September 25, 2012
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, at the Canadian Council of Chief Executives' conference "Canada in the Pacific Century"
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I am very pleased to have the honour of providing the closing keynote address for this conference on “Canada in the Pacific Century.”
I am going to talk about our relationship with Asia, about where we are as a country and what our plans are.
Canada’s economic relationship with Asia has received considerable attention in the past several months. My colleague, Minister John Baird, Governor Mark Carney and your other distinguished speakers have already spoken to the importance of that relationship for Canada’s future prosperity.
Indeed, as the CCCE’s projections show, Asia is expected to generate 33 per cent of global economic growth between now and 2025. Over my more than six years now as Minister of Finance, I have witnessed the growth of the Asian economies and the degree to which two-way trade and investment has increased, first-hand. Also, as Minister of Finance, I recognize the importance of this growth to Canada’s prosperity.
To promote Canada’s strengths as an investment destination and trading partner, I have travelled to Asia frequently since we took office in February 2006. I have been to Japan five times, to China four times and to Korea several times, and visited Indonesia, Vietnam, Singapore and India. Next month I am going back to Japan, Hong Kong and Malaysia.
This direct engagement has provided an opportunity to make important political connections and advance issues related to Canadian companies that export our goods and services to these emerging economies.
Just before I go on to talk about the importance of that ongoing relationship and growing that relationship, I would like to talk briefly about our current economic and fiscal position in Canada and the major global threats to our future growth.
Let me begin with Canada’s current economic and fiscal health, a record that many other nations today regard with some envy.
Thanks to prudent fiscal and economic decisions made before the recession hit in 2008–2009, Canada’s economic and fiscal health today is stronger than most other developed countries. We paid off a lot of debt in 2006 and 2007. Then, when we were faced with the unprecedented global crisis, we responded with Canada’s Economic Action Plan, which stimulated the economy, protected Canadian jobs during the recession and invested in long-term growth. The results have been very positive and widely recognized.
The fall of 2008 was a frightening time economically. I’m sure it was frightening for most of you as chief executives of your businesses. The degree of uncertainty was inordinate and we had to act in the G-7 and the G-20. The good news, particularly in October 2008, was that the international organizations actually worked.
I remember being in the Cash Room of the US Treasury with Secretary of the Treasury Hank Paulson and the other G-7 Finance Ministers and central bank governors on a Friday afternoon at 1:00 p.m. It was October 10th, four days before our election. Lehman Brothers had just failed. The Europeans were quite aggressive about what had happened, which is ironic now when you look at some of the challenges that have evolved with their banking system.
Having said that, at that meeting we tore up the long communiqué that had been drafted by our officials and we agreed on a five-point plan, which was fundamentally that we would not permit any more banks to fail. Then President Bush endorsed it the next morning and there was a G-20 meeting and other meetings that took place on the Saturday, all of which resulted by Saturday night in there being an agreement among the major economies of the world that we would proceed in that way.
We had an election on the following Tuesday. Then we had the recession in the real economy in Canada later in the autumn of 2008. All of that resulted in the Government having to take a long look at where we were and what the dangers were for the Canadian economy.
In the January 2009 budget, we made the important decision to go from running balanced budgets and paying down public debt to running a very substantial deficit, not only for the next fiscal year but for several years. We’ve reduced that deficit by about half but we still have a way to go to get back to balanced budgets. We did that because we were very concerned about the danger of a prolonged deep recession in Canada and of millions of Canadians being out of work.
So we made the decision to create very substantial stimulus and it worked. We didn’t have our unemployment numbers get out of control. We didn’t have millions and millions of Canadians out of work back in the midst of the recession. Now I would like to see more progress, but we have recovered and we now exceed all of the output and all of the jobs lost during the recession.
Since July 2009, almost 770,000 net new jobs have been created. Virtually all jobs created have been full-time jobs, mostly in the private sector. The Canadian unemployment rate has dropped to 7.3 per cent, 1.4 percentage points lower than the recession peak in August 2009, and lower than the American unemployment rate, which hasn’t happened since the 1970s. We are now close to 340,000 jobs above the pre-recession peak.
Real GDP is now well above pre-recession levels.
Canada has the distinction of having the world’s soundest banking system for the fifth year in a row, once again affirmed by the World Economic Forum.
Five Canadian financial institutions were named to Bloomberg’s list of the world’s strongest banks, which is more than any other country.
Three credit rating agencies have reaffirmed their top rankings for Canada, and it is expected that we will maintain our AAA rating in the year ahead.
Canada’s fiscal fundamentals are solid. Our US$3-billion bond issue earlier this year was widely subscribed, with Euroweek magazine concluding, “The fact that Canada is able to do a trade like this cements Canada’s status as a true Treasury alternative and the best credit in the world.”
So Canada is still growing, but we are not immune to downside risks originating outside our country and the economic challenges faced by some of our largest trading partners.
There are two key international risks: the crisis in Europe and the fiscal situation in the United States, including the so-called fiscal cliff that the United States is facing at the end of this calendar year.
The first major immediate threat is the enduring sovereign and banking crisis in Europe. As Prime Minister Harper has observed, “The risks to the global economy stemming from the euro zone remain considerably elevated, with the capacity to affect all of us.”
In the euro zone, real GDP contracted in the fourth quarter of 2011, was virtually flat in the first quarter of 2012, and then contracted again in the second quarter of 2012.
In addition, current indicators show little improvement, suggesting that the euro area economy is unlikely to see a sharp rebound in the third quarter.
Today, the euro area is essentially in recession.
Many nations, even those an ocean away, are concerned about the impact of the euro zone crisis on their own economies.
To complicate the issue, policy response options are much more limited than they were during the 2008–2009 crisis.
High debt levels in some countries mean new fiscal stimulus could be counterproductive. In addition, monetary policy rates are near zero in many countries, which constrains the scope to further lower interest rates as a means to stimulate lending.
I am encouraged by the ECB’s recent announcement that it would support European sovereign bond markets. This is a step in the right direction, but we continue to wait for intentions to become actions. European leaders must continue to make progress on fiscal and banking unions and encourage vulnerable countries to reform.
Turning to the United States, there is great concern with the long-term fiscal challenges in the US. This also has a short-term dynamic. I am speaking about political gridlock in the United States. Without a political agreement, a number of tax increases and spending reduction measures, which will represent about 4 per cent of US GDP, are scheduled to come into force at the beginning of 2013, the so-called fiscal cliff.
The US needs to reduce its fiscal deficit over time. This point is clear. But it also needs to ensure that there is policy certainty in the short term so that markets and investors can be confident that its economic growth will not be interrupted.
In response to these and other challenges, our Government is positioning Canada to weather these storms from offshore.
That brings me to my second issue, which is this year’s budget—Economic Action Plan 2012, the long-term plan for our country.
First, we ensured that we have fiscal stability in the country in the longer term—that meant we had to deal with issues like Old Age Security, which is the largest social program of the Government of Canada. In the longer term, 2023 and beyond, we are dealing with the Old Age Security issue and bumping the age from 65 to 67.
Also, we dealt last December with the Finance Ministers on the issue of the growth of health care spending at the federal level. We made an arrangement about what we would be contributing out to 2024. Spending will grow by 6 per cent a year over the course of the next five years, which is a greater increase in spending on health care than in any of the provinces so far, except for Alberta. The provinces are averaging about a 4.1-per-cent increase in health care spending.
We had to deal with those longer-term issues to make sure that we have fiscal stability in the longer term for Canada and to make sure that we can afford the important social programs like Old Age Security, not just 2 or 5 years from now, but 10 and 15 years from now.
Innovation is another important pillar in the budget. We’ve implemented some of the recommendations in the Jenkins report. We have much more to do on innovation, research and development, and productivity in Canada.
Labour shortages are an important issue as well, not just in western Canada where we hear about it all the time, but elsewhere including in Newfoundland and Labrador and in Montréal.
Certain groups in our society are under-represented in the labour force, including Aboriginal youth, persons with disabilities and seniors. Some seniors want to continue working. We have a mismatch of skills in many areas, where the unemployment rates have been high but where people are not trained for the jobs that are available.
We have a lot of work to do in all of those areas in Canada to make sure that we have economic growth going forward. This is fundamental to our standard of living and quality of life.
On the issue of trade, our largest historical trading partners, the United States and Europe, are going through a prolonged period of deleveraging which will result in slow growth for a long period of time. We will not be able to rely on these trading partners to the same extent that we did in the past, so we must develop new markets and create new opportunities in dynamic parts of the world if we are to keep raising our standard of living.
Our Government is committed to increasing Canadian exports and creating the conditions necessary for our homegrown businesses to compete in the global marketplace.
The pursuit of free trade is key to our future growth. Indeed, it is one of the pillars of our Economic Action Plan for Canada going forward.
Too often, growth policy is characterized as fiscal stimulus. In my view, a sustainable growth agenda involves structural reforms, including trade liberalization that allows for Canadian businesses and their workers to fully compete in the global market.
Our Government has already made Canada one of the most open and globally engaged economies in the world. In six years, we have reached free trade agreements with 9 countries. We are negotiating with many more. We have also concluded Foreign Investment Promotion and Protection Agreements with 11 countries and we are in active negotiations with 14 others.
We are optimistic that our negotiations with the European Union will soon produce an ambitious free-trade agreement that facilitates greater trade and investment between Canada and Europe. A few weeks ago, the Prime Minister met with German Chancellor Angela Merkel here in Ottawa to strengthen dialogue on this key initiative with the EU.
Combined with our Government’s free trade commitment is our continued tariff relief to enhance the competitiveness of Canadian manufacturers and importers. In all, our Government has eliminated more than 1,800 tariff items and provided more than $435 million in annual tariff relief to Canadian businesses. As a result, Canada is now the first tariff-free manufacturing zone in the G-20.
Let me stress this point: open trade has long been a powerful engine for Canada’s economy, driving us forward through some pretty tough conditions. It is something that our Government firmly believes and our record demonstrates. Not all of the parties represented in Parliament share this view. In fact, the Official Opposition has opposed almost every free-trade agreement that has come before Parliament.
Deepening Canada’s trade and investment relationships in large and fast-growing export markets around the world is key to jobs and growth.
In the past few years, our Government has been aggressively expanding commercial relations with the Asia-Pacific region to create jobs and economic benefits. The opportunities for Canada in this dynamic region are vast, with an economic growth rate that is two to three times the global average.
By 2040, China and India are predicted to be the number 2 and number 4 destinations for Canadian merchandise exports, with South Korea and Japan in the top 10 as well.
That’s why our Government is actively pursuing a whole host of trade initiatives in Asia. Consider the Trans-Pacific Partnership, for example. The TPP’s current membership represents a market of 510 million people and a GDP of $17.6 trillion.
At the June G-20 Leaders Summit in Los Cabos, TPP members announced their support for Canada joining the Partnership, an “historic opportunity,” in the words of your organization.
It is indeed historic, but this trade effort in the region has some company. In addition to the TPP, Canada is pursuing a number of similar initiatives, including continuing free trade agreement negotiations with Japan and conducting exploratory discussions toward trade negotiations with Thailand.
Our Government continues to take action to increase Canadian exports to China. Canada has a strong network of trade commissioners throughout China who can help Canadian businesses to assess the potential of the Chinese market, find qualified contacts and resolve any problems that may arise along the way. This network was expanded in 2009, when Canada opened 6 regional trade offices to expand our presence to second-tier cities, the new drivers of China’s economic growth. Our country now has a total of 11 points of contact for Canadian businesses in China.
To increase protection for Canadian businesses in China, earlier this month we signed the Canada-China Foreign Investment Promotion and Protection Agreement. This landmark agreement will provide a more stable and secure environment for Canadian businesses in China. We will continue to work with China to increase Canada’s competitiveness and sustain future growth.
Now let me briefly conclude.
As the CCCE has so perceptively observed, economic power is shifting to Asia. The Government of Prime Minister Harper not only agrees wholeheartedly, we are doing something about it, creating the right conditions for Canadian businesses to compete in the Far East and, indeed, around the world.
Two weeks from now, I will be going to Tokyo for meetings with the IMF, the World Bank and the G-7. I will also visit other key Asian countries to strengthen Canada’s profile as a strong country for savvy investors looking for rewarding opportunities in an economy that has persevered in spite of unprecedented global challenges.
Deepening Canada’s trade and investment relationships in large and fast-growing export markets around the world is a key part of keeping Canada strong and growing. However, government cannot do this alone. Private-sector business investment must also help lay the foundation for a sustained long-run expansion of Canada’s economy and job growth. Recently, we have seen some data that indicate that the private sector is beginning to invest more in Canada, which is welcome, but more needs to be done.
Our Government continues to create the right conditions to enable Canadians and Canadian businesses to feel confident to invest, to create jobs, to participate in the global marketplace and to grow our economy.
We have lowered taxes on income for businesses and individuals. We have encouraged the purchase of new technologies and equipment through accelerated capital cost write-offs. We have reduced red tape.
But ultimately, it is up to you in the private sector to take advantage of all these strengths and to invest, to create jobs and to grow our economy.
As last month’s CCCE-sponsored report observed, the world is rebalancing towards Asia and China in particular.
Canada must respond to this fundamental shift.
As the senior voice of Canada’s business community, the CCCE has a key role to play in helping Canada take better advantage of the many potentially rewarding opportunities in Asia.
This conference has made a valuable contribution to meeting that challenge. I look forward to your actions and your investments that flow from these discussions. As we have in the past, our Government will continue to do its part.
And, with your help and support, together we can—and will—keep Canada strong and prosperous, even in a volatile and uncertain global economy.