November 22, 2012
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, at a luncheon hosted by the Toronto Board of Trade
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I am grateful for this opportunity to address the voice of Canada’s business community in the great city of Toronto.
The Toronto Board of Trade has for 150 years provided its members with expert advice and a forum to exchange views on a host of crucial issues.
I benefit from its advice, particularly with respect to infrastructure. The Federation of Canadian Municipalities was in Ottawa this week. I met with them, as did the Minister of Infrastructure and others, to discuss long-term plans for infrastructure growth in Canada, which creates jobs and economic growth.
We have some crucial issues that we are dealing with now. We certainly have our fair share at the moment.
This is a challenging time for the global economy. We have seen challenges come from almost every direction. It’s been a remarkable time if you look back over the economic challenges that the world has faced, including what the economists now call the Great Recession of 2008–2009 and the struggle to recover, which is continuing quite dramatically in Europe. This is a volatile and uncertain global environment.
Our government remains completely focused on the economy—on helping support job creation and economic growth in the medium and the long term.
That brings me to the subject of the next federal budget. A budget isn’t just a bunch of numbers. A budget is the general policy statement of the government and shows the direction of the government going forward on major issues.
When developing a budget, our government does something right at the start that is a little different from what governments have done in the past: we make sure that we hear from Canadians from coast to coast to coast. It’s important that we sit down—and we do in roundtables, town halls and online consultations—with Canadians and allow them to have a say in how their government works and the future of their country.
We appreciate and take into account their views of the economy and what we can do to strengthen it. I am proud that during my time as Finance Minister, almost seven years, we have dramatically expanded the consultation process, including online consultations open to all Canadians.
It’s important as we prepare the next budget to look at a few things—where we are coming from, where we are now, what is working and what does not work so well, and where we are going.
Specifically, today I am going to talk about three items: first, where we are today, our strengths and some major threats to our continued success in Canada; second, how our government’s record of responsible fiscal management has made Canada’s economy resilient and our finances sustainable; and third, what all this means as we go forward.
Where are we today? First and foremost, it’s important to remember Canada is positioned relatively better than many of our peers in the industrialized world. I don’t say that to boast about Canada, but merely to point out that our economic policies to date have worked, our positioning is very good and we are on the right track.
Our economic policies in Canada’s Economic Action Plan have worked and obtained the results that we were seeking, in particular our major decision in December 2008 to go from a balanced budget to a large deficit within 30 days. We did it to avoid what we feared would be a long, deep and dark recession in Canada, with millions of Canadians out of work. It worked. In fact, we had the strongest and quickest recovery in the G-7 as a result of that successful program.
This all means that Canada can say a lot of things that others can’t about their economies.
We have recovered all the economic output lost during the recession. We have regained all the lost jobs and more—over 820,000 net new jobs have been created in Canada since the end of the recession in July 2009. Employment is now more than 390,000 jobs above the pre-recession high. Canada has the strongest growth rate in jobs in the G-7.
Real GDP is now significantly above pre-recession levels, which is also the best performance in the industrialized world. In short, Canada has weathered the global economic storm relatively well and the world has noticed. Canada’s brand, I think it’s fair to say, has never been stronger.
Canada is well respected around the world. It’s great to be a Canadian. This is an incredible opportunity for people like you and for the Canadian government to promote economic policies that create foreign direct investment in Canada and create the kind of growth that we want to see.
The Secretary General of the OECD, Angel Gurría, said recently: “Canada is well prepared. You have been better prepared and therefore you have weathered the storm a lot better. You are well prepared now. Your fiscal policy, your monetary policy, your financial system is in better shape. And therefore, you are doing better in the world economy.”
That’s nice to hear, of course, but we cannot afford to be complacent.
This is especially true in the face of the volatility in the world economy. The threats are pretty clear right now. The most imminent threat is the so-called fiscal cliff in the United States. There is a genuine concern, not only on the part of Canada and other countries that are affected strongly by what happens in the U.S. economy, but by Americans themselves about the consequences of not getting some kind of resolution of that issue.
We certainly are not shy about making our position clear, which we’ve done for a long time, that the United States needs to move forward with a medium-term plan to deal with deficits and accumulated public debt. This is part of that process. Were it not to be dealt with, as Federal Reserve Chairman Ben Bernanke has said, the consequences for the U.S. economy next year range between 4 per cent and 5 per cent of real GDP. That’s obviously not going to happen in January but over the course of the year.
That would have an immediate consequence during the course of the year and a continuing consequence on Canada, and it would hurt our GDP. We still do 75 per cent of our trade with the United States. So we encourage them to move along with that.
Our government is cognizant of these challenges, which brings me to my second point: how our government’s record of fiscal management has made our economy more resilient and our finances sustainable.
In an era where we are seeing many governments around the world crippled by decades of living beyond their means, governments without viable or realistic plans to ensure long-term fiscal sustainability, our government has followed a different path.
We have made the necessary decisions to ensure Canada’s return to balanced budgets and long-term fiscal sustainability. These decisions, of course, are not always easy. There is always opposition, but they will benefit our country far beyond today.
What can we do in Canada to protect our country? We can pay down public debt and continue to run balanced budgets, which is what we did when we paid down about $38 billion worth of public debt before the recession. As a result, we were in one of the best positions among the industrialized countries to deal with the consequences of the recession, unemployment and weakness in the economy.
In cooperation with the provinces, we were able to do stimulus representing about 4 per cent of GDP, which is what the G-20 leaders had agreed to in Washington in November 2008. As I said earlier, it was effective and accomplished the goals. You want to be in a position, certainly as a Finance Minister, of having room to move if bad times like that happen. We are in a much better position than most.
So we paid down public debt, and then we had to make the decision to go into deficit in 2009–10. As part of the Economic Action Plan though, we built in a plan to get back to balanced budgets. The plan was to get back to balanced budgets in the medium term, the middle of the decade, and we are on track to do that. The deficit is already down by half. We will continue that over the course of the next two years, which will get us back to a balanced budget during the current Parliamentary term and certainly before the next election.
The deficit reduction work was led by Treasury Board and a special committee. The Government of Canada is the largest employer in Canada. We found savings and efficiencies in programs that were created years ago and which no longer serve a purpose. So it took some investment of political capital to discontinue programs because every program has interest groups interested in preserving the program.
What we accomplished was a relatively moderate reduction of $5.2 billion in spending annually. Since they are annual savings, we can count on them going forward.
Due to that, we have also been able to move forward on the sustainability front. This is a problem for many countries in the world, including the United States. You hear a lot of talk about entitlements and so on. We addressed that. We moved the age of eligibility for Old Age Security up two years, but that doesn’t start to happen until 2024, so people have lots of time to plan.
We addressed the issue of public sector pensions, including our own pensions as Members of Parliament. So now we will contribute a reasonable amount to our own pensions, as people do in the private sector. And we’ve been aggressively eliminating tax loopholes. Everyone has to pay their fair share.
We have made a deliberate choice to protect what we consider essential government spending, such as transfers to the provinces, including Equalization, the Canada Health Transfer and the Canada Social Transfer for education and social services.
In the 1990s, the previous government moved towards balanced budgets by unilaterally reducing the transfers to the provinces and territories. This was a very difficult time for the provinces because they had to somehow deal with that unilateral reduction in health care transfers. We won’t do that. I lived through that and we are not going to reduce transfers to the provinces for education or for health care, in fact just the opposite. We have given them a schedule of how we are going to increase the payments all the way out into the next decade.
About a third of federal spending goes to individuals in Canada, including seniors, persons with disabilities and children. We are not going to reduce those as well.
We are left with about a third of the federal budget and that’s the spending we can really control: the program spending of the Government of Canada. I don’t think we need to do anything drastic in terms of that spending, but we have to keep an eye on it all the time and watch that it doesn’t slip away on us.
If we see inefficient spending we get rid of it. If we see programs that no longer serve their original purpose or no purpose or aren’t working, we end them. If we see special tax loopholes that allow a select few to avoid their share of taxes, we don’t hesitate to close them. Spending control is not always a popular path, and I can assure you it’s not easy, but it is the responsible one we are committed to and something Canadians I hope understand and support.
Canadians after all have to balance their own household budgets. They know the importance of living within their means and they know the dangers of not doing so. I think they expect the federal government to know the same. From the experience of Greece and beyond, Canadians know that the consequences of unsustainable finances are all too painful.
There is always some pain to spending control and spending reduction but there’s also the positive side, and that is the freedom that balanced budgets bring.
It’s freedom from wasting taxpayer dollars on interest costs. It’s freedom from higher taxes tomorrow on our children and grandchildren. It’s freedom to keep interest rates low, encouraging businesses to create jobs and invest in the future. It’s freedom to protect and help finance the services that Canadian families rely on, including health care and social services, ensuring they are there when we need them. It’s freedom to make the investments we need, be it in innovation or infrastructure, to maintain Canada’s advantage into tomorrow.
That’s why balanced budgets matter. That’s why we are committed to taking the necessary action to ensure Canada’s finances get back into balance in the medium term. Balance is a crucial concept here. It’s not just balanced budgets themselves, but also trying to strike that balance between reducing expenditures, maintaining some kind of appropriate tax base and collecting the taxes, while taking measures to encourage economic growth. If a country’s economy starts to contract due to austerity measures, then it will be very difficult to recover going forward.
There is a balance between some economic growth and maintaining control of spending to avoid substantial deficits and the accumulation of public debt. We did quite a bit of that in the Economic Action Plan this year and we intend to continue doing that.
For example, we put forward a venture capital initiative in the budget this year, which we have worked very hard on and is almost ready to be announced. It will help support the creation of venture capital funds led by the private sector, not led by the government. It will help increase private sector investments in early-stage risk capital in Canada.
In addition, we are helping support job creation by renewing the infrastructure that businesses and communities rely on. And we have intensified our efforts to expand and diversify Canada’s trading relationships beyond our traditional markets like the United States.
We are helping the lifeblood of the Canadian economy, which is small business, grow and expand with an extended Hiring Credit for Small Business. This is an important measure. More than 500,000 Canadian small businesses can use this tax credit to hire. We extended it to this year because we know it is effective in creating jobs. We will continue to build on this strong foundation that we have laid with these initiatives and more.
The third point I want to talk about is our plans for the coming budget.
There is a lot of uncertainty and a resultant lack of confidence in the world of business and finance. There is a lot of capital in the world, including in Canada. Corporate balance sheets are very strong.
Our job in government is to try to reduce uncertainty and instil more confidence so more of that money will move forward. The most important thing we can do is maintain a sound fiscal position. That’s the number one job of the government as I see it.
I am now going to highlight some of the basic principles that will shape where we go next year in Budget 2013.
First of all, we have to keep building on our strengths.
We will maintain fiscal sustainability not just for this decade but for the next decade in Canada.
We will continue to build on the pillars of infrastructure, venture capital, innovation, research and development, and skills training, which is vitally important, making sure we match the skills of Canadians with the jobs that are available across the country.
As many of you know, we have job shortages not just in western Canada but also in some areas in Newfoundland and Labrador, in the aeronautics industry in Quebec and in some areas of industry here in Ontario. We have tremendous potential going forward. This is a very serious issue for us as a country.
We need to make sure that we match skills to available job opportunities and that the under-represented people in our society, many of whom want to join the workforce, have the opportunity to do that through training. That includes seniors, persons with different abilities and certainly Aboriginal youth, whose unemployment rate is quite regrettable.
We will continue to work on expanded trade agreements.
We will continue to work to attract more skilled economic immigrants to Canada.
Let me pause here and talk just for a moment of what we won’t do.
We will not engage in large new spending schemes. We will not engage in more spending which would increase deficits. We will not impose new taxes on Canadians.
The pressure to spend more is always there. Inevitably, every year, I get lots of cards and letters with proposals for spending tax dollars.
There are always some groups interested in various projects. Many of these projects and ideas are very good ideas but we have to keep our eye on the ball and focus on what really matters for our country’s future. We can’t afford to take the risk of running deficits any longer than we must. We won’t shy away from continuing to watch wasteful government spending and stopping it.
The U.S. fiscal cliff and the European situation are clear dangers, as I’ve mentioned. Were we to have a shock or shocks from outside our country, as we did in December 2008, then we would respond. We are a flexible and pragmatic government, and we would make sure that we respond to protect Canadians and our country going forward.
I am actually quite optimistic that the future is going to show a lot of positive economic growth, not only in Canada but in the United States. Our plan is to stick to our plan—balanced budgets and low taxes. We are not going to raise taxes on business.
One of the great aspects of the Canadian brand right now is our very attractive business tax structure. In the United States, you heard all about it from Mr. Ryan, Mr. Romney and Mr. Obama toward the end of the campaign.
In most of the country, the combined provincial-federal corporate tax rate is 25 per cent, 15 per cent federally. We reduced it from just over 22 per cent to 15 per cent over the course of five years. Most of the provinces have joined us in moving in that direction. Ontario is at 11.5 per cent now, so just another 1.5 per cent and the combined rate will be 25 per cent in Ontario, too. It’s a big brand around the world.
I hear about it everywhere, including at G-20 meetings.
Our corporate revenues keep going up. It does work. If you attract business activity, you don’t have to worry too much about the corporate revenues.
We are not going to raise taxes. We are not going to create any large new programs. We will remain focused on jobs, economic growth and long-term prosperity.
We are starting national consultations for the coming budget next week. I want to hear the views of Canadians on economic priorities and how best they can be realized. I want to hear ideas on how we can generate jobs and growth while keeping taxes low and returning to balanced budgets in the medium term, during the current Parliamentary term.
These consultations will continue into the new year at several locations around the country and on the Department of Finance website, and I hope that all of you will add your voices to this discussion.
Let me conclude with a few brief remarks about Canada’s future.
Since our election in 2006, our government has taken the long-term view in managing our economy. We even took the long-term view when we were a minority government for the first five-and-a-half years. We have acted consistently to help create jobs, growth and long-term prosperity.
Over the past several years of economic instability, we have seen the effectiveness of that plan. It has enabled us to meet an historic challenge. It has positioned us to seize an historic opportunity and to protect and strengthen our country. It has given Canada an advantage today which we can seek to maximize for our future.
Canada has been a leader throughout the response to the global economic downturn. We are committed to ensuring we remain a leader.
We have more work to do in Budget 2013 and beyond, but we are building from a solid foundation.
Of course, we cannot control the economic shocks that can ripple outwards from other nations. We will remain focused on the things we can control and we will not lose that focus. The reward will be a legacy we will be proud of and proud to leave to our children and grandchildren.