June 21, 2010
Archived - Remarks by the Honourable Jim Flaherty, Minister of Finance, at a Briefing Session on the G-8 and G-20 Meetings and Canada’s Economic Performance
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I am happy to be here this morning to talk about the Canadian economy, the G-20 Summit taking place at the end of the week in Toronto, and the G-8 meetings that will take place towards the end of the week in Muskoka in advance of the G-20.
Just by way of context, in the last few weeks Prime Minister Stephen Harper has been in Germany, France and the United Kingdom meeting with the heads of state there. I have been in India, South America, China and South Korea meeting with our G-20 colleagues in preparation for the G-20 meetings. Also, the G-20 finance ministers and central bank governors met in Busan, South Korea, two weeks ago. So a lot of preparatory work has gone into the G-20 Summit.
Part of what I’m doing today is updating Canadians about our Economic Action Plan. This is our two-year stimulus plan. We are now well into Year 2 and we report regularly to Canadians on this subject. I will also talk about the G-20 and what we hope to accomplish at the end of the week.
I’m happy to be in New York, the financial capital of the world, to talk about these issues and some of the challenges that we’re facing. We view the G-20 Summit of heads of state as an historic opportunity to take necessary steps to keep the global economy firmly on the road to recovery.
Even after an unprecedented global and economic crisis, we still live in difficult times. Overcoming our challenges will mean that all nations need to demonstrate fiscal discipline—fiscal consolidation in many countries—implement financial sector reforms and open up global markets even more. The world will be coming to Canada looking for some answers.
Wherever I have travelled in the run-up to the Summit—to China, to India, to Washington, to London, to South Korea, to South America, and today in New York—Canada’s economic leadership is showing.
We are open for business, creating more and better jobs today and for the future.
Today, I’m pleased to release a report on our country’s strong performance entitled Canada’s Global Economic Leadership.
This report tells Canada’s winning economic story.
Canada has weathered the deepest, most synchronized global downturn since the 1930s in better shape than other industrialized countries. The decline in output in our country was the smallest of our G-7 counterparts.
Canada’s economic recovery has also been remarkable. We have virtually recouped a recession’s worth of economic decline. No other G-7 country can say that.
In the first quarter of this year, real GDP growth was 6.1 per cent, which is the strongest quarterly growth in Canada in 10 years. In less than a year we’ve recovered three quarters of the jobs that we lost during the recession. We are the only G-7 nation to report a year-over-year increase in employment in March 2010.
At the G-20 Summit in Washington in November 2008, leaders resolved to stimulate our economies by 4 per cent or more of real GDP over the course of the next two years. Canada has done that. We did it decisively in the budget—Canada’s Economic Action Plan—which I presented in January 2009. It means Canada is running a deficit for a few years after having recorded balanced budgets for about 10 years. But we will be able to get back to balance within the next few years because we did not enter the recession with a structural deficit.
We paid down a substantial amount of debt in the first three years of our government—just under $40 billion. We’re running a deficit now of slightly more than $50 billion. We were relatively well positioned going into the recession in 2008.
The two-year Economic Action Plan was designed to protect and create jobs and improve Canada’s long-term growth and prosperity.
We’ve been able to work well with the provinces and territories in Canada in order to get the money out the door. Importantly, we’re ending the stimulus spending at the end of the fiscal year, which is the end of March 2011.
It’s been our intention from the beginning to have a built-in exit strategy. Part of the stimulus spending is infrastructure spending; part of it is reducing taxes—permanent tax relief to individuals and families; and another part is investment in unemployment benefits and retraining to get our unemployment numbers down.
Our unemployment rate is about 8.1 per cent. We had feared at the beginning of the recession that it would go into double digits. It did not. The Economic Action Plan made a difference because of the training and infrastructure spending. Historically, the Canadian unemployment rate has exceeded the United States unemployment rate. That’s no longer true. We’re about 1.5 percentage points lower now. That’s the first time that’s happened since 1975.
Real consumer spending has increased in each quarter since the Action Plan was implemented. We estimate that the Action Plan added about 2 per cent to economic growth on average in the last three quarters of 2009. Domestic demand has held up. Going forward, both the IMF and OECD expect Canada to have the strongest economic growth in the G-7 over the course of the next two years.
The results we’re beginning to see demonstrate that the Economic Action Plan was the right way to meet the economic challenges Canadians were facing. It was a plan for its time but it was also designed to ensure that it did not outlive its time. This is an important point given that governments around the world are now grappling with crippling debt loads.
We entered the global downturn from a position of strength. We were the only G-7 country to consistently post surpluses in the years prior to the global downturn. As a result, at the outset of the crisis Canada had the lowest total government net debt burden in the G-7. In 2007, before the crisis, Canada’s net debt stood at 23 per cent of GDP, less than half the G-7 average of 53 per cent.
The Economic Action Plan is fully consistent with Canadian fiscal discipline. In the budget this year, I outlined a three-point plan that will get us back to a balanced budget by 2014–15. I mentioned the exit strategy that is built into the plan. The infrastructure spending will end. We’ve made it clear from the beginning that this money had to be spent within the first two years.
Secondly, we are going to limit the rate of growth in our government’s program spending. It won’t be necessary for us to actually cut spending in areas, but we will limit the rate of growth of spending, particularly in a couple of large spending areas.
Thirdly, we’re reviewing our administrative costs. For example, we’re freezing some of our administrative costs, including the salaries of ministers, members of Parliament and senators.
Our deficit is projected to decline by about one half between 2009–10 and 2011–12, and by two thirds by 2012–13, with smaller deficits in 2013–14 and 2014–15.
In fact, government revenues this year are a little bit stronger than anticipated. Real GDP growth in the first quarter was a little bit stronger than we anticipated at 6.1 per cent. Our nominal GDP growth, which is the best predictor of government revenues, is higher than anticipated. We may well get to balance sooner than anticipated but there’s lots to happen between now and then.
The IMF expects that Canada will be the only G-7 country to return to balanced budgets within the next five years. It projects that Canada will be the only G-7 country to place its net debt burden back on a downward track over the next five years. Our net debt ratio will stand at about 31 per cent of GDP in 2015 according to the IMF, less than one third of the G-7 average of nearly 95 per cent.
Debt and deficits are a major topic among heads of state, finance ministers and central bank governors these days in the G-7 and G-20. Of concern is the fact that you’ll see a number of countries with net debt ratios above 80 per cent of GDP in 2015.
There’s been some progress in terms of potential agreement by countries at the G-20 about having some targets that will be more ambitious than those. In Toronto G-20 nations will be asked to confront the fiscal challenges ahead of them and the unavoidable need for fiscal consolidation. We will be urging all of our partners in the G-20 to address the issue of fiscal consolidation, just as we have, to ensure a truly sustainable recovery.
Let me talk a bit about financial systems. We did not have to put any taxpayers’ money into financial institutions in Canada. There were no taxpayer bailouts. There were no government takeovers of financial institutions during the very difficult global financial storm. Our financial institutions survived intact for a reason. They were better capitalized and less leveraged than their international competition prior to the global recession.
They were also supported by a strong and effective financial regulatory and supervisory framework. We have lots of discussions about financial sector reform globally. One of the points that we make repeatedly is that most of the financial institutions that failed were in fact regulated. The key is effective supervision and effective regulation, not simply having regulators and rules in place.
Canada’s hard-earned reputation for prudence—by our banks, households and regulators—meant that we entered the global recession without the major housing market imbalances we saw in some other advanced economies. House prices and household net worth declined significantly less in Canada than elsewhere. We were able to sustain credit growth even during a recession the likes of which most Canadians had not experienced before, hence the strong rating by the World Economic Forum of our financial system.
When I first went to China as Canadian finance minister in January 2007, I recall it being suggested to me that Canadian banks were not only boring but also excessively risk averse. During my last trip about two or three weeks ago, some of my counterparts mentioned to me that the Canadian banking system was very solid, very stable and appropriate in its risk taking. It’s been a big change from 2007 to 2010.
If there’s one clear lesson in the G-20 from discussions around the table at the various Summit meetings that have taken place in Washington, London and Pittsburgh and at the various finance ministers and central bank governors meetings, it is that one size does not fit all when we’re looking for solutions to these problems.
At the G-20 this week, we are going to try to encourage follow-up on the commitments that were made, especially the commitments made at Pittsburgh. We are going to emphasize the features of the Canadian system that have served us well, such as stronger capital liquidity standards and a limit on leverage. I think it’s important in the G-20 that we focus on the cause of the crisis and not on peripheral matters like bank taxes.
The key here is that by the end of this year, which was the direction of the heads of state at Pittsburgh, we arrive at a definition of capital that is agreed on through the Financial Stability Board and that we arrive at an agreement on the quantity and quality of capital standards and caps on leverage. That’s the fundamental need.
We’ve said that in the communiqués arising out of the Summits, including the last Summit at Pittsburgh. That’s the key we want to focus on, not on a punitive tax on the financial sector. Canada’s performance during the crisis clearly demonstrated that such a tax is not necessary. It will only reduce the flow of credit and encourage excessive risk taking.
Our financial sector held its ground under intense pressure and we’re determined to boost its rising global position even further. I can assure you that the majority of countries in the G-20 will not implement a global ex ante bank tax. It should be remembered that the majority of countries in the G-20 did not have to put public money into their financial institutions. If you look around the world at who is advocating this kind of tax, it is countries that had to put substantial taxpayers’ money into their systems, or even nationalize financial institutions in their countries.
In addition to fiscal consolidation and financial sector reforms, I think there is an expectation that G-20 leaders will also make headway on promoting trade and investment and fighting protectionism. Canada is once again moving forward in this area. Not only do we talk about anti-protectionism and free markets, but we actually take action.
In my budget this year we unilaterally eliminated tariffs on imported machinery and manufacturing inputs, which makes Canada the first G-20 nation to become a tariff-free zone for manufacturers. In doing so, we built on some of the other changes that we’d made to ensure that Canada is an attractive destination for business. According to the Economist Intelligence Unit, Canada is the best place to invest and do business in the next five years.
On the tax side we’ve made some long-term changes. Canada will have an overall tax rate on new business investment that is the lowest in the G-7 this year and the lowest statutory corporate income tax rate in the G-7 by 2012. Both the provinces and the federal government levy business taxes. I challenged the provinces back in 2007 to go with us, as we’re reducing our corporate income tax rate from a little over 22 per cent when we took office to 15 per cent by 2012.
We’ve persisted in this despite the recession because we think it encourages business activity and creates employment. Some provinces in Canada will be at 10 per cent by 2012–2013, so the combined corporate tax rate in Canada by that time in most of the country will be 25 per cent, which will allow Canada to brand itself as a low-tax jurisdiction. Our government has also taken steps to reduce the regulatory burden on businesses, especially small and medium-sized businesses, while modernizing competition and investment regulations.
The Canadian advantage arises out of fiscal prudence. I think I need to say too that in terms of the management of our financial institutions in Canada, there is a culture of fiscal care, some would say fiscal conservatism, which has served us well over the years. Our top 5 banks are all in the top 50 in the world. Our 3 largest insurance companies by capitalization are in the top 10 in the world. We have a stable financial system and effective regulation.
The Department of Finance, the Canada Deposit Insurance Corporation, the Financial Consumer Agency of Canada, the Bank of Canada and the regulator, the Office of the Superintendent of Financial Institutions, meet in order to keep an eye on the macroeconomic situation.
We have the best net debt to GDP ratio in the G-7; the best growth prospects in the G-7; fiscal stability; the world’s most stable financial system; and the lowest overall tax rate on new business investment in the G-7 this year, moving to a 25 per cent combined corporate tax rate in the next couple of years. And we are the only G-20 nation where a manufacturer can set up shop and face no tariff costs on production. It all adds up to a compelling model for a global G-20 gathering tasked with putting the global recession behind us.
We are creating jobs, attracting investment, reducing taxes and making the responsible decisions that sustain economic growth, and thanks to our responsible fiscal stewardship they are actions that we can sustain and continue.
The G-20 meetings are very important meetings. We have an opportunity to deal with some of the big issues, including the Framework for Strong, Sustainable and Balanced Growth, and we can aim at achieving some concrete results with respect to deficit reduction. Prime Minister Harper and President Obama both wrote to the G-20 partners, and they both had some targets. They’re quite close on the targets, which I think is important in terms of coming away from Toronto with some concrete results that countries around the world can target rather than simply some statements urging fiscal consolidation without targets.
The news that China is prepared to allow some flexibility in the Chinese currency is quite encouraging. There’s always been discussion in the international fora on that subject, certainly the last four and a half years or so that I’ve been at those meetings. China had shown some flexibility in its currency before the crisis and now has indicated that it will go back in that direction, which is good for everyone.
On fiscal consolidation we’re trying to strike the balance between absolutely essential fiscal consolidation by certain countries in Europe, where their debts are clearly excessive, the need for moderation by those countries that don’t have as dire a circumstance, and the need for increasing domestic demand in Asian countries that are emerging and growing, like China, so that we can maintain some economic growth as we go forward.
On financial sector reform, the mandate from the heads of state was that we arrive at a solution by the end of this year. The next Leaders’ Summit is in Seoul, South Korea, in November and the finance ministers and central bank governors will meet before then. An incredible amount of work has been done on this subject through the Financial Stability Board. We have not yet resolved those issues, and I would not expect that there will be a resolution of those issues at the G-20 Summit in Toronto.
A great deal has been done on the issues of quantity and quality of capital, caps on leverage and the definition of capital. I would not expect any agreement on the issue of a global bank tax for the reasons I’ve already expressed.
We do want to have clear targets. In terms of our budgeting and fiscal management in Canada, we have clear targets and we have been meeting our targets and acting decisively. We look forward to doing the same thing at the G-20 Summit in Toronto later this week.
That’s a brief summary of where we are, and where we’re going in the next while.