Matthew Barrett, Chairman and CEO, Bank of Montreal
A PENNY EARNED
Chairman: MGen. Bruce Legge Past President
Friends and members of the Empire Club of Canada. In 1950 the Empire Club of Canada was told by Mr. Canada, also known as John Fisher, that instead of being owners ourselves of our resources we will wake up some day to find we are OWERS--the N is gone. This very week the Honourable Michael Wilson, the Minister of Finance, lamented to the Empire Club and to the Canadian Club the same factors which result only in deficits and national debts.
As part of setting the scene for Mr. Barrett's introduction I recall that on Monday our President Sarah Band thanked the Honourable Michael Wilson for his speech about debts and deficits. Thereafter she was admitted to Mount Sinai Hospital and on Tuesday morning she telephoned me with the news of her baby's birth and to instruct me to preside in her place today. I suggested to her that the baby should be named Michele after Michael Wilson but she was adamant that her daughter would be christened Zoe Lilliana! All of this contemporary history should be noted in your introduction, Mr. Barrett.
The privilege of introducing our guest brings with it the responsibility of examining his biography. And having done so, I believe he began life as a banker and, moreover, as an Irish banker. The Bank of Montreal is the oldest chartered bank in Canada. It was founded in Montreal in 1817 and now has about 1300 branches. Mr. Barrett joined that bank in England at the age of 16 to earn enough money to be a writer. But, he acknowledges that he "had zero talent in writing, and a black belt in balancing cheque books." Sir, l love your idiom because balancing cheque books is certainly a martial art!
Matthew Barrett arrived in Canada in 1967 and strode through the sixteen-step choreography of promotion to take the Chairmanship of the Board of Directors just six and a half weeks ago. In one of its thoughtful articles the Financial Post described Mr. Barrett as "stylish, personable and a team builder." Additionally, the Wall Street Journal says Matthew Barrett is "devoted to the institution" and "all his friends are Bank of Montreal people." Certainly his wife will endorse that assertion because Mr. Barrett met her in the Bank and one of his supporters believes her to be his best personal withdrawal from any bank.
In January of 1964 one of your famous predecessors as President of the Bank of Montreal, Mr. Arnold Hart, ended his speech to the Empire Club by saying that "solid economic progress is in store for Canada--only the rate of advance and the timing are uncertain." Twenty-six years later we welcome you as one of the youngest leaders in the world's banking community and we enthusiastically await your opinions as the Chairman and Chief Executive Officer of the Bank of Montreal. Ladies and gentlemen, Mr. Matthew Barrett.
This being my first opportunity to address a Toronto audience since taking on my new job, I naturally sought to capture your imagination with a riveting theme of the utmost national interest. But Mr. Wilson has already seized that high ground …"Read my lips, no new taxes."... he told you. It is hard to top that. So it leaves me with a more prosaic subject--the health of our national economy.-
More specifically, I want to put to you the case for improving the savings rate in Canada, which I see quite simply as a strategic imperative if we are to prepare ourselves sensibly for the future. Here my focus is not on 1990 or 1991.I am thinking longer term: a directional shift extending over the next decade or two.
Now I know there are risks in taking a long term view. Predictability is not a hallmark of our world these days. The magnitude and velocity of change now taking place in the political economy is almost breathtaking. Who among us a decade ago--even a year ago--could have imagined the events in Eastern Europe; or in the Soviet Union itself; or that "Europe 1992" would in fact come to pass. More improbable still, who would have thought that the United States would be the world's biggest debtor, while Japan and Germany would be the biggest suppliers of capital. As we approach the end of the 20th century, history seems almost to have accelerated its pace. It's as if the more things change the less they will remain the same.
It is obvious that we face a future more than usually fraught with uncertainty. But one thing we can be sure of--the drive for economic renaissance, fuelling still more change, will lead to a world economy that will make today's competitive environment seem like a playpen. An economy like Canada's--mid-sized and open--needs to watch out for itself. The question to ask ourselves is this: Are we well enough prepared to meet the inescapable challenges coming?
First off, we have much to crow about in Canada. We are just coming off seven years of strong growth, second only to Japan. And we have made substantial improvement in our international competitiveness. Today, we are ranked fourth among all the OECD nations in overall competitiveness, up from seventh in 1986. In fact, this even placed us ahead of West Germany in 1989--no mean feat. This ranking is found in the respected World Competitiveness Report, which looks at all 23 OECD nations. This report spells out the many areas of competitive strength we in Canada enjoy: "Natural and Human Resources", "Economic Dynamism", "Industrial Efficiency", as well as the relative absence of what is called "State Interference". On each of these measures, Canada has shown marked improvement over the past three years. These are impressive accomplishments and they should augur well for our ability to hold our own in the international marketplace--at least over the next couple of years. Beyond that, though, the outlook is not so rosy. The report also makes clear that there are some serious weaknesses in Canada that need to be tackled. One such area is investment in research and development and the commercialization of new technologies. Here, Canada slipped badly--from ninth place to fifteenth in just three years.
The crucial area where we slipped very badly is the category known as Financial Dynamism which, simply stated, encompasses the many dimensions of the financial environment in which we all operate. The report takes us to task for -continuing massive budget deficits,
- rapid growth in government debt to fund those deficits, and
-a decline in the domestic savings rate.
Under this heading, we fell from seventh, which was already barely acceptable, to eleventh. This clearly is a problem area, posing a significant threat. It is my contention that unless we build more muscle in the area of Financial Dynamism, our present overall ranking as a competitor could fall off a cliff in the next decade. And if that happens, we would be the first parents in generations who could not look forward with contentment and optimism to a better life for our kids than we enjoyed. Is there some miracle cure for the disease wasting our financial dynamism? Of course there isn't. There seldom is. No single policy prescription will set things right. But there is one old-fashioned remedy that would at least put us on the road to recovery--and that is an improved national savings rate.
The idea is not new, it is not novel, nor is it trendy. But it is still valid, and for a very good reason. Saving is essential to fund investment, and investment is one of the most potent forces behind increased productivity. Only through improved productivity can we enhance our competitive standing. That's why saving is so important. Without productivity gains, there can be no improvement in real Canadian living standards. The logic of this is indisputable. If the amount produced by each worker does not grow, real income per worker does not grow. To illustrate, let's compare productivity growth. In the last 20 years, productivity growth fell from nearly two and a half percent to less than a half percent. Not surprisingly, real income growth fell with it, from three and a half percent to less than one and a half percent. Why is this so important? Let's look at just two areas that will demand our attention--demographic change and environmental concerns.
We know Canadians are aging. By the year 2040, we will have three times as many seniors in Canada as today. Inevitably, just to maintain current levels of health care and social services will require an expansion in resources. A similar increase in resources will be required to stay abreast on the environment. And these are just two priorities among many that will strain our resources. How are we to step up to their increased price-tag if productivity growth is stagnant? The answer is simple. We can't. There's only one way to pay the bill if you don't want to lower living standards. Productivity needs to be kick started again, and that means more investment, which brings me right back to where I started: we need more savings.
Investment is not, of course, the only contributor to productivity performance, but study after study has demonstrated its critical role. Equip workers with more capital goods and you almost always get greater output per worker. So, the linkages between investment and productivity growth are clear. Equally clear is the linkage between domestic savings and investment. High saving countries frequently have a stronger investment and productivity performance than low saving countries. The Japanese and Germans built their investment and productivity track record substantially on their domestic savings level. Japan continues to lead the field with a savings rate of 17 percent, Germany is second with a 13.5 percent rate.
The Canadian rate is below 10 percent. And that's down from nearly 12 percent in the late seventies. By any measure, it's a mediocre performance, and it's getting worse. The question is, what do we do about it? For one thing, I suggest we stop shooting ourselves in the foot with a tax structure that actually discourages savings. Let's keep in mind that many Canadians are already in the 50 percent tax bracket, or close to it. I am dreading the prospect of a customer complaint letter that might read something like this:
"Dear Mr. Barrett,
I've invested in one of your bank's GICs that pays me 10 percent interest. When I get the interest, Mr. Wilson takes half of it, and inflation eats up the rest. My real rate of return is zero!
Yours insincerely, a Canadian saver."
How am I supposed to answer this customer?
Small wonder that people are tempted to spend rather than save. To make saving the intelligent choice, we need to tilt the ', tax system away from income and toward consumption which brings me to the GST. I must have a latent death wish to talk positively about these three letters--but I will anyway. Of ', course it has its design flaws. Yes--the base is too narrow, and yes, the application is inefficient, too complex, and so on. But despite all that, it has the virtue of eliminating the Manufacturer's Sales Tax, (one of the worst taxes ever, to which I say--good riddance). And it is a tax on consumption, not income. I would even go as far as supporting a higher GST rate--as long , as the government were to offset the revenue gain with reduced income taxes.
We should be getting rid of the taxation of inflation. Specifically, it would be a real boost to business in this country if capital gains were adjusted for inflation. As the rules now stand, the real rate of return on investment is diminished. Likewise, taxing inflationary gains on savings also diminishes the real return to savings. And we also need to look at eliminating all forms of double taxation of income, the two most obvious being interest and dividend income. The message that double taxation sends out--yet again--is that saving and investment is not the smart choice. And speaking of tax incentives, the sooner the government raises the limit on RRSP deductibility, the better. RRSPs have had a strong positive effect on Canada's savings rate. A higher limit would help Canadians better control their incomes during retirement. Indeed, if social welfare programs continue to edge away from universality or suffer cutbacks, RRSPs will be increasingly important. Ultimately, good for us when we retire; meanwhile, good for the country's savings rate--a nice win-win strategy!
These tax reform measures would, in my view, increase the national savings rate over time. But this effort will all be in vain unless we launch a more aggressive attack on our federal and provincial budget deficits.! It is not the deficit per se that is the problem; nor even the large stock of debt! The problem is that deficit spending is national dis-saving: governments are spending money faster than we can save it! And to the extent deficits are funding consumption and debt-service costs--which, increasingly,. is what our deficits are doing--they cannot possibly help our productivity. That, in a nutshell, is what the debt debate is all about. The expenditure cuts announced in last week's budget are certainly welcome, although, I confess, a bit timid for my taste. I just hope that they are the start, not the finish, of a sustained effort, and one that will not be derailed by the provinces.
The further problem is that deficits drive up real interest rates, putting us at a significant disadvantage on the cost of capital, relative to our competitors. The cost of capital is also determined by other factors. We know, for instance, that countries with lower rates of inflation also enjoy a lower cost of capital. So it is important to resist those voices who are calling for the Bank of Canada to moderate its anti-inflation stance. Until the forces of inflation are in full retreat, it is difficult to criticize the Bank of Canada. Hang tough, Mr. Crow! If we make these reforms, and the savings rate does improve, how do we encourage it to fund domestic investment? Empirical evidence suggests that savers and investors have a natural bias in favour of their home country, but evidence also tells us we can't take this tendency for granted. To ensure we hold, or better still, improve our share of any increase of domestic savings, the investment environment in Canada must remain attractive.
To the Government's credit, we have improved the investment climate for both domestic and foreign capital. Added to that, we have entered boldly into a free trade agreement with the U.S. But to reinforce these important advances, more must be done to bring down budget deficits and to build up incentives to save and invest. Policy-makers must look towards the next century, not just the next election. I'm struck by the fact that our parents and grandparents were right. Savings are the source of future wealth, for individuals and for the nation. A higher savings rate will give us greater control over the levers of our economy, and the ability to pursue a more independent national agenda.
For a banker to applaud higher savings comes as naturally as a dentist promoting six-month check-ups. But I am certainly not alone in extolling the virtues of saving. Past generations needed no persuasion, from bankers or anyone else. For them, hard experience was quite enough. In their world--one with no safety nets or guaranteed income supplements--they knew only too well the value of savings and investment. For present and future generations, let's make Ben Franklin's adage a reality. Let's make sure "A penny saved is a penny earned". And please don't put it in your piggy bank.
The appreciation of the meeting was expressed by Montague Larkin, Stockbroker, Treasurer, Toronto Arts Council and a Director of The Empire Club of Canada.