March 15, 2010
It’s great to be in New York.
The United States and Canada have the strongest trading relationship in the world and we work well together. There were some challenges with respect to the Buy American issue but we were able to work those out.
First of all, let me say a few words today about the seriousness of the financial crisis. I don’t know what it’s like in New York, but in Toronto and Vancouver I get the impression that it’s all over and we don’t need to worry about it anymore, and I think sometimes we lose the context of the seriousness of what we’ve been through. I also want to talk about the Canadian fiscal situation and about financial sector reform globally and the discussions that have been taking place at Basel and elsewhere.
But just by way of context, in October 2008, we were a minority government and it was decided that we would call an election in September. Now, no one anticipated the recession or that it would be as deep as it was in Canada. But it became increasingly clear in September and early October 2008 that the Canadian economy was suffering some of the effects of the recession that were coming from outside and that we would have to take some action during the course of the election campaign. This is not done in the Parliamentary tradition when the government is at the polls. You don’t take government action except ordinary, day-to-day action.
But I had lots of discussions with the Prime Minister during the course of that election campaign, almost every night, until finally it became apparent, given actions by other governments, that we would have to take some action to support the Canadian financial institutions. So on the morning of Friday, October 10, 2008, we said we would buy insured mortgages from the banks, thereby providing more liquidity, and we would guarantee their wholesale debt to make sure that they were not at a disadvantage internationally given that other governments around the world were doing or had done similar things.
It was in the afternoon that day that the G7 Finance Ministers and Central Bank Governors met in the Cash Room of the Treasury. I’ve been to lots of these meetings over the course of more than four years now, but this was a different kind of meeting.
Hank Paulson opened the meeting by saying that we’re in a lot of trouble and the Europeans then went on to say what one would expect them to say at that point in October 2008, and to pass around a chart showing what had happened to credit spreads since Lehman Brothers had happened.
I pointed out, among others, that some of the European banks were not exactly innocent, having leverages of 30 to 1 and 40 to 1 and lots of toxic assets. The German Minister pointed out in a very impassioned way that a woman who had grown up in East Berlin told him that she had witnessed the fall of communism and now she was witnessing the fall of capitalism.
This was a dramatic time in October 2008. British banks had failed, American banks had failed and some of the German regional banks had failed. It was unclear whether the markets would even open on the following Monday. But the end of this story that weekend is promising in terms of what can be accomplished in terms of global cooperation, at least in the G7.
And after the recriminations and a bit of the stridency had abated, we tore up the communiqué. If you go to these international meetings, communiqués are done by officials in advance. They’re very dense and very long. So this time we tore it up and we created a five-point plan. I, among others, insisted that we have something simple on one piece of paper in order to restore confidence, and fundamentally what we agreed to do is not let any more banks fail.
Having done that, the next morning at 7 a.m. we met with President Bush in the Roosevelt Room of the White House and he endorsed the plan. The President showed up at the G20 meeting, which was a surprise. We had the IMF meeting and the World Bank meeting. The Finance Ministers of the Americas, North America, South America and Central America met during the day. By that evening everyone had agreed to the five-point plan, which was significant in terms of restoring confidence at that time in the middle of October 2008.
Then I went back to Canada, back to an election campaign. I had to take a G7 Finance Ministers call with Secretary Paulson at which time he told us about how much money was going to go to some of the American financial institutions. I’m standing in front of a furniture store on my cell phone running for office here in Canada, waving at cars. It was a surreal moment, but that weekend was important I think in creating some confidence.
When Canada went into recession it became apparent to us in the late part of the fourth quarter of 2008. We conducted very broad consultations across the country. Listening is good for elected people, and I recall being in Saskatoon in the middle of December 2008 and listening to a group of business people from different parts of Canada and the realization intensely felt that we were in a lot more trouble than it had appeared so far from the statistics we had seen.
We had decided to do the earliest budget in Canadian history, which was on January 27, 2009. I had discussions with the Prime Minister about how big a deficit we would run and we were thinking about a modest deficit in Canadian terms, but it became apparent to me, at least listening to business people, that we would run a downside risk that we would not do enough, and we would have to stimulate the economy twice, which would be a dangerous thing to do.
We decided that we would go ahead and run in Canadian terms a large deficit, which I announced on January 27, 2009, and we introduced the two-year Economic Action Plan. We would run a large deficit for the current fiscal year and yet another substantial deficit in the next fiscal year.
The good news is we were relatively well prepared going into this. In our first three years in government, we had paid down almost $40 billion of debt. We were running surpluses and we used the money to reduce the public debt. This put us in a relatively good position to run a deficit, which can be a temporary deficit over the course of two years.
Our debt-to-GDP ratio was 29 per cent in 2008–09. It will rise to close to 35 per cent in 2010–11 and will be back down to 31 per cent in 2014–15. By way of contrast, the U.S. debt-to-GDP ratio is about 67 per cent, the UK’s is about 75 per cent, and Japan’s is about 115 per cent and is likely to worsen over the course of the next several years. Relatively speaking, we have sound fiscal strength.
In the budget almost a couple of weeks ago, I announced that we would continue the Economic Action Plan. We think that the economic recovery is showing good signs but that it is still fragile.
We’re conscious of what’s happening with some of the sovereign states in Europe, some of the marking assets to market in the European banks. We’re conscious about the relatively high rates of unemployment in the United States and Canada. So we’re going to continue to run a deficit and stimulate the economy in Canada over the course of the next 14 months, until March 2011. But then it will stop. From the beginning, our plan has been that we would have a two-year stimulus package, that we would fulfill our obligation in the G20 to stimulate the economy, which we are—in cooperation with the provinces we are spending about 4 per cent of GDP in Canada. So the first thing we’re going to do is end the stimulus spending on time.
We are also going to restrain growth in spending because I am a fiscal conservative and I want to get back to a balanced budget and running surpluses. The only way we’re going to be able to do that is restrain the rate of growth in those areas of government that have very substantial spending growth.
So we’re doing that in the Department of National Defence. It will still grow but it will not grow at the same rate. And we will fulfill our commitment to double our foreign aid spending by the end of next year but then we will freeze it and deal with it along with other budget items. And finally, we will freeze most of the spending that goes for operating expenses in the public service of Canada.
These are not easy decisions to make but they’re decisions that you have to make if you’re going to get to a balanced budget over time. And in government you have to make these decisions early on because you can’t turn a big government around quickly. Just like a ship, it takes time. So they have to have notice where we’re going, which is what we did in the budget this year.
The result of that is two years from now the Canadian deficit will be cut in half, three years from now it will be cut by two-thirds and we’ll be very close to a balanced budget by 2014–15. It gives us a competitive advantage. In fact, it’s a massive permanent Canadian advantage. Our current deficit is 3.5 per cent of GDP, which you can compare to other countries.
We will have a tax advantage as well. By 2012–13, the combined federal-provincial corporate business tax rate in most of Canada will be 25 per cent. When we were elected in January 2006, the federal tax rate was a little over 22 per cent. We’re going to have it down to 15 per cent by 2012. By 2013, most of the provinces, including Ontario, will reduce their corporate tax rates to 10 per cent.
That tax advantage is important. It means that we will have the lowest corporate tax rate in the G7 by 2012–2013. We already have the lowest overall tax rate on new business investment in the G7.
The G7 Finance Ministers and Central Bank Governors Meeting took place in Iqaluit, Nunavut, about five or six weeks ago. I took a bit of a chance because the weather in February in Nunavut is not always welcoming. But it was terrific. The weather, as the Consul General in New York pointed out, was much worse in Washington that weekend.
What we were trying to do was to get the G7 Finance Ministers and Central Bank Governors back to the concept originally of the G7, which was a fireside chat. We did not have a communiqué but we did have a conversation.
We agreed in principle that financial institutions should bear the cost of financial crises occasioned by them, and not taxpayers. That’s not that hard to agree to in principle. But it’s not so easy to implement, as we can see now by the efforts that are underway in Washington.
It is a difficult implementation issue. For Canada’s purposes, we are against a capital tax, we are against a tax on financial transactions, we are against raising taxes period in our government. That’s not what we have been about.
The Financial Stability Board of the G20 is looking at some kind of contingent capital requirement. We’re prepared to look at that.
We don’t have any particular interest in “too big to fail” or “systemically important” phrases. We find that they’re not useful and would distort the market.
We are in favour of leverage standards. We have had those in our Canadian financial institutions and it’s one of the reasons why they have managed well through the crisis. We do believe in the regulation of all financial institutions, which we do in Canada, and we also believe in effective regulation. I don’t mean just regulation, because most of the entities that failed in Europe and in the United States and elsewhere during the course of the crisis were in fact regulated, but there’s a difference between having regulation and having effective regulators who actually do their job.
And I know Julie Dickson, the Superintendent of Financial Institutions in Canada, is going to be here tomorrow, and she has done a remarkable job of staying on top of the financial institutions. During the crisis over the past couple of years, she and I would speak regularly.
Now, it’s easier in Canada. We don’t have thousands of banks, we have five or six large banks and three large insurance companies. We have another 70 or 80 banks as well and other financial institutions, but it’s not on the scale that there is in the United States.
Having said that, I think some of the principles apply to leverage in Europe and elsewhere. We’re in favour of limiting leverage.
We do have a consumer protection agency in Canada. It does have regulatory power. It reports to the Government through me. The Commissioner and I do talk. She is able to accomplish what she wants to do without using her regulatory power. She does it through phone calls and keeping track and encouraging behavior that is not consumer unfriendly, and it works in our situation.
We do believe in limiting securitization and lenders holding loans, particularly in the housing market. Our banks all have large retail chains in Canada, branch banking. They take residential mortgages and give residential mortgages, they hold those mortgages for the most part.
With Canadian mortgages, there’s recourse. That is, you can’t walk away; you’re personally liable on the mortgage. We also do not have mortgage interest deductibility in Canada. The capital gains on your primary residence are tax-free but on mortgage interest deductibility, I’m glad that over time we’ve resisted that impulse.
The other thing that favoured the Canadian banking system was that in the late 1980s and early 1990s our banks were allowed to and did acquire most of the investment banks in Canada so that when this crisis came, most of our investment banks were within the regulatory purview of the Superintendent of Financial Institutions and subject to the same regulatory fervour.
So we have remarkable stability of Canadian banks. We have the opportunity to be a role model.
The advantages of our fiscal situation are evident in two recent and highly successful bond issues. We haven’t done this in about 10 years in Canada but we did two bond issues recently, one in euros and one in U.S. dollars. There was overwhelming investor demand and favourable pricing. We used the proceeds to diversify foreign exchange; we did not use them for government spending.
Our fiscal situation is strong. We are going to exit a year from now from the stimulus strategy. The expectation is that the private sector, increasingly this year, will return to provide the demand we need in the market. We are going to return to balanced budgets.
Consumer confidence in Canada—with consumer spending about 60 per cent of our GDP compared to about 70 per cent in the U.S.—has been persistent, which has made it easier for Canada to get through this recessionary period. Business confidence has returned. Energy and commodity prices have come back significantly.
Canada is an emerging energy superpower in uranium, oil, gas, hydroelectric power (particularly in Quebec), and in commodities like potash and wheat. Prices have been strengthening overall in those sectors. That, among other things, has created some pressure on the Canadian dollar but that is to be expected. Our financial institutions are stable, modestly leveraged and effectively regulated and we intend to stay the course on all of that.
Internationally, in the months ahead we will urge the adoption of practices that have served Canada well, and that is ensuring institutions are well capitalized and place a cap on leverage; ensuring transparency in the marketplace; and making sure risk performance and reward—and that has something to do with executive compensation which the Financial Stability Board has been working on in terms of guidelines and principles—will encourage a culture of prudent behavior focused on the long term.
Canada will not go down the path of excessive arbitrary or punitive regulation of its financial sector. We have a well-regulated free market economy with a private financial sector of substantial strength.
Our nation fully intends to build on that crisis-tested advantage. We intend to see the financial sector in Canada grow and to encourage its growth, and we are determined to strengthen Canada’s rising global position in the future.
This is a great year for Canada. We are not only hosting the Winter Olympics and Paralympics in Vancouver, but in June we will host the G8 meeting in Muskoka and the G20 meeting in Toronto.
And this will give us an opportunity to continue our policies of prudent fiscal management and sensible financial sector regulation. You can rest assured that we will stay the course that we have followed these past four years as we go forward.
Thank you for inviting me here today.