re facing. I had one challenge recently, and that is during the political campaign having not enough time to campaign in my own riding. I thank the voters of Whitby–Oshawa for still electing me despite the fact I wasn’t there, particularly toward the end of the campaign, when the international credit crunch and dramatic swings in global markets made it imperative that we work together internationally and coordinate our efforts.
This has been and this is a difficult time for Canadian families and for Canadian businesses. People are worried about their jobs and their savings. During the recent election I certainly heard that in my home community of Whitby and I also heard it across Canada, and quite frankly people in Canada—I can say this, the election is over, it’s not a political kind of thing to say—were not looking for grand spending plans or schemes. I think what people were looking for was stability and staying the course and making sure, in a time of global turbulence, that Canada stays on a steady track. And that requires a sensible and realistic plan and an expectation, which we accept as a re-elected government of course, but we need to continue the work that we were doing and make sure that we execute the plan that we have in place.
So that’s why during the final weekend of the campaign I was behind closed doors working with my colleagues, the finance ministers in the G7 in Washington on the Friday and then on the Saturday with the International Monetary Fund governors, and later on Saturday afternoon with the finance ministers from the Americas, North and South America, Central America, and in the evening with the finance ministers of the G20. These were extraordinary meetings. They could not have come at a more appropriate time, a more necessary time. Recent events have brought all nations together to prevent the current turmoil gripping global markets from worsening.
The meetings took place in the shadows of growing stress in global financial markets. Credit was becoming increasingly difficult to obtain for even the most creditworthy. There was a growing reluctance by banks to lend to one another. I emphasize that these problems were external in origin—they originated outside of Canada. But during this period, Canadian financial institutions were battling these cross-border headwinds remarkably well.
Others at these meetings were quick to note Canada’s unique performance. Our federally regulated banks and other financial institutions have remained sound, well capitalized and less leveraged than their international peers throughout this difficult time. The World Economic Forum a couple of weeks ago assessed Canada’s financial system to be the most sound in the world. It ranked our financial market sophistication and investor protection among the world’s best. Likewise, the International Monetary Fund concluded that Canada’s financial system is unique, sophisticated and well managed, and able to withstand sizeable shocks.
This is made-in-Canada stability. It comes in part from Canadian capital regulatory requirements for financial institutions that are well above minimum standards internationally and higher than in other jurisdictions. It also reflects the financial sector’s structure, that continues to benefit Canadians. Large Canadian investment dealers have been bank-owned since the late 1980s so they are regulated on a consolidated basis by the Office of the Superintendent of Financial Institutions, which means that our large investment banks are part of our chartered banks in Canada and we regulate them federally.
Canada’s mortgage system is also sound. The sub-prime component in Canada is small. We have avoided the products and marketing practices that have led to the serious problems now being experienced in the United States. And these are tragic issues in the United States, with many Americans losing their homes because of this sub-prime issue in that country, including many Americans who were sold that product in their homes and they did not have financial problems then and now they do. So, as I say, this is a serious matter for our friends in the United States. So compared to U.S. households, Canadian households have smaller mortgages relative to both the value of our homes and to our disposal incomes.
So Canada entered these meetings in Washington a couple of weeks ago in a strong position despite the turmoil in the global economy, turmoil that did require and does require global coordinated action.
As an indication of the meetings’ significance, the G7 meeting concluded with a clear five-point plan of action for all nations to stabilize financial markets, restore the flow of credit and support global economic growth.
This was followed—after the G7 communiqué, which was a brief one-page communiqué, not the usual long communiqué, very much to the point—by a meeting the next morning of the IMF, where on behalf of Canada and other ministers as well, we advocated for the same coordinated approach internationally, the same support for the five-point plan, which the International Monetary Fund governors agreed to. And in the afternoon the ministers of the Americas agreed as well and in the evening the ministers of the G20 agreed as well. So we have a cohesiveness of purpose following that five-point action plan, which is a good indication of strong international cooperation and coordination.
Obviously, Canada supports these actions and the spirit of cooperation that inspired them. We are continuing in our efforts to coordinate the efforts. I believe finance ministers should continue to meet in the coming weeks to ensure further global progress, and we will. In less than two weeks, the finance ministers are meeting in Peru for the APEC, the Asia-Pacific Economic Cooperation Forum, and then immediately after that in Brazil the finance ministers of the G20 will meet, and that will help in the preparation for the leaders’ summit, which will take place in Washington on Saturday, November 15. And of course Prime Minister Harper will be attending there.
In the meantime, I’ve been having ongoing discussions with my provincial and territorial colleagues. As finance ministers, we’ve been speaking frequently on the phone so that they are up-to-date on what is happening internationally and our federal plans.
Prime Minister Harper this week certainly and previously has been actively engaged in discussions with other world leaders leading up to the summit on November 15, as he recently put it, to "protect this country’s economy, our earnings, our savings and our jobs during a time of global economic uncertainty."
Now fortunately for Canada, while other countries are now hard at work fixing problems within their financial systems, we go to these international meetings in an enviable position. Canadian financial institutions have always had a prudent and cautious Canadian approach to mortgage lending. This, combined with sound oversight, has allowed Canada to maintain strong and secure housing and mortgage markets. As a government, we acted long before the financial turmoil became a crisis this fall. We prepared in advance. Canada was a leader in increasing disclosure and transparency by financial institutions as we implemented the recommendations of the Financial Stability Forum and endorsed by all G7 nations.
The Financial Stability Forum was created by the G7 finance ministers to make recommendations since August 2007, when the sub-prime crisis started to happen, about how we make sure that our financial institutions around the world are open and transparent, particularly in terms of the value of their assets. And as I say, Canada’s been a leader in following those recommendations.
Over the past year as well our government, along with the Bank of Canada, introduced several measures aimed at making the financial system even stronger. In my budget this year in 2008, we provided additional powers to the Bank of Canada to provide liquidity to the market. Why is liquidity important? It’s important so that our banks can continue to lend, not in some theoretical way but for mortgages on homes, for mortgages on commercial properties, for car loans, for all of the ways in which we carry on our lives. In business, of course, to finance inventories and so on, it’s necessary that there be liquidity in the system.
The Bank has used the legislative authority they got from Parliament this year after our budget and has also widened the range of acceptable capital. The liquidity provided so far by the Bank of Canada is about $20 billion and that, as I say, is due to the expanded statutory authorities.
With respect to our housing market, I saw in the first half of this year that there was an increase, a substantial increase leading to a point where more than half of the residential mortgages in Canada were 40-year amortizations with less than 5 per cent down payments. I’m sure the generation before us would be shocked by that and I hope lots of you are shocked by that. So we tightened that up. In the summer we made the requirement that if one wants to have an insured mortgage in Canada with the guarantee of the Government of Canada, that one must put at least 5 per cent down, and the maximum amortization period is now 35 years. We also brought in new loan documentation standards and a consistent minimum credit score for insured mortgages in Canada. All of those new provisions came into force on October 15.
Going back to the summer, we introduced new consumer measures to improve disclosure for mortgage insurance transactions and ensure consumers are charged no more for an insured mortgage than the true cost of obtaining that mortgage. We also expanded the Canada Mortgage Bond Program, increasing the volume of funding for mortgages available to Canadian banks and mortgage lenders through the Canada Mortgage and Housing Corporation. By taking these steps, we recognized the importance for individuals and families in Canada to save through home ownership, especially during a period of economic uncertainty.
Even with this solid foundation and early action, it was becoming clear that the trouble in global credit markets was making it difficult for Canada’s financial institutions to raise long-term funding. As a result, it was becoming more difficult for ordinary Canadians to access credit. Canadian families wishing to buy a house or a car or trying to send their children to college or university, or Canadian businesses trying to invest and grow, would be facing decreased availability of credit and other types of loans.
So on the day of the G7 finance ministers’ meeting, which was two weeks ago this morning, we went further. We announced in Ottawa that the government would take steps to maintain the availability of longer-term credit in Canada by purchasing up to $25 billion in insured mortgage pools through CMHC. This was an innovative Canadian way to make loans and mortgages more available and affordable for ordinary Canadians and businesses using these high-quality assets, which are CMHC-insured mortgages already guaranteed by the Government of Canada and presenting no additional risk to Canadian taxpayers.
And I can say this approach has gone well so far. We will continue to monitor that program and we will take additional action if necessary.
Just yesterday, we went further again to strengthen access to international credit markets for Canadian financial institutions. We created a Canadian Lenders Assurance Facility, which is a temporary program that will provide insurance on the wholesale term borrowing of federally regulated deposit-taking institutions.
What does all that mean? It means that we want to ensure that our banks are not at a competitive disadvantage internationally. Many other governments in the world have gone ahead and provided guarantees for the international lending, the interbank lending of their institutions. The Canadian banks, as I’ve said, are well funded. They don’t require an injection of capital from our government. They have adequate capitalization above the standards that are required by regulation. But they could be at a competitive disadvantage if we did not provide this sort of backstop for them, which we did yesterday in a proactive way. And we did not want them to be at that disadvantage because, again, that would affect the real economy in Canada, the ability of individuals, families and businesses to borrow on good terms in Canada.
So that’s why we took the step yesterday. We’re continuing to monitor what is going on in international credit markets and, as I say, and as the Prime Minister has said, we will ensure that our Canadian financial system is not put at a competitive disadvantage.
Why did we respond this way?
Because as other countries have moved to address problems originating in their own economies, we must ensure that Canada’s financial institutions do not become victims in the process. That would affect Canadians and Canadian businesses.
Because we will never allow Canada’s financial system, ranked as the soundest in the world, to ever be put at risk by global events.
Because Canadians deserve nothing less.
Now a few words about our economic fundamentals in Canada. I am getting away from our financial institutions for a moment and talking about where we are as a government. The thoughtful, careful approach to predicting and strengthening our financial system is no different than how we have managed other aspects of the Canadian economy since 2006. Once again, we saw the economic slowdown coming and we prepared in advance.
As was the case with our substantial debt and tax reductions, it’s all part of our government’s overall approach to managing the economy to ensure long-term growth and reduced economic risk.
It’s true that the federal government’s fiscal position is under the same pressures as those of other levels of government in Canada. This week, we’ve seen some of the provincial governments release their most recent plans to deal with those challenges that they face in their own way. Today, my department released the monthly Fiscal Monitor, which gives the results for the first five months of this fiscal year. It shows a surplus of $1.2 billion as a result of those first five months. I can assure you that we remain on track for a balanced budget this fiscal year, with a modest surplus by the end of the fiscal year—a position that I can tell you remains the envy of other industrialized countries.
There are many global economic challenges but, as in the case with our financial system, the fundamentals of Canada’s economy put us in a good position to deal with what’s ahead. Just last week, the IMF forecast that Canada will have the best economic growth in the G7 next year. And I’m now being reasonable about this, this is not big economic growth. This is a time of economic slowness. The IMF prediction was 1.2 per cent real GDP growth for Canada next year. So we have to be realistic and realize that we’re in a time of economic slowness, despite the fact that Canada is doing better than our competitors internationally.
Business and household finances remain solid in Canada. Unemployment is still near a generational low, a 33-year low, in this country. A great deal of the explanation for the success of the Canadian economy relative to other nations is the recognition by our government that times would get tougher. So particularly last fall when I looked at the fall Economic Statement, we decided to take bold action with respect to business and business taxation in Canada. You, members of the Niagara Falls Chamber of Commerce, know full well that the big job generator in this country is small- and medium-sized business. And we wanted to encourage small and medium-sized business to grow and to invest and to reinvest, and one way of providing that stimulus is to reduce business taxes.
So in the fall Economic Statement on October 30 last year, we set out a program to continue to reduce business taxes out to 2012, to reduce the Canadian base tax rate for businesses which, when we started in 2006 was at a little bit over 22 per cent, to 15 per cent by 2012. We asked the provinces, we challenged the provinces to join us in that and get their business tax rates down to 10 per cent by 2012. That would give us a combined rate in Canada of 25 per cent by 2012, which would be a tremendous marketing brand for this country in terms of attracting investment in Canada.
I’m happy to say that most of the provinces are following the lead of the federal government on that. As you know, I’ve been gently urging Premier McGuinty to go in the same direction. I have some more work to do there but I think that the indications are pretty clear that this is developing into a consensus in Canada that this is important for our economic growth in the future to get our base business tax down to a good brand of 25 per cent.
Since we’ve been in office, federal money has flowed to the provinces at a record rate. I say this because I read from time to time concern by the provinces about transfers. Well, transfers are at a record high. The transfers have never been higher from the federal government, your tax money, to the provinces in Canada. This year alone, more than $14 billion of your tax money that you pay in federal taxes is coming back to the province of Ontario and these transfers, the social transfer and the health transfer, all increase automatically each year going forward. So they will remain at record highs.
That money is for infrastructure, health care, post-secondary education, immigration, labour market training, public safety, communities in need, as well as in innovations like the auto innovation fund, which is very important for the province of Ontario and including the people of Whitby–Oshawa, who I represent, with the neighbouring headquarters of General Motors of Canada Limited.
For the people of Ontario, we’ve also delivered on the tax front, with nearly $75 billion in tax relief to the people and businesses of our province of Ontario. What does that mean for families? It means the average family with four people had tax reductions of over $3,500 so far under Prime Minister Harper’s government. It means the average tax rebate this year was up about $200 from around $1,200 to more than $1,400 for each individual in Canada. These are practical, pragmatic refunds to people that get spent in the real economy, which helps us weather difficult times like we’re in now.
Ontario businesses are benefiting primarily through the accelerated capital cost allowance and the tax reductions I mentioned. What is accelerated capital cost allowance? You know what it is. It means that businesses can invest in the most modern available equipment and processing. That’s essential if we’re going to have a strong manufacturing sector in Ontario and in Canada that is going to be sustainable over the medium and long term. We have to be more productive. Being more productive doesn’t mean people working harder, it means working smarter with better machinery and equipment, which increases productivity and increases our competitiveness as a province and as a nation. So that accelerated capital cost allowance is vitally important so businesses can spend that money and take the tax deduction for it.
I want to mention one other thing about savings and economic policy, and that is—some of you may know about it—the Tax-Free Savings Account (TFSA). Some of the private sector folks have been advertising recently about it and getting great responses, I’m told informally. We brought it in in Budget 2008. Why? Well, we had reduced taxes for individuals, for businesses. We had reduced the GST by a full 2 percentage points. We had reduced excise taxes, including in Niagara the excise taxes on wine, which was appreciated, I can tell you, by the industry in Niagara region.
But on the savings side we’re seeing some slippage in terms of the inclination of Canadians to save, and that’s important. Savings are important in terms of keeping interest rates down, keeping deposits up, which also assists the liquidity of our capital markets and our banks, so we felt we should encourage that.
We did it through the Tax-Free Savings Account. It comes into force January 1, 2009; it’s only a couple of months away. And, as of that day, any Canadian 18 years of age or over can put aside a maximum of $5,000 a year in a Tax-Free Savings Account. The money going in is tax-paid so you pay tax on it first and put it in the account. Whatever you earn on it, you can take out, it’s tax-free. And you can keep the room. So if you had $5,000, became $6,000, you can take up to $6,000 tax-free and you can put $6,000 back in later on when you’re able to do it, and of course it’s cumulative over time.
If you’re a Warren Buffett fan and believe in the miracle of compound interest, just imagine what that can produce over your lifetime. You don’t have to just imagine it. You can go on the Department of Finance website, and there’s actually a scale there that will calculate for you what that could mean over your lifetime. I tell you, when I speak at universities about this and our colleges there’s tremendous enthusiasm among those that understand compound interest and what it can mean over a lifetime if you start when you’re young with that type of plan. This is an important timely thing, as I say, available as of January 1, 2009.
We’ve taken a realistic approach to managing Canada’s economy. We’ll continue to display the characteristics we’ve relied on since 2006, the same traits that today’s award winners have shown through their accomplishments.
We will remain responsible, prudent, focused, decisive, and committed to making sure Canada remains a world leader and a model for other countries to follow.
Thank you for inviting me here today.