August 30, 2009
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to the 63rd Congress of the International Fiscal Association
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Vancouver, British Columbia
Good evening. It is my pleasure first of all to welcome all of you on behalf of Prime Minister Stephen Harper and the Government of Canada. Welcome all of you to Vancouver, British Columbia, Canada, certainly one of the most beautiful cities in the world and a beautiful day of weather here today in Vancouver.
Canada is a federation, as you know. We have a division of powers between the federal government and the provinces. I can assure you that the federal government is always responsible for good weather and that is part of our responsibility.
I wanted to be here because of the importance of the International Fiscal Association and have an opportunity to spend a few minutes with you and to make some comments about what we've been going through the past more than two years internationally.
This organization does have a long record of thoughtful and insightful research. Your views do inform governments around the globe as we manage public finances and policy. The importance of your global perspective grows as the world shrinks. Economies, as you know, are more interconnected than ever before, and fiscal, economic and financial policies in one part of the world quite quickly have profound effects in other parts.
The past year and a half, two years or so has brought this into sharp and sudden focus. It did not take long for the credit and financial crisis to spread to real economies. We have regrettably seen rising unemployment and economic contraction all over the world.
Governments have been working together to respond. In fact, the international cooperation to respond to the recession has been extraordinary.
Indeed, because we are more interconnected than ever before, our response to the recession has had to be more coordinated than ever before. We have all viewed our economic, fiscal and financial policies through the prism of a global recession. We have all wrestled with the question of what steps need to be taken to steer the world out of it.
Your focus at this conference, I know, is international fiscal and tax policy. Having served as Canada's Minister of Finance for more than three and a half years, I can certainly tell you first-hand about how the global recession has had an effect on the way our government has managed fiscal policy.
The fiscal pressures, of course, have been considerable. The challenges have been significant. But the opportunities presented by this extraordinary situation should not be underestimated either.
We have not allowed these opportunities to simply pass us by. In cooperation with our international partners, we have brought forward a large fiscal stimulus package. This stimulus in Canada is helping to boost our economy and it is building upon the stimulus in other countries as well. From building and improving our infrastructure, to enhancing benefits for the unemployed, to investing in our colleges and universities, our Economic Action Plan is delivering where and when it is most needed.
Our fiscal stimulus also includes permanent tax reductions. We've also taken steps along with other countries to deal with international taxation issues.
When I spoke at a joint seminar of the Canadian and U.S. branches of the IFA in May 2007, I pledged to create a panel of experts in this country to look for ways to further improve the fairness and competitiveness of our international tax system. The Advisory Panel on Canada's System of International Taxation was subsequently appointed and its final report was delivered in December 2008. We took early action in response to the report in certain areas, including the interest deductibility provisions relating to Canadian corporations using borrowed funds to finance a foreign affiliate.
Overall, the Advisory Panel concluded that "the Canadian international tax system is a good one that has served Canada well." Of course, it can be better for everyone, which is why our government has acted to ensure fairness and prevent the inappropriate use of tax havens. At the recent meeting of G20 countries' leaders and finance ministers in April in London, Canada pledged to work with other nations to effectively deal with jurisdictions that have not committed to implement the accepted OECD standard relating to the international exchange of tax information.
Our government has already introduced incentives for countries that do not have a tax treaty with Canada to sign Tax Information Exchange Agreements with us. We have also required that all new tax treaties and revisions to existing ones include the OECD standard.
Just yesterday, in fact, I was pleased to sign an agreement with Canada and the Netherlands Antilles that will lead to better administration and enforcement of tax laws for both of us. That is the first Tax Information Exchange Agreement which we have signed, with many more to come.
Domestically within Canada we have taken steps to streamline and improve our taxation system as well. Reductions our government has made are bringing the statutory federal corporate tax rate to 15 per cent by 2012. We were elected at the beginning of 2006, and at that time the federal corporate tax rate was in excess of 22 per cent. As I say, we'll have it down to 15 per cent by 2012.
We've encouraged the provinces and territories to reduce their corporate tax rates to 10 per cent by 2012, and most of the provinces are moving in that direction. So by 2012, 2013 most of Canada will be subject to a joint federal-provincial-territorial corporate tax rate of about 25 per cent—15 per cent federally and 10 per cent provincially.
This is a key change to build competitiveness and improve the climate for business investment in Canada. It also helps simplify the tax system corporately in Canada. As a result of these and other changes, by next year we will meet our commitment in Canada to have the lowest overall tax rate on new business investment in the G7.
Measures like this are necessary and useful responses to the global financial crisis and recession, but we must not ignore the things that caused the recession, in particular the global financial meltdown that brought down economies with it. The financial crisis has crystallized the need in the world for strong regulation of financial systems that take into account systemic risk.
This is often referred to at international meetings of finance ministers and central bankers as macroprudential oversight. Countries have begun to look back at what caused the crisis and to look ahead to what needs to be done to prevent another one.
In Canada—and I hope I'm not being immodest here—we have perhaps one of the strongest financial systems in the world.
Our banks and other financial institutions are very well capitalized compared to the rest of the world. In contrast to many other countries, none of Canada's banks have required an injection of taxpayers' money, of public funds during the crisis. Even during the crisis, our financial institutions' health allowed them to continue to raise equity capital, which they were able to do.
Canada has not seen a proliferation of sub-prime mortgage products that formed the root of the credit issue in the United States in particular in August 2007. The sub-prime component of our mortgage market is very modest. In fact, high-ratio residential mortgages in Canada must be insured by the government, requiring mortgage holders to be creditworthy.
The Canadian financial system has been criticized from time to time as being boring, particularly when credit was flourishing. The global financial crisis has shown us that boring has its benefits. International authorities like the World Economic Forum and the IMF have pointed to Canada as a model for the way forward.
The praise has also come from political leaders as well, including U.S. President Barack Obama. Tim Geithner, the U.S. Secretary of the Treasury, when he introduced his comprehensive financial regulatory reforms, also used the boring tag as being desirable.
So Canada spoke with some authority when the world did come together to repair the global financial system last autumn.
There were many calls at the time to fix our problems by creating elaborate and untested new schemes. What the world really needed, in our view, was decisive and pragmatic action. Canada's message at last November's G20 summit in Washington was that sound regulation begins at home. Every country needs to fix its own problems, to fix its own banks, because we all suffer the consequences of each other's weaknesses.
Following that summit in Washington, Canada was asked along with India to co-chair the G20 working group on enhancing sound regulation and strengthening transparency. That working group created 25 recommendations which helped form the backbone of the changes to the global financial regulatory structure that the leaders agreed to with the finance ministers at the second G20 leaders' summit at the beginning of April in London. The world is now implementing that strategy.
If Canada has helped lead the way in developing these recommendations, what are our own responsibilities here at home? This might be the part of the speech where I could say, if it ain't broke, don't fix it. While we have helped the way internationally, our system has its imperfections.
It is strong. It is built on institutional pillars with clear mandates.
In our system, ultimate accountability rests with elected representatives through Parliament. The pillars of the system all report to Parliament through the Minister of Finance. We rely on the best and the brightest regulators and officials to execute their responsibilities and serve the public interest faithfully.
Through the Minister of Finance, who is accountable to Parliament, they are all accountable to the citizens of the country.
It is only with all pillars playing their roles effectively and in a coordinated fashion that our financial system will remain on the steady even keel that we have come to value so highly. One of the strengths of the Canadian framework is that the individual pillars in the system have powers and responsibilities that are evenly distributed, clearly defined and not overlapping.
What are those pillars and what roles do they play? First of all, the Department of Finance of course, my department, has the ultimate responsibility for the financial system and authority for all financial sector regulation and legislation. It is our job to ensure effective coordination of all of the pillars as well.
Another pillar, the Bank of Canada, is the key architect and implementer of monetary policy in Canada. The Governor of the Bank of Canada, Mark Carney, spoke last week in Wyoming about the role that central banks play in maintaining financial stability. He pointed out quite appropriately that changes to financial stability regulation are generally the purview of the government, not of the central bank.
The Bank does play an important role in supporting the financial stability within its existing scope of authority. For example, we must not underestimate the role the Bank plays by serving as lender of last resort and providing liquidity to markets. In addition, as the Governor noted in Wyoming, the implementation of monetary policy can also affect our financial stability.
Prior to the financial crisis, the relationship between monetary policy and financial stability was not always viewed with a critical eye. With central banks focused on inflation targets, the predominant presumption was that financial stability would follow. That was obviously not the case everywhere.
The financial crisis has shown us, as the Governor of the Bank of Canada indicated, that "price stability does not guarantee financial stability and is, in fact, often associated with excess credit growth and emerging asset bubbles." Central banks, including Canada's, can and should look for ways to improve the implementation of monetary policy. In fact, the Bank of Canada has launched extensive research in order to develop a greater understanding of the relationship between monetary policy and financial stability.
The Office of the Superintendent of Financial Institutions is another critical pillar to the strength of our financial system. It has a delegated legislative mandate to supervise financial institutions and pension plans in Canada, ensuring sound financial conditions and plan funding requirements respectively. It advises the institutions when there are deficiencies, and either takes action itself or requires management to do so.
While the Office of the Superintendent of Financial Institutions focuses its efforts on the institutions themselves, another pillar of the system, which is the Canada Deposit Insurance Corporation, looks out for individual clients in an important way. This is a Crown corporation created by Parliament and has a statutory mandate to provide insurance against the loss of part or all of deposits and to promote and otherwise contribute to the stability of the financial system in Canada.
In addition to the Canada Deposit Insurance Corporation, competent and informed consumers are keys to the health and strength of any financial system. So we also have another pillar called the Financial Consumer Agency of Canada, which plays an important role in this and other matters related to consumer protection. Again this is a federal regulatory agency responsible for ensuring that federally regulated financial institutions comply with federal consumer protection laws, among other responsibilities.
In addition—and I'm a great believer in financial literacy—I just recently appointed a panel in Canada which will report by the end of next year to develop a national strategy on financial literacy, which I think is imperative for progress to be made on this subject.
So those are the pillars of our financial governance in Canada. Our system is of course imperfect. We are missing one pillar and that is the uniform regulation of capital markets. Right now in Canada, we have 10 provinces and 3 territories. We have a securities commission in each one of them.
We are convinced at the federal level in Canada of the need to establish a Canadian securities regulator. This has in fact been a priority of our government since we were elected in January of 2006. Among other things, the need for stronger enforcement and more efficient allocation of resources is clearer than ever.
We aim to achieve this through a Canadian securities regulator that respects constitutional jurisdiction, regional interests and expertise. Such a regime would allow quicker more decisive action and improve coordination with domestic and international financial sector regulators.
The Canadian securities regulator will also have a financial stability mandate. So the Canadian securities regulator will be integrated into what I've been describing to you, into Canada's financial network as another pillar. Its role will be coordinated with those of the other pillars through the final piece of the framework that has already been in place for some time—that is the coordinating committee.
During the crisis it has been all the more important that this committee meets regularly. It reports to the federal government through the Minister of Finance. This committee allows us to collectively identify and correct weaknesses in a timely way. It helps to stop problems before they become crises in the financial system.
Now all of this is in keeping with the recommendations of the G20, the G7, the G8 and other international institutions and organizations. We put forward our system as an example for others to follow while not ignoring the need to make certain improvements here at home, as I've described.
Our aim has been for all countries to do the same. Whether it's fixing large banks in the United States, the United Kingdom, Europe by moving toxic assets off the books, or improving securities regulation here at home, all countries must take a critical look at their own systems and do what it takes to prevent another financial meltdown.
The Canadian system clearly works and works well. It works because all aspects, each pillar of the system diligently and effectively carries out its mandate, putting the best and brightest minds here to work on it. It works because the coordinating committee in fact effectively coordinates the work of all of the pillars.
Now, I've gone on almost as long as it seems. I really do want to say to all of you, welcome to Canada. Vancouver is a beautiful city. British Columbia, if you have an opportunity to travel a bit, particularly to the north and the interior of British Columbia, is a spectacularly beautiful place with wonderful hard-working Canadians.
I welcome you here once again on my own behalf and on behalf of the government and the Prime Minister. I assure you that the weather will stay beautiful for your several days here in Vancouver. Thank you for inviting me to be here.