May 18, 2010
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, at a luncheon hosted by the Confederation of Indian Industry
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I am happy to be here, and I thank the Confederation of Indian Industry for hosting this today.
The primary reason I am here in India is because Canada is hosting the G20 Summit six or seven weeks from now in Toronto. This is an important event, of course, particularly in light of some of the continuing challenges that we have globally, including in Europe, relating to the euro and other issues relating to sovereign debt in some countries.
We have been through a very difficult period. In the fall of 2008, G7 finance ministers and central bank governors gathered in Washington at a time when investment banks had failed in the United States, banks had been nationalized in the United Kingdom and regional banks had failed in Germany. There was tremendous uncertainty in the markets. We developed a five-point plan, the primary purpose of which was to ensure that none of the countries represented around the table would allow systemically important financial institutions to fail.
That difficult time is not yet clearly behind us. The recovery that we have seen in those countries that went through a recession, including Canada, is fragile.
There are indications of recovery but there are no clear indications of an entrenched recovery, and the most recent difficulties in Europe remind us of the need to be cautious. Which makes the G20 Summit in Toronto several weeks from now all the more important, as its first priority is to ensure that we have sustainable economic growth globally and address some of the imbalances. The Toronto Summit’s goal will be to help keep the global economy firmly on the path to recovery.
The G20 and India in particular have played critical roles in making the global recovery possible in the first place. Last year Canada and India helped lead the G20 response to the global financial crisis. Together we co-chaired the G20 Working Group on Enhancing Sound Regulation and Strengthening Transparency. The world is now implementing the recommendations from this G20 working group.
And our two nations continue to display leadership this year. We are co-chairing the G20 working group that has the task of implementing the G20 Framework for Strong, Sustainable and Balanced Growth, the number one priority for the G20 Summit in Toronto.
This is an effort that is absolutely vital to the long-term health of the global economy, and India should be proud of the role that it’s playing. But this rising influence should come as no surprise.
The emergence of India has been as rapid as it has been extraordinary. This country has transformed itself in a matter of decades from a nation that was primarily based on agriculture to one of the largest and most dynamic economies in the world. And it is an economy that keeps growing. As recent events have shown, not even a global recession can stop the growth of the Indian economy.
This success means India has a major stake and a major voice in what happens next. Your country’s continued leadership will be crucial to making 2010 an historic year, which is why this pre-Summit visit was a personal priority for me and for our country.
I’d now like to say a few words about the growing bonds between India and Canada. Our two nations have much more in common than a shared response to the global crisis. Our past has been marked by friendship and by strong ties that bind us closer than ever. We are nations shaped by a common empire. We are also democratic nations that are ethnically, spiritually and linguistically diverse.
This year we each welcomed the world. In Canada’s case it was at the highly successful Winter Olympics in Vancouver. Here in this country, in 138 days the Commonwealth Games will begin in Delhi.
Also, Canada’s history has been greatly enriched by many whose families once called this land home. Nearly 1 million Canadians can trace their roots in India.
Our two countries, on a darker note, have also experienced tragedy. We were united in grief over the senseless loss of 329 lives, mostly Canadians, aboard Air India Flight 182. This terrorist attack remains the worst in our history even now, 25 years later.
And Canada shared your grief following the unacceptable acts of terror inflicted on innocent victims in this city less than two years ago.
Our recent history has been one of determination. When faced with a global economic downturn that originated beyond our borders, Canada and India held our ground while other nations slid. Our financial systems did not fail us. Our fiscal prudence served us well. Our commitment to global trade never wavered.
Now we are both determined to become stronger trade partners than ever before. Trade between our two countries has increased by 70 per cent since 2004, slowed only briefly by the global economic downturn.
Two-way foreign direct investment between Canada and India reached record levels last year. This is a relationship that has clearly benefited both our nations in ways that were once unimaginable.
Who could have foreseen a decade ago, for example, Canada-Indian partnerships to build rail coaches, helicopter flight simulation centres or Mumbai’s ambitious new metro line? Who could have envisioned the unprecedented collaboration in financial services that I saw first-hand earlier today? For that matter, who would have thought the name of an Indian-owned steel manufacturer would grace a Canadian hockey rink in Sault Ste. Marie, Ontario, two continents and an ocean away?
Canada would like to take this relationship to a new level in trade. Canada has identified India as a priority market in our Global Commerce Strategy. We have three new trade offices in India this year, which raises the number to eight. Our goal is to increase bilateral trade to $15 billion by 2015.
So where does Canada stand today in terms of our reputation in the world or, what is common to say now, our brand? In a rapidly expanding global marketplace, Canada is an emerging energy superpower blessed with the resources that the world demands.
We have the second largest known petroleum reserves on the planet, second only to Saudi Arabia, and we rank third in global natural gas production. We’re the largest producer of potash and uranium, the second largest producer of nickel, the third largest producer of aluminum, and the largest exporter of forest products in the world. In the years to come, Canada will become an increasingly attractive choice for trade and investment.
Canada was the last G7 nation to enter into a recession, with a decline in real GDP that was virtually the smallest of all the G7 countries. The IMF expects us to have the strongest growth in the G7 coming out of the recession.
We’re reducing taxes in Canada. By 2012 Canada will have the lowest statutory corporate income tax rate in the G7. When we formed the government more than four years ago, the federal corporate tax rate was slightly over 22 per cent. By 2012 we will have reduced it to 15 per cent.
In 2007 I encouraged the provinces in Canada, which also have businesses taxes, to reduce their business taxes to 10 per cent by 2012. Most of them will be there by 2012–2013, which means that by 2013 Canada’s business tax rate for most of the country will be a combined 25 per cent, which is a good brand.
Canada has also been at the forefront in the G20 fight against trade protectionism. Even during the depths of the recession Canada opened its markets further. We don’t just talk about free trade in Canada. We know that Canada, as a country with a modest population and a large land mass, has been able to create a relatively high standard of living because we are a free-trading country. We’ve concluded a number of free trade agreements. We’re pursuing others, including a comprehensive economic partnership agreement with India.
In addition, Canada responded to a global downturn not through trade restrictions, but by unilaterally eliminating all remaining tariffs on manufacturing inputs and machinery and equipment—more than 1,500 tariffs in all. We did that in my budget this year on March 4th. This makes our country the first tariff-free zone for manufacturers in the G20.
Like our fiscal policies, our financial system is also the envy of others, which is why nations like India are so interested in partnering with Canada’s banks. Our system has been held up during the global crisis as a role model—the world’s soundest, according to the World Economic Forum.
Long before the hard times began, Canada’s financial system was well capitalized, with one of the most effective regulatory frameworks in the world. In financial reform, the key is effective regulation, not simply regulation. We know that most of the financial institutions that failed in the past few years were regulated. I think most of us would agree they were not effectively regulated. Unlike many of our G7 counterparts, none of India’s or Canada’s banks required taxpayer bailouts.
The reforms that have been recommended by the G20 working group we co-chaired with India look very similar to the system that has served us so well. They include improved quality and quantity of bank capital, strengthened liquidity standards and a curb on excessive leverage.
At the recent G20 meeting in Washington in April, I was pleased to see that finance ministers remain united behind this proven approach. We must create a global financial system that is better prepared to withstand adverse shocks. We need to strengthen prudential oversight, improve risk management, promote transparency and reinforce international cooperation.
In terms of financial sector reform, let me say a few words about ex ante bank taxes. Canada and most countries agree with the principle that, to the extent a financial institution in the future would contribute to a financial crisis, it is the financial institution which should bear the cost of that and not the taxpayers. Jurisdictions should have the flexibility to consider whatever measures are appropriate in the circumstances.
As I mentioned a moment ago, in India and Canada taxpayers were not called upon to have their dollars used to bail out financial institutions during the crisis. A global levy would remove capital from financial institutions. This could, in turn, weaken their ability to absorb losses and possibly restrain credit availability. It could also result in the same kind of excessive risk taking that brought us to the brink of financial collapse. Risk takers would naturally consider such a tax— I'm talking now about an ex ante tax—to be a government promise to bail them out again.
In the recent meetings in Washington, rather than an ex ante tax or levy, I urged the G20 nations to consider capital rules that would support banks holding contingent funds that would stay within a bank to be available as a bank faces distress. This approach would create a security that converts to common equity when a bank is in serious trouble. It would increase the core capital of the bank without the use of taxpayers’ dollars. The use of contingent capital would create self-insurance prefunded by investors to protect the solvency of the bank.
I expect that this discussion will continue on the international stage as central bankers and finance ministers gather together in a couple of weeks in Korea.
We cannot afford to allow this discussion about bank levies to sidetrack the important reforms. And the key elements, as I mentioned, are the quality and quantity of capital and a cap on leverage in the global financial system.
Seeing global financial reforms through will remain a top priority for Canada as we prepare to welcome India and the world to Toronto for the G20 Leaders Summit. We have seen in recent weeks that considerable risks remain, as illustrated by the recent financial developments in Europe, but all told the global recovery is progressing. To sustain it, all countries need to continue to work with some urgency. As our Prime Minister has repeatedly emphasized, the global discussions going forward should be less about new agreements than accountability for existing ones.
The Toronto Summit’s theme, which is Recovery and New Beginnings, reflects our goal to work collectively toward a sustainable recovery. We also expect discussions to turn to exit strategies and much-needed fiscal reforms following extraordinary economic stimulus.
So the agenda for Toronto is based on four key priorities. First of all, taking collective action to secure sustainable and balanced economic growth, and this includes fiscal consolidation measures where necessary. Second, maintaining momentum to complete the financial sector reforms required to fix a flawed global financial system. Third, strengthening international financial institutions to meet the needs of today’s global economy. And fourth, promoting liberalization of trade and investment and fighting against protectionism.
When G20 leaders meet in Toronto, we will all need to act with the same focus, speed and coordination as we did at the global recession’s onset. In achieving these G20 goals, Canada calls on the help of partners like India to help implement the G20 Framework for Strong, Sustainable and Balanced Growth.
This document has an unwieldy title. Its objective, however, is straightforward. The framework aims to fix the imbalances in individual countries that, if ignored, can throw the international economy we’re all connected to off track. The framework is targeted at the very flaws that aggravated the most recent global crisis and that make the risk of another one much more likely.
The recent financial developments in Europe and the increased concern about sovereign risk only make the need more urgent to adjust policies to achieve our shared objectives.
We can either confront our fiscal challenges with clear and realistic solutions, or we can delay and wait for markets to dictate the terms to us.
Of course the pace and timeframe for the return to fiscal sustainability will depend on conditions in each country. But it will remain imperative for all countries to coordinate their policies to ensure consistency with the Framework for Strong, Sustainable and Balanced Growth.
Failure to achieve our goals would endanger the fragile recovery that we need. Failure to achieve our goals could lead to a vicious cycle of higher interest rates, lower growth, reduced potential output and higher debt. It would also call the very credibility of the G20 into question.
So we all have a collective responsibility to see this framework implemented. Success is only possible if everyone follows the same rules. Where imbalances exist, in emerging and advanced countries alike, we must fix them. The message from bond markets is that advanced countries will need to accelerate fiscal consolidation. If we are to sustain the global recovery, this means other countries will need to reduce their savings, supported by structural reforms and exchange rate adjustments.
India is a country with growing influence on the global stage. You have weathered the economic downturn with a resilience that traditional economic powerhouses could not match.
So today India has a tremendous stake in ensuring that those countries that helped spark the crisis eliminate the policy errors that stand in the way of long-term stability.
The stakes are clear: if we don’t work together to fix what remains broken in the global economy, we’ll be paying the costs for years. When tested, we will have shown that we have learned nothing. But if we heed the call of responsibility and collective interest, we will reap the rewards for years to come.
So it’s a worthy effort. It is a duty Canada and India must be willing to shoulder. It is a responsibility I know we can live up to together. Our two nations have already achieved a great deal. As this visit has shown me, the future potential is unlimited.
And if I can leave you with one message, it is that in Canada you have a friend and a partner as India moves ever closer to its vast potential.
It’s a pleasure to be here with you today.