October 5, 2011
New York City
I am very pleased to join you for this Canada-U.S. Securities Markets Summit.
Your two associations, SIFMA and IIAC, share much in common, and so do our two countries.
The links between our financial sectors are strong. For example, there are more than 140 U.S. companies listed on the TSX and TSX-V and over 170 Canadian companies listed on the New York Stock Exchange, the New York Stock Exchange Arca, and NASDAQ—more than any other country. I could easily list a host of other commonalities, most of which are positive, but I want to focus instead this morning on shared challenges we face as a result of the continuing financial crisis.
The pervasive force of global uncertainty is a major inhibitor to growth, and it demonstrates the fundamental need for close cooperation—not just between Canada and the United States, but also in a global context.
And that brings me to my theme for today, which is leadership.
Both SIFMA and IIAC cite this crucial quality as a key element of your respective missions. Canada is playing a leadership role in its ongoing efforts to build a better future for our citizens by helping to promote a more stable and resilient global economy.
And so, in the next few minutes, I would like to talk about this crucial trait, leadership, as it applies to three key issues and as it applies to Europe.
To begin, let me turn the clock back to 2008.
I’m sure many of you have memories of the fall of 2008, when we were faced with the possibility of imminent economic catastrophe. As Canada’s Minister of Finance since 2006, I experienced that crisis at every stage.
I particularly recall Friday, October 10, 2008, when the G-7 Finance Ministers and Central Bank Governors met in the Cash Room of the Treasury in Washington. Lehman Brothers had failed in September, Bear Stearns had failed in the spring, some of the British banks had failed, and some of the German regional banks had failed. There was concern about the ability of the markets to continue to function on the following Monday.
The meeting started with U.S. Treasury Secretary Paulson expressing his concerns about the situation and his explanation with respect to Lehman Brothers, followed by—interestingly now when you look at what’s going on in Europe today—some significant criticism of the American initiatives by the Europeans. And it was my role at that meeting to point out to some of the European banks that their capital ratios were not exactly stellar. Time passes and things come around.
At that meeting, instead of issuing a traditional communiqué, we prepared a five-point plan, which made it very clear we were going to stand behind the system. The next morning President Bush endorsed the plan, and then later that day the G-20 convened in Washington and endorsed the plan.
It worked. We were able to backstop the banking system, inject liquidity into the financial system and implement stimulus programs to replace lost demand. We showed the power of the G-7 and the G-20 to be decisive and to show leadership.
These actions had the desired effect. In Canada, for example, our Economic Action Plan entailed about 4 per cent of GDP of fiscal stimulus. We got it out the door quickly in early and mid-2009, which was vitally important because that was the way we were able to keep the unemployment rate from moving into double digits and we were able to fuel growth in the face of severe economic and financial headwinds.
Since October 2008, some have strayed from our global focus and commitment to tackle problems in concert. That is unfortunate, and with headwinds re-emerging we must return to strong, united and decisive leadership, especially by the G-20 nations, to effectively address our current economic and fiscal challenges.
The European crisis is the world’s most immediate and pressing problem. It threatens the strong, sustainable and balanced growth that the G-20 countries have made their priority, and risks bringing the world to the verge of another recession.
Two weeks ago, our Prime Minister in Canada and his British counterpart, David Cameron, met in Ottawa. Both leaders noted that concerted action was needed to avoid a downturn.
Ten days ago, at our most recent meetings in Washington with the G-20, I delivered a similar message to my G-20 colleagues.
The situation in Europe is serious. Unsustainable debt levels in certain European countries and doubts about the resolution of this crisis are a significant threat to Europe, to the European banking system and to the global economy. The slow response to this crisis is what has allowed it to spread.
This crisis could have been averted a year ago. This crisis could have been averted before it threatened global growth.
The bad news is that the situation in Europe is very fragile and the good news is that it could be fixed, given the necessary political will and leadership.
This is the time for elected governments, heads of state and Ministers of Finance to rise to the opportunity and show true leadership.
To be sure, the choices you must make are not easy. But governments are elected to make difficult choices. What is needed in these times of uncertainty is a combination of three things: political will, decisiveness and clarity.
Political will and decisiveness alone will not be sufficient. The plan European leaders agree upon to solve the crisis must be clear and must be clearly communicated to all. The lack of clarity in Europe’s plan so far has only exacerbated the ongoing instability.
The plans for fiscal consolidation must be clear, credible and fearlessly implemented. Politicians in these countries must explain to their voters that restraint is not merely designed to please the EU and the IMF—it is necessary to save their countries. This is what leaders agreed to at the G-20 Summit in Toronto in June 2010.
This is not an easy task. The effort made so far is significant and must be commended, but more is needed. Only with a clear plan will populations accept the compromises that they are asked to make for their countries.
Finally, clarity is essential to the markets. If the markets understand that Europe has a clear and comprehensive plan and will decisively implement this plan, the markets will support Europe on its path to recovery.
The ultimate solution to Europe’s debt crisis is a matter for European leaders to decide. There is no doubt about Europe’s capacity to solve the current crisis. They have the tools. However, if this crisis is left unaddressed, it will eventually become too big for Europe to solve. That is why immediate action is needed. Delays will only make necessary choices more difficult.
First and foremost, the European Financial Stability Facility must be expanded and made flexible enough to address the crisis. Canada, the United States and other non-eurozone countries have urged European leaders to commit to an expanded emergency fund to deal with their sovereign debt problems and protect exposed banks. The eurozone Finance Ministers vowed to increase the flexibility of the European Financial Stability Facility and to maximize its impact by the time the G-20 Finance Ministers meet at the end of next week in Paris. At a minimum, this commitment must be carried out.
Secondly, Europe must decide whether it will support Greece unequivocally either through enlarged support or through an adequate restructuring. Not deciding is not an option.
I understand that normal parliamentary processes in Europe take time. However, extraordinary circumstances call for extraordinary actions. Today more than ever, the greatest level of flexibility is needed to address the unique circumstances of this crisis.
The agreement to increase the flexibility of the facility in Europe on July 21st is still pending approval in several European national parliaments. These approvals need to be expedited. Europe’s credibility hinges upon its ability to recognize these exceptional circumstances and take the necessary action.
I hope that European policymakers will take strong, decisive and clear action now. I am confident that if they do, Europe will recover from this crisis as a stronger continent and a more important global player.
Our federal government has also called for credible medium-term fiscal consolidation plans in countries with large fiscal deficits. We believe that such plans have to be pragmatic and flexible, as Canada’s have been, should the global economy falter more than the current expectations.
We have also stressed that emerging market economies, particularly those with fixed exchange rates, have an important role to play in rebalancing global demand by putting in place measures to allow their exchange rates to appreciate. This is not some vague technical issue. It is critical to achieve greater exchange rate flexibility now when it is most needed. The risk is that we can start to fall back into protectionist policies.
So I’ve been advocating quite a list of actions and priorities for attacking a host of crucial challenges. Some of you may be thinking, “That’s all very well, but what’s Canada doing to meet the challenge of leadership?” That’s a fair question. So let me take just a few minutes to give you some highlights of our initiatives north of the border and of the difficult choices that we have had to make along the way.
Canada’s economy was sideswiped by the recession. We’re recovering better than most. Fortunately, we had a lot of advantages going into the crisis that mitigated the impact of the downturn.
We have a strong and stable housing sector, and that’s quite different from the situation here in the United States, and there are reasons for that.
First of all, we don’t have mortgage interest deductibility. As Finance Minister, I don’t believe in using tax policy to increase risk in the housing market.
Secondly, we have recourse mortgages in Canada. This helps instill, in our view, a sense of responsibility and discipline among homebuyers.
Thirdly, we have very prudent lending standards, reflecting both solid management practices and strong supervision.
We also have originators, primarily the banks and some of the credit unions, who for the most part hold the mortgages they originate.
And finally, we monitor the housing market very carefully.
I’ve intervened three times now in the Canadian housing market in the past three years with respect to our insured mortgage market to tighten the rules. The last time, earlier this year, we reduced the amortization periods, we increased mandatory down payments and we lowered the maximum loan-to-value ratio on refinancing.
Canada’s lenders demonstrated responsibility and restraint throughout the global downturn.
As a result, Canada did not suffer a single bank bailout or failure.
For the fourth year in a row, the World Economic Forum rated Canada’s banking system as the soundest in the world. More recently, five Canadian financial institutions were named to Bloomberg’s list of the world’s strongest banks, more than any other country.
This solid record gave us the credibility to fight and win against the push for a global financial transactions tax, which is quite popular with a number of the Europeans. We were successful in the G-20 in defeating that notion.
Now it’s coming back again in various other forums. We will continue leading that charge against a global transactions tax and I am confident that our allies on this point, who are the emerging economies, will stay with us and join us in opposing what we view as a counterproductive tax. I am confident that we have enough of them in the G-20 that we’ll be successful on that initiative.
Canada’s financial system is solid. We have well-run companies based on sound risk management. It’s supported by an effective regulatory and supervisory framework. At the same time, we are actively identifying areas in need of improvement.
You’re going to have a presentation later today about a national securities regulator for Canada. That is a deficiency in our system. It’s one of the first things that I looked at as Finance Minister in February 2006. We have stayed the course on this and there have been lots of challenges in moving this forward. Canada is a federation, so we have to work with the provinces and territories.
We launched a reference this spring with the Supreme Court of Canada on the constitutionality of the federal government’s proposal with respect to securities regulation. We’re waiting to hear from the Supreme Court of Canada on that. It’s a gap in our system.
There is a committee in the Government of Canada comprised of: my Deputy Minister; Mark Carney, the Governor of the Bank of Canada; Julie Dickson, the regulatory head; and the head of CDIC that meets regularly. This is a good committee. What we’re missing is the securities regulator at that meeting and this is the gap that we need to fill. I look forward to accomplishing that, assuming that the courts tell us that we have the constitutional jurisdiction to do this.
We also have a credible fiscal track record. Our government paid down significant amounts of debt when times were good in 2006 and 2007 and kept our debt-to-GDP ratio well below our G-7 counterparts.
The IMF Fiscal Monitor released in September forecast that Canada will continue to have by far the lowest total government net debt-to-GDP ratio in the entire G-7—33.3 per cent in 2016 compared to a G-7 average of 92.9 per cent. As a result, in early 2009 we were able to respond quickly and boldly with our Economic Action Plan to support the Canadian economy, including measures to ensure the availability of capital.
On the world stage, the Canadian economy is coping relatively well, in spite of the economic challenges we must face beyond our borders. Canada’s economic and fiscal fundamentals remain solid and sustainable.
We’re the only G-7 country that has recovered more than all of the output and jobs we lost during the downturn. Both the IMF and the OECD forecast that our economy will be the strongest-growing economy within the G-7, with relatively modest growth in the G-7 this year and next. Moody’s renewed Canada’s AAA credit rating, citing “economic resiliency, very high government financial strength, and a low susceptibility to event risk.”
More recently, the same top credit rating was affirmed by Fitch, with a stable outlook, citing a “culture of conservative policymaking” that allowed Canada to weather the global recession and recover faster than other nations.
In addition, Canada returned to the global bond market in 2009–10 with two highly successful and oversubscribed offerings, one in U.S. dollars and the second in euros. As with all foreign currency borrowing by the Government of Canada, the proceeds were used to fund Canada’s foreign currency reserves. They were not used to fund government spending.
In the same spirit of careful fiscal management, our government has designed initiatives to achieve substantial savings for taxpayers through greater efficiency and effectiveness in government. We intend to reduce our operating spending within our own government, not transfers to the provinces or individuals, by 5 per cent over the course of the next three years. This will permit us to balance our budget again by 2014–15. We were in balance and paying down debt before the recession and of course we did the deficit spending during the recession, but now we’re going to stay on track to get us back to a balanced budget.
What else did we do to encourage economic growth?
We reduced taxes substantially, especially on the business side. This is not something we did during the course of the recession; I announced it in the fall of 2007, when the federal business tax in Canada was a little over 22 per cent. We worked with the provinces, which also tax businesses, and their tax rates were variable.
Our goal was to brand Canada as a low business tax jurisdiction at 25 per cent. I had to get the federal rate down from more than 22 per cent to 15 per cent. We will have accomplished that as of January 1st, two months from now. Most of the provinces have joined us in this effort, and they will be at 10 per cent within the next year or so, so that Canada will be overall a 25 per cent business tax jurisdiction.
We also got rid of capital taxes. A lot of provinces had capital taxes and we had some federal capital taxes. We got rid of those and we incented the provinces in Canada to get rid of theirs and not surprisingly they accepted the incentive. So the provinces will have gotten rid of their capital taxes by 2012. These and other tax changes have allowed Canada to achieve an overall tax rate on new business investment that is substantially lower than any other G-7 country.
Now, talking about the creation of a good environment to do business, there are a couple of issues that Canada and the United States need to address. Secretary Geithner and I have discussed these issues.
First of all, the requirement for dual U.S.-Canadian citizens living in Canada to file Foreign Bank Account Reports. Most of them didn’t even know that they had to file U.S. tax returns, even though they weren’t earning income in the United States, and there are substantial potential penalties. So this is something that we’re talking about to try to be effective and efficient in what is sought to be accomplished. What is sought to be accomplished, of course, is to avoid tax evasion and the use of tax havens.
There’s also the impact of the Foreign Account Tax Compliance Act on Canadian financial institutions and consumers. This is a key issue. It would impose extremely heavy reporting obligations on Canadian and other non-U.S. financial institutions.
I’ve discussed this with our banking leaders in Canada and with Secretary Geithner and other American officials. We do have a bilateral agreement with the United States, a Tax Information Exchange Agreement, which I think we can use to our advantage because most of the information that would be sought would be information that we’re already capable of providing. Canada is not a tax haven and if we’re going to use government resources and private sector resources in this area, I think we ought to target them more toward issues that are of serious concern, such as money laundering and terrorist financing.
So I urge you to join us in calling for changes to these proposals in order to avoid a lot of red tape for Canadian financial institutions and expenses. Hundreds of millions of dollars spent on developing compliance processes to target Canadian citizens will not be a useful exercise, and these are for the most part people who have no tax liabilities, as they have not earned income in the United States.
Let me briefly conclude my remarks with a final look at how we can overcome the economic and financial challenges facing the world today.
While Canada’s economic fundamentals remain sound, the risks to the global economy are serious. It is crucial for governments to work together in a coordinated effort to restore growth and confidence and to create jobs. Both advanced and emerging economies have an important role to play.
At the height of the global financial crisis, the G-20 showed the international community that leaders could work together to deal with global instability. The G-20 must once again send a clear signal to the world that it’s ready to take the strong actions necessary to maintain future growth and stability for all.
Our upcoming meetings hold promise for such action but our chief enemies now are uncertainty and delay. As I said earlier, there’s a meeting of Finance Ministers and Central Bank Governors at the end of next week in Paris, followed three weeks later by a meeting of the leaders of the G-20 in Cannes in early November.
In today’s difficult conditions, we need people, organizations and countries that show true leadership through political will, decisiveness and clarity.
That’s a tall order but I firmly believe that meeting this challenge of leadership is the best way to strengthen market confidence and forge the policies needed to promote and sustain the global recovery.
Thank you for the invitation to be here this morning.