May 8, 2009
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to the Canadian Club of Hamilton
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It is a pleasure to be here today. I want to talk a bit about our economy—about some of the good signs we're seeing and about some of the realities we're facing in the auto sector and in other places—and about the world economy. I will also make an announcement about something we're doing in the auto sector in terms of financing.
Let me talk for a moment about how we're doing economically. This is a serious recession. It became apparent toward the end of last year that not only Canada but the entire industrialized world was in a recession. This recession moved from a credit crisis in 2007 into the real economies of the industrialized world and then into the emerging economies, and now into the poorest countries in the world. So we have a synchronized global recession.
The expectation of Canadians, I think quite reasonably, is that governments focus on the task at hand and that we cooperate and collaborate. We certainly have done so with the Government of Ontario. I had a further discussion with Premier McGuinty yesterday afternoon about how we can work together to cushion the impact of the recession on those who lose their jobs, which means making sure Employment Insurance (EI) functions adequately and that retraining can be done. This means not only billions more dollars for EI, which we're providing in the budget this year, but also making sure that our community colleges and other post-secondary institutions are in a position to provide the training that people are going to need in the new economy. All of that is being done collaboratively with the Government of Ontario, and that is important.
Now there are glimmers of hope; I'm not going to put it any stronger than that. There are some good signs in the economy. You probably heard about the job numbers this morning in Canada, which are up for the past month. That is encouraging. They've been down for several months. The job numbers in the United States continue to be in serious decline. The unemployment rate in the United States now is about 8.9 per cent. We're at about 8 per cent. We can anticipate, as with the recession in the early 1980s, that there will be some continuing job losses in 2009. So, as I say, we have to act to cushion the impact of that.
We also have to act, which we did in our Economic Action Plan, to create stimulus in the economy. And we're doing that as well.
We need to take bold steps. These are not ordinary times. These are extraordinary times requiring bold action and extraordinary measures.
We start from a good position in Canada. You can be proud of the fiscal position of your country. We have been paying down debt. We have been running balanced budgets for years in Canada, particularly in the last three years, when we paid down almost $40 billion in public debt. This enables the Government of Canada to run deficits when we need to in the bad times like this economic downturn. You contrast that with the situation in the United States and other places in the industrialized world, where governments have been running deficits for a time. So when they need to run even larger deficits during a time of recession, it weakens their fiscal status and their fiscal framework. Canada is in better shape than that.
We also have a strong financial sector. This is important. This crisis started as a credit crisis in August 2007 in the United States with sub-prime mortgages. We did not have that kind of housing bubble in Canada and it's not an accident. We do not permit by law the deductibility of mortgage interest payments in this country. Some people want to do that from time to time. It was one of the contributing factors to the bubble in the United States.
We also require by law that mortgages worth more than 80 per cent of the value of the property be insured. This was valuable when we got into a liquidity issue with the Canadian banks last October during the federal election campaign, when I was able to announce that the Government of Canada, through Canada Mortgage and Housing Corporation, would buy some of these mortgages. Now they're already insured by us as Canadians, but so far we were able to provide about $56 billion worth of liquidity to our Canadian banks by buying some of these mortgages which, as I say, we insure anyway. This was not an option for the United States and for the European countries. So you get situations like the nationalization of banks in the United Kingdom, the investment of taxpayers' money heavily in some of the banks in the United States, none of which has happened in Canada.
When President Obama came to Ottawa on February 19, he praised the Canadian financial system as a model to be looked at by the United States. I heard the same thing from congressional leaders when I met with them in Washington about 10 days ago.
We have the best fiscal situation of any country in the G7. The International Monetary Fund (IMF) expects Canada to have the smallest economic contraction in the G7 this year and the fastest-growing economy next year. They are talking about restrained growth but it is growth.
We have some challenges, of course. We still have a financial system internationally that is not functioning properly. The Prime Minister and I have been emphatic in our international meetings, most recently at the London summit of leaders and finance ministers, saying to our colleagues in the G20 that they have to fix the financial markets—that is, fix the banks—because when the financial markets don't function properly it's impossible for the real economies in our countries to flourish.
That is happening in the United States now. You heard about the stress tests of the large U.S. banks, so that issue is being addressed by U.S. Treasury Secretary Timothy Geithner. I should tell you that we do stress tests of our banking system, our financial system, regularly as a matter of course in Canada and we're comfortable with the situation with our banks.
This also has to happen in the United Kingdom and in some of the other European countries. Germany announced last week a plan to move forward and deal with toxic assets, bad debts that are difficult to value in some of the European banks. I mention this because it's important to get the world economy functioning properly so that the breadth and depth of this recession will be limited.
So what did we do? In December and January we did the broadest consultation that's ever been done in a modern Canadian budget. We brought in the budget the second day Parliament came back on January 27, the earliest budget in modern economic times in Canada. And we addressed several things.
First, the financing situation. The number one issue that I heard across the country was access to credit. It makes it possible for people, families, and businesses large and small to invest, employ people and grow. So we created the $200-billion Extraordinary Financing Framework. It is a strategy to improve access to financing for Canadian households and businesses and it protects taxpayers by controlling risk.
This is already making a difference in the system. We have the Insured Mortgage Purchase Program, which is providing $56 billion of liquidity in the system. And we asked our financial Crown corporations to take on new and expanded roles. It is important that we have these corporations. We're the shareholders of them—Export Development Canada (EDC), the Business Development Bank of Canada (BDC), Canada Mortgage and Housing Corporation (CMHC) and Farm Credit Canada. I've made it clear to EDC, BDC and CMHC that we expect them to take on more risk during this time of recession, so that they can help Canadian businesses that are viable survive this difficult time and come out of it stronger than ever. We don't want good Canadian businesses to go out of business because of this recession as long as they're creditworthy. So I asked the CEOs of the chartered banks to work with EDC and BDC to make sure that viable Canadian businesses, large and small, survive this recession. The results are good. I spoke with the President of EDC this morning and I'm up to date on what they're doing.
I'll make a formal report to Parliament and to the people of Canada in June about what is being accomplished in terms of access to credit. We have the Business Credit Availability Program, Canadian Lenders Assurance Facility and Canadian Life Insurers Assurance Facility. So we're expanding the availability of credit during this contraction in the economy.
I get good advice from McMaster University President Peter George, and I've appointed a 12-member Advisory Committee on Financing, largely made up of CFOs of Canadian businesses, large and small. I'm meeting with them Monday morning at Meech Lake to hear their advice about where the gaps are in our financing efforts. We have to make sure that we stay on top of this as we go forward.
Now I want to talk today about the rollout of the Canadian Secured Credit Facility. This is important in the auto sector. As you know, we've been able to accomplish a way forward for Chrysler with the assistance of the Government of Ontario, the Government of the United States and Fiat, and now we're working with General Motors. A serious shortfall in Canada has been the lack of financing of vehicles and equipment for consumers and businesses. And this has led to increased borrowing costs for some and limited credit availability for others. It's a situation that can't be allowed to continue if we want to restore confidence and get our economy growing again.
So today I'm pleased to announce the rollout of the Canadian Secured Credit Facility (CSCF). Through the facility, the Government will purchase up to $12 billion of asset-backed securities backed by loans and leases on vehicles and equipment.
Today, the Business Development Bank of Canada has allocated over $10 billion of that amount to 15 Canadian lenders in the CSCF's Large Enterprise Tranche. This group includes the financing arms of major auto and equipment manufacturers in Canada and covers loans, leases and dealer floor plans.
I'm also pleased to announce that BDC has launched a process targeting a $1-billion allocation to a Small Enterprise Tranche of the CSCF. By introducing a smaller minimum transaction size, our Government is ensuring that the benefits of this program will reach market participants both large and small.
Like all of our efforts to improve access to financing, taxpayer dollars will be respected every step of the way. We will require assets to be rated triple-A by two nationally recognized credit rating agencies and structured so that they will be able to withstand current market conditions or worse.
So the CSCF is going to be a lot of help in our communities because the auto sector isn't just assemblers. There are many people who are employed in the auto sector and who rely on the success of the sector. And this credit facility will be an important step forward. It is bold. It is not a small amount of money. We've taken time to consult and get it right, and I believe it's going to work well in both tranches, first the larger one and then the smaller one in the auto sector.
There's more work to be done. We have a strong financial system in this country—a strong insurance system and a strong banking system. The federal government has a strong fiscal position.
We do have a weakness and quite frankly it's an embarrassment internationally for Canada: we have 13 securities regulators across this country. So we're moving ahead, as I announced in the budget this year, with one national securities regulator. It takes time with some of these things. Perseverance is important. And I've been advocating this for more than three years as Minister of Finance of Canada. We have to get this right. I'm pleased to say that we have a critical mass of provinces and of the industry supporting us now. So we'll be moving ahead with the transition office, which is funded, and I'll say more about that in the next month or so.
Another issue is credit cards. There are some challenges. In the budget this year, the Parliament of Canada gave the Minister of Finance the power to regulate credit cards. Part of the issue is consumer protection, which is important, and the other part is financial literacy—making sure that people understand what is disclosed to them.
For example, we know that some people in Canada think it's okay to make the minimum payment as shown on your credit card statement. Well, it's actually not okay because it will take you more than a decade to pay off the principal amount. This needs to be disclosed to people. So we're going to release a set of regulations within the next several weeks dealing with the issue of disclosure and a few other issues relating to credit cards in Canada.
The other part, as I just mentioned, is financial literacy. We want to make sure that people understand what a balance sheet is, understand what compound interest is, understand what a profit and loss statement is.
At a recent conference on this subject at the Federal Reserve Bank of Chicago, I spoke about what we're doing in Canada, about the importance of understanding debt loads and cash flow and that kind of thing. We are about to appoint an independent task force, which over the course of the next year and a half will report back to the Minister of Finance about how we go about structuring the education necessary, whether in our school systems or in our post-secondary education institutes or however we do it, to ensure financial literacy for the next generation.
The other concern we have is pensions. This is a challenge. Capital markets have come back significantly in the last seven or eight weeks, but with the decline in capital markets there is a decline in the capitalization of some of the pension plans. This creates pressures on the companies involved that are supposed to top up the plans and maintain levels of capitalization. We don't want to have good, viable Canadian businesses not being able to persevere because of pension issues.
So we're consulting. We've already allowed the length of time for solvency payments to be made to double to 10 years subject to certain conditions. My Parliamentary Secretary, Ted Menzies, has been across the country listening. I've been having meetings in Ottawa with Ted and some companies that have concerns with respect to their pension situations. Pensions are about people. We have to make sure that we take the necessary steps so that those companies that have survivability are able to persevere and protect their pension plans going forward.
The first thing we did in the budget was deal with access to credit. The second thing we did was deal with Employment Insurance. Thirdly, we provided stimulus. Stimulus means spending. It means shovel-ready projects. It means making sure that actions are taken now, not two years from now, to help people find jobs and to get some of the necessary infrastructure projects done.
The provinces need to work with the federal government on this, and most of them have been there. Certainly Ontario has been there in its budget. It is very important for all people across Canada. It includes not just infrastructure—bridges and roads, buildings, and university campus and college campus building repairs—but also looking down the road a bit. So there is another large sum of money for Infoway, which involves electronic health records in the provinces. It is essential to have an intelligent health care system that functions efficiently and effectively in our country. We need electronic records, so the federal government is continuing to fund that and to increase broadband Internet access across the country.
We're also cooperating with the provinces on tax relief. We're going to reduce the federal corporate income tax rate from 22.5 per cent when we started to 15 per cent by 2012. We wanted the provinces to get to 10 per cent by 2012, because that gives us a 25 per cent brand in Canada. We can say around the world: come and do business in this country and your tax rate in your business is 25 per cent. Most of the provinces have gone in that direction, including Ontario, which indicated in its most recent budget that it will have a 10 per cent tax rate by 2013.
The IMF said our stimulus package is large, timely and well targeted. We're certainly encouraging our fellow leaders and finance ministers in the G20 to do what Canada has done: make sure their stimulus is substantial and timely—that is that it happens now—so that we can curtail the length and breadth of the recession. Our stimulus amounts to about 3.2 per cent of GDP with the provinces. Canada is a leader in the G7 on this.
We're also investing in bridges. Rehabilitating federal bridges is important. This is about tourism and it's about trade. Examples include the Blue Water Bridge in Sarnia, the Peace Bridge in Fort Erie and the Burlington Lift Bridge.
We also face the reality of the auto sector and the manufacturing sector. Southern Ontario is going through a tough time in manufacturing. We've had regional development agencies in many other parts of the country, but we did not have one for Southern Ontario. We will have one now— the Southern Ontario Development Agency funded with $1 billion over the course of the next five years.
To conclude, planning is important. You have to have a plan to deal with a crisis. We have had a credit crisis globally. We have had a crisis that has entered the real economies of the world. And we have not had a synchronized global recession like this in modern times. So we have challenges. We have a plan to address those challenges.
I think most of us were around in the early 1980s when we had a significant recession with high unemployment and high interest rates. In September 1981, the prime rate was 22.5 per cent. We had another recession in the early 1990s. But I say to you we are not weak people. We are Canadians. We are well prepared. We are sound fiscally. We have a sound financial system. We have a plan. We are implementing the plan and we Canadians will come out of this recession stronger than ever.
Thank you for the invitation to be here.