February 6, 2013
Speech by the Honourable Jim Flaherty, Minister of Finance, to the Economic Club of Canada
Good afternoon. It’s a pleasure to be here.
It has been seven years since I was sworn in as Minister of Finance on February 6, 2006. During the first years we were a minority government, which poses its own special challenges in terms of planning.
We are now still in the midst of a very volatile and risk-filled global environment.
Our government is remaining squarely focused on the economy and we are preparing the next phase of Canada’s Economic Action Plan. We want to keep Canada on a deliberate path toward a more competitive economy.
As we prepare the next budget, it is important to look at where we’ve been, where we are now and where we want to go.
Late last month we celebrated the seventh anniversary of our 2006 election victory and the government’s seventh year of having the privilege and responsibility of serving Canadians. Back in 2006 the previous government had become complacent, which is the worst of all sins in a globalized economy. Canadians knew that the economy could be encouraged by sound, proven fiscally conservative economic policies such as lower taxes, focused economic policies like infrastructure renewal, and debt reduction.
In the last seven years it has been a great privilege, even at the most trying and challenging of times, to serve and continue to serve as Canada’s Minister of Finance. I have had the opportunity to witness a lot of economic history in action, some of it unprecedented in our lifetime.
I look forward to returning to balanced budgets, which is something we always planned to do when we brought in the Economic Action Plan in January 2009.
Going back to 2006, the first thing we did was fulfill some of our major campaign commitments: cut the GST by 1 per cent, create the Universal Child Care Benefit for families with children, and decide to pay down debt. In fact, we paid down about $38 billion of federal debt, which put us in good stead when the bad times came in the last quarter of 2008. In 2006, our economy was growing but we were worried about the accumulating deficits and substantial public debt in the United States. So to protect ourselves we decided that we would pay down as much debt as we could as quickly as we could.
We also created our economic roadmap, called Advantage Canada, which was published in November 2006. It was an economic plan designed to position Canada for future prosperity. It set out a series of advantages that we wanted to accomplish for Canada: a tax advantage, an entrepreneurial advantage, an infrastructure advantage, a fiscal advantage and a knowledge advantage.
I’m glad to say we’ve made progress on all of these over the past several years. In fact, looking back, the basic principles of Advantage Canada remain as relevant today as when we created the plan in 2006.
Although 2006 was a good year economically, we were worried about what was going on elsewhere, particularly in the United States. At the time, I was reminded of one of my favourite quotes, by former British Prime Minister Harold Macmillan. When he was asked what he most feared, he said, “Events, dear boy, events.”
We had events. In July 2007, I was with U.S. Treasury Secretary Hank Paulson and the other
G-20 Finance Ministers in Australia. We were all concerned about the amount of capital washing around the world. There was just too much easy credit as a result of that cash being available around the world.
The question was where this easy credit was going to manifest itself as a serious problem. I found out the next month. I got back from Australia on a Sunday afternoon. Hank Paulson called me at home and said he had the answer to the question we were asking in Australia. He said he knew where the crisis is: in subprime mortgages in the United States.
Since then we have had significant challenges—not as bad today as they were during the crisis—with respect to credit first of all and then the crisis in the real economy.
Many of you will recall that housing prices in the United States peaked in 2006, followed by the credit crisis. The market for asset-backed commercial paper froze.
Our market for non-bank-backed asset-backed commercial paper also froze. While this was a provincial responsibility, the federal government worked out a solution with the provinces involved to unfreeze that market in Canada. We also had to put in some taxpayers’ resources. And in late 2007 we formed a special committee to make sure the credit markets would continue to function in Canada, which they did.
Then by October 2008, following the collapse of Bear Stearns and Lehman Brothers, it was quite clear that we were having a global economic crisis and there was a substantial risk of a prolonged, deep recession, certainly in the western industrialized countries.
In the fall of 2008, we ensured our banks had adequate liquidity by purchasing insured mortgages from CMHC. That program did not cost Canadian taxpayers any money. In fact, we made a profit and it worked well. No Canadian banks failed or had to be rescued.
On a Friday afternoon in October 2008, I attended a G-7 meeting in Washington, where Hank Paulson said that we were in a lot of trouble. There was some fear that the equity markets would not open on Monday. We agreed to a five-point plan, under which none of our countries would allow any more significant financial institutions to fail. The plan was then approved by the G-20, the IMF and President Bush. The plan worked. On Monday people were satisfied that the international institutions were capable of resolving the immediate crisis.
Then in December 2008 we decided that we would deliver the earliest budget in Canadian history, at the end of January 2009. The reason for that was that it was increasingly apparent that the economy had gone into recession in the fourth quarter of 2008—not only our economy but the other G-7 economies and others.
We held consultations, led by James Rajotte who chairs the House of Commons Standing Committee on Finance.
We thought it would be necessary to boost the economy with a stimulus package of $10 billion to $15 billion. However, I recall a consultation in Saskatoon, where it became clear that the recession might be much deeper than some of the economists were telling us, which meant that the stimulus package would have to be much more substantial.
The stimulus package in the budget at the end of January 2009 was about $63 billion. This was a dramatic change, compared to the surpluses we had recorded for the two previous years. Of course, we now have a plan to get back to a balanced budget in the medium term.
Extraordinary times require extraordinary measures. I’ve always been of the view that government must be practical and responsive. Back then, we faced the danger of double-digit unemployment and a prolonged, deep recession, both of which we avoided in Canada. We came out of the recession ahead of other G-7 countries. We were only in recession for three quarters because the Economic Action Plan worked.
There was also international cooperation. In November 2008, there was the first meeting of the G-20 leaders, which was chaired by President Bush in Washington. It was there that the leaders agreed that all of us would stimulate our economies by 4 per cent of GDP. I want to thank the provinces in Canada for cooperating by matching our 2 per cent.
We witnessed the building of roads, bridges, public transit, research labs, university and college facilities, and lots of other excellent infrastructure projects that will serve us for a long time.
The public service deserves a lot of credit for implementing this plan. The public service, along with John Baird, President of the Treasury Board, did a terrific job of making sure the money got out the door, as did the provinces. Not only did the money get out the door and accomplish the goal intended, but the Auditor General gave the process a seal of approval, which is a great credit to the officials involved.
This was an unprecedented effort that worked. The actions our government initiated early in the mandate were possible because we had more flexibility. Had we not paid down that debt, it would have been much more challenging to do the size of stimulus that we were able to do.
Canada has a great economic brand around the world. Tom Donohue, the President of the U.S. Chamber of Commerce, said recently about Canada’s achievements: “The great Canadian miracle is something we should follow.” I’m not sure it was a miracle, but it was deliberate and effective and it worked.
Having said that, we are not out of the woods and we are continuing to have international challenges today.
In Europe there are some continuing challenges and more work to be done. In the United States there’s a continuing fiscal challenge, although we’re past the fiscal cliff.
In May 2011 we were elected as a majority government. This provided political stability.
It made it possible for us, in Budget 2012, to lay out an even longer-term plan for Canada going out into the next decade and beyond. It made it possible for us to look at federal spending.
After we pay interest on the public debt there are basically three pools of spending. The first pool is transfers to individuals, direct transfers by the government of Canada to individuals, seniors, children across the country.
We are not going to reduce transfers to individuals, including seniors and children. In fact, we continue to increase them.
The next big pool of spending is transfers to the provinces and territories. The previous government reduced that spending in order to balance the budget. That creates hardship in education, social services and health care so we will not do that. We will not reduce the transfers to the provinces.
How do we become more fiscally responsible? We have to look at the third pool of spending, which is federal government program spending.
The largest social program of the Government of Canada is Old Age Security. In the last budget we ensured that Old Age Security remains sustainable in the future.
With respect to transfers to the provinces, we’ve made it clear to them that the transfers will continue to increase but that ultimately there has to be a relationship to the growth of the economy. This is not an easy path but it is the responsible path to jobs, growth and long-term prosperity and fiscal sustainability.
We have the lowest tax rate on new business investment in the G-7. That’s something we set out to do and we’ve accomplished that.
We’re saving the average family of four more than $3,100 a year in tax. That includes reducing the GST twice and other tax reductions.
We’ve also provided tax relief in other ways.
We introduced the Registered Disability Savings Plan, which is growing with families across the country.
We introduced the Working Income Tax Benefit, which has been described by some people who work in social services as the most important tax reform dealing with social services in a generation because it encourages people to work rather than remain on social assistance, and it’s to their benefit.
We introduced pension income splitting for seniors, which is a major reform in taxation.
And probably the most important reform is the Tax-Free Savings Account, which 8 million Canadians already have.
Trade is another important economic pillar.
We’ve signed free trade agreements with nine countries since 2006, and negotiations are ongoing with 60 other countries including the European Union and the Asia-Pacific countries.
We are putting Canadian goods, services and expertise, and Canadians themselves, to work around the world.
Another economic pillar is innovation, R&D and capital formation, which is fundamental to stimulate business investment, create new high-quality jobs and equip our country for success in the future.
As part of all this, we introduced an accelerated capital cost allowance for manufacturing as a temporary measure, which created $1.3 billion in tax savings for businesses at a time when we needed that kind of stimulation.
We also eliminated tariffs on production inputs. Canada became the first G-20 country to become a tariff-free zone for manufacturers.
Just a couple of weeks ago, the Prime Minister and I announced our Venture Capital Action Plan, which is part of the Economic Action Plan.
Another important pillar is infrastructure.
We made significant infrastructure investments in the initial Economic Action Plan in 2009, but we started that commitment before that. In 2007 we introduced the $33-billion Building Canada Plan to fund infrastructure projects across the country. And we have the federal Gas Tax Fund, which we remit every year to the municipalities across Canada for important infrastructure projects like sewer and water systems and green energy. More recently we made that transfer to the municipalities permanent.
Also, one of the great success stories of the Economic Action Plan was our colleges and universities, which were incredibly efficient at spending money on infrastructure and deferred maintenance after January 2009 as part of the Knowledge Infrastructure Program.
With respect to infrastructure, we’ve had continuing discussions of course but I must say that no decision has been made in terms of a future infrastructure plan. Any decision will be made in the context of our current fiscal situation.
We need to have a world-class workforce in Canada. We have labour shortages already in many parts of our country. This is fundamental if we’re going to be able to grow economically.
There are several things we need to do.
We need to connect Canadians with available jobs through skills training and education.
We need to encourage economic immigrants to come to Canada.
We need to encourage increased participation in the workforce by some parts of our workforce that are underrepresented including Aboriginal youth, persons with various abilities and disabilities, and of course seniors because many seniors want to continue working in the workforce. Funding for some of these was provided in the budget last year.
Since being elected in 2006 our government has lived through some extraordinary global economic challenges. We met those challenges and persevered.
Where do we go from here?
Let me conclude with a look ahead at the budget, which will come before too long.
In uncertain global economic times, the most important contribution a government can make to bolster confidence and growth is to maintain a sound fiscal position. We have done so and we will continue to do so. Fiscal sustainability is number one. This is part of maintaining the terrific Canadian brand around the world.
And then there are the pillars of economic growth.
We will continue to work on ways to spur innovation, research and development, and venture capital formation.
We will continue to address Canada’s skills and training issues to ensure that Canadians are suited for the jobs that are being created across our country, including persons with different abilities and Aboriginal people.
Trade agreements are a continuing priority, as are initiatives to attract skilled immigrants.
Let me pause here to emphasize one thing, and that is what we won’t do.
We will not engage in dangerous and risky new spending schemes.
We will not engage in endless spending to increase deficits.
We will not impose new taxes on Canadians.
We simply cannot afford to risk the future of our country of Canadians against the future generations of Canadians by running deficits longer than necessary.
As I’ve said several times today, the Economic Action Plan from January 2009 was always designed to get back to balanced budgets in the medium term, and we are on track to balance the budget in the current Parliament, which means by 2015.
We won’t shy away from eliminating wasteful or ineffective spending. That is important, especially looking at our own spending as a federal government.
We are prepared to be flexible and pragmatic should circumstances warrant.
Our plan is to stick to our plan: balanced budgets and low taxes.
We will remain focused on what matters to Canadians—jobs and economic growth, and ensuring Canada’s economic advantage today will translate into the long-term prosperity of tomorrow.
Of course, we cannot control the economic shocks that ripple outwards from other nations, but we can and we will remain focused on the things we can control.
We will not lose this focus.
The reward will be a legacy we will be proud to leave to our children and grandchildren.