June 15, 2011
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, at a luncheon hosted by the Canadian Association of New York
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I am very pleased to be here today.
I will say a few words about the Canadian economy, about the budget and about the global economy, with respect to which we have some significant concerns.
But first I would like to say a few words about the importance of the relationship between the United States and Canada. We have $250 billion of direct investment in each other’s country. This results in bilateral trade of more than half a trillion dollars a year in goods and services. And most importantly, this creates and sustains millions of jobs in our countries.
In my meetings this morning in New York, one of the major issues that we’ve been talking about is unemployment in Canada and the United States and the concern that we have particularly with respect to youth unemployment in both countries. We’re in a relatively fortunate position. Our unemployment rate in Canada is, and has been for some time, lower than the U.S. unemployment rate, but there are still too many people unemployed. The slowness of the jobs recovery is a concern coming out of the recession.
The partnership between Canada and the United States has led to Canada being the single largest export market for 34 U.S. states. Canada is the largest and most secure energy supplier to the United States. We are a democracy, we are stable, we have the rule of law and we have a majority government. We have all of the good things that lead to security and stability in terms of energy supply from Canada to the United States. Canada is the largest supplier of oil, natural gas and electricity to the United States. Canada is also the major supplier of electricity to the State of New York.
So I was pleased when former Ambassador to Canada David Wilkins said earlier this week that the U.S. should be buying even more Canadian energy. In sum, I think our countries and our people need each other and benefit from the relationship that we have.
I’ve addressed this group before, and when I look back at the remarks I’ve given over the last five or six years, they are a snapshot of what has been happening in Canada and a snapshot of what’s been happening in the world since the credit crisis in the second half of 2007.
When I addressed this group in 2006, I spoke about the approach of our new government and the significance of the remarkable electoral watershed that had just taken place in Canada—that is, the movement to Conservative government after 13 years of Liberal government in Canada, although we were a minority government when we were elected on January 23, 2006. And when I visited here in 2007, I talked about our long-term economic plan, Advantage Canada. I described how we were moving the yardsticks farther and faster on the economic front than had ever been thought possible by a minority government.
One of the major things we did in 2007, and we’re just completing our plan now, was to reduce federal business taxes. When we started in government, the federal base corporate tax rate was 22.5 per cent. It is now 16.5 per cent. On January 1st, it will be 15 per cent.
I challenged the provinces in October 2007 to join us in this effort to brand Canada as a 25-per-cent tax jurisdiction by getting their corporate tax rates down to 10 per cent by 2012–2013. Most of them will be there by then. In fact, with Ontario being there in 2013, most of Canada will have a basic combined federal-provincial corporate tax rate of 25 per cent, which is a good branding opportunity for Canada.
And we persisted with that despite the fact that we were defeated in the House of Commons in March. All of the opposition parties demanded that we abandon our plan to reduce business taxes. This is part of building the welcome reputation that Canada has for foreign direct investment and for growth by our own investors within the country. I’m proud of the fact that the Prime Minister has stayed the course on that.
My April 2008 speech took on a more sombre tone, with references to economic uncertainty and global financial turmoil. We anticipated that back in 2006 when we took office. At that time, I had discussions with the Prime Minister about our concerns with respect to the U.S. deficit, the accumulation of large public debt, and the situation of some of the European countries.
Before the crisis, we paid down public debt and were as prudent as possible, running balanced budgets and reducing taxes to try to encourage entrepreneurial activity in the country.
Then we had what economists now are calling the Great Recession.
We implemented our stimulus plan, the Economic Action Plan. We went from running surpluses to all of a sudden running substantial deficits, and we still got the support of the House of Commons because of the nature of the crisis. The public service got the job done. They got the money out the door quickly, especially for infrastructure, so that the stimulus to the economy occurred in 2009.
In the meetings we had with the leaders in our public service, I was adamant that if we didn’t get the money out the door promptly, it wasn’t worth doing. In fact, it could have a negative effect down the road. And I’m proud of the fact that it worked and that the money got out the door primarily in 2009. Our unemployment rate never went into double digits, which was a very serious fear when we were looking at the situation in December 2008.
Not much has changed with respect to the economic challenges in the western industrialized economies. The global recovery remains fragile. Our message to the Canadian voters was that things are getting better but we’re not out of the woods yet. And the number one issue in Canada, when people went to vote on May 2nd, was the economy. I think we are the first western government to be re-elected since the recession.
Our message was an economic message. We did not offer huge promises of things to come down the road. What we offered was a competent economic performance and that we would continue to take the steps necessary to protect Canadian jobs.
Our response to the most recent recession has made our country more competitive. We had some advantages going into the recession. We have a strong financial sector in Canada. Financial institutions around the world lost about $1.8 trillion during the crisis. Canada’s banks were solid, steadfast, based on sound risk management and supported by a very effective regulatory and supervisory framework.
And between those two words, I prefer “supervisory” to “regulatory.” One of the reasons that we did relatively well during the crisis was the fact that we stay on top of our financial institutions in Canada through the Superintendent of Financial Institutions, which reports to Parliament through me.
We also have a prudent mortgage market in Canada. There are some significant differences between our mortgage market and the market elsewhere. We have recourse mortgages in Canada. We don’t have mortgage interest deductibility. This has been advanced by some in Canada at various times as a means to stimulate the mortgage market. As a Finance Minister, I don’t believe in using tax policy to increase risk in the housing market. So we’re not about to change that.
We have prudent lending standards, our lenders have demonstrated responsibility and restraint throughout the global financial crisis, and most residential mortgages in Canada stay with the originators of the mortgages.
We monitor the housing market. It’s not a situation without some worry. Three times since 2008, I’ve intervened to tighten up the rules in our mortgage insurance market, by reducing allowable amortization periods and requiring larger down payments. There has been some moderation in the market in most parts of the country since the most recent intervention, which came into play in March this year.
For three years in a row, Canada’s banking system has been ranked the soundest in the world by the World Economic Forum. Five Canadian financial institutions were named to Bloomberg’s list of the world’s strongest banks, more than any other country.
On the fiscal side, back in 2006 we wanted to make sure that we did what we could to protect the country. Our net debt-to-GDP ratio fell to 29 per cent in 2008–09, which was its lowest point in nearly 30 years. That was on the brink of the recession. We then brought in the stimulus package, the Economic Action Plan, which brought our deficit to 3.6 per cent of GDP and federal debt to 34 per cent of GDP. This compares well with the much larger debt loads in the United States and the United Kingdom.
Unlike many advanced economies, our debt-to-GDP ratio will once again resume its downward track in 2012–13. According to the IMF, Canada will be one of only two G-7 nations to return to budgetary balance by 2016—and by then Canada’s federal debt in relation to GDP will be less than 30 per cent. That is, we will get that ratio back down to pre-recession levels by that time. So by paying down debt when the sun was shining, we had more capacity to respond—as all G-20 nations agreed to do—when economic gloom arrived.
Canada and Germany are the only major industrialized countries to have fully recouped both output and employment losses experienced during the recession.
So looking ahead, how is Canada positioned? We have the business tax advantage that we planned back in 2007 and which is coming to fruition. We have eliminated capital taxes, and most of the provinces have eliminated their capital taxes because we encouraged them to do so with incentives. We’re encouraging provincial governments who haven’t completely gotten rid of their capital taxes to do that as well and we’ll continue to incent that. The tax reductions have allowed Canada to achieve an overall tax rate on new business investment that is substantially lower than you’ll find in any other major industrialized country.
We’ve also taken some steps to encourage foreign venture capital. An example of this is our narrowing of the definition of taxable Canadian property, thereby eliminating the need for tax reporting under section 116 of the Income Tax Act for many investments. I heard a lot about this red tape reporting requirement and withholding tax, particularly from American investors in Canada.
Most importantly, the steps that we have taken are affordable. They are sustainable, they are broad-based, they are fiscally durable, they are structurally sound, and they are way of attracting job-creating investment to Canada. Our foreign direct investment continues to rise.
We’ve also looked at tariffs and imports because we believe in free trade. We want to have more trade with all of the world. We’re in the midst of negotiating a free trade agreement with the European Union, and the negotiations are ahead of schedule. We have eliminated most of our tariffs. We will be a tariff-free zone for industrial manufacturers next year. We will be the first country in the G-20 to accomplish that for industrial manufacturers.
In the past five years, Canada has concluded free trade agreements with 8 countries. Currently we are in negotiations with another 50 countries.
So we have a solid and stable financial system, a strong fiscal framework and a commitment to free trade that we have acted upon.
I am pleased that Moody’s Analytics recently concluded Canada has made the jump from recovery to a “self-sustaining expansion”—once again placing us first among major industrialized countries. And The Economist magazine’s Economic Intelligence Unit recently ranked Canada as the best place to do business in the G-7 over the course of the next five years.
Canada is not an island so we have to face up to the challenges that come from elsewhere. We have expressed our concerns repeatedly with our colleagues in Europe with respect to making progress on the sovereign debt situation in the European Union. This needs to be dealt with because of the danger of contagion. We know that delay causes more difficulties and ends up making the resolution more expensive, and with more strife at the end of the day. So I continue to encourage my European colleagues to act as quickly as they can to resolve that situation.
In terms of our own budgetary plans, we will stay on track. As a result of steps we’re taking to control our spending even more in the next year, we will be able to balance the Canadian federal budget a year earlier than we planned, by 2014–15. This does require some discipline. We are looking at the cost of operating the government, which hasn’t been done in about 15 years in Canada. I can’t imagine a business as large as the Government of Canada didn’t examine its operating spending more often, but we’ll do it now, and we’ll find the savings we need. There will not be draconian savings, but realistic savings that we can implement within the course of the next few years so that we’ll get to a balanced budget by 2014–15.
This will give us the opportunity to do what we said we would do during the election campaign, and that is bring in income splitting when we balance the budget in 2014–15. All of this, of course, is about sound fiscal management. With last week’s budget, our economic focus is shifting from protecting jobs and output through temporary stimulus measures to creating the right conditions for more long-term jobs and stronger economic growth, all the while steadily eliminating the deficit and returning to surplus.
We also need to call on the private sector to pick up the ball and run with it. Government stepped into the breach in 2008, 2009 and 2010 with very substantial deficits and stimulus. It is time, as we withdraw stimulus during the course of this year, that the private sector step up to the plate. There are some encouraging signs of that. Investment in new machinery and equipment by Canadian companies was up 15.4 per cent in the first quarter of this year. We’re incenting that through accelerated depreciation, and it is important that Canadian companies take advantage of the relatively high Canadian dollar vis-à-vis the U.S. dollar to purchase machinery and equipment, which is largely priced in U.S. dollars.
The need to balance our books is a lesson we must all heed, which is why fiscal consolidation was a priority at the G-20 leaders summit in Toronto last year. At that summit the leading economies, including Canada and the United States, committed to cut fiscal deficits in half by 2013, and either stabilize or put debt-to-GDP ratios on a downward track by 2016. In Canada’s case, we will overshoot these targets by a healthy margin. At less than 2.5 per cent of GDP, the federal deficit in Canada in 2010–11 is projected to be more than a third lower than it was during the time of stimulus spending in 2009–10. Still, we are concerned about the cost of government and that is why we will move forward with more spending reductions in the course of the next year.
Sometimes voters ask me why we obsess about moving toward balanced budgets. Sometimes I want to say to them they’ve forgotten about the 1970s and the 1980s in Canada, when we had runaway inflation. The prime rate in Canada in September 1981 was 22.5 per cent, and middle-class people could not afford to renew their mortgages. This is an evil that we must avoid. And that’s why, as the person responsible for fiscal policy, I have to make sure that we move back toward a solid fiscal performance, which means balanced budgets. It also means lower debt charges. It means lower interest charges. It means lower taxes.
We brought in a budget without any tax increases. We’re not in the business of increasing taxes. We’re in the business of reducing taxes to incent entrepreneurship in Canada.
I’ve been the Finance Minister for more than five years. I’ve worked with three Secretaries of the Treasury, three Chancellors of the Exchequer and many Ministers of Finance of other countries in the G-20 over the course of those years. For all nations, fiscal challenges cannot simply be ignored or wished away. As the headlines in the newspaper this morning remind us, in Europe, there is no shortage of economic pitfalls. We will never be prepared for the next financial crisis if we are still grappling with the consequences of the last one.
Fiscal responsibility has a lot to offer. It is essential that we all have a clear strategy in place to ensure markets continue to have confidence in our fiscal plans—and there is no time to waste in accomplishing this.
The United States is the world’s largest economy. The health of Canada’s economy—and of the world’s for that matter—depends greatly on the fiscal decisions being made here. We look forward to a solid plan to eliminate deficits, reduce debt and create a cushion against the next global economic shock, combined with the determination to deliver results on time and as promised. It’s a tall order for all of us, but it is doable. The benefits for all of us and for future generations will be immeasurable.
The United States and Canada have a remarkable history together. Throughout our histories, we have carried on a mutually beneficial conversation across our fence, answered each other’s calls for assistance in times of trouble and never allowed passing disagreements to become lifelong grudges. We have a special relationship, one that friends in other places around the globe can only dream of.
We owe it to ourselves to keep those ties strong, particularly while the world remains an uncertain place. And no matter how many times I address this association, that’s one message that will never change.
Thank you for your attention.