FEBRUARY 27, 2008
Minister of Finance, Government of Canada
A joint meeting of The Empire club of Canada and The Canadian Club of Toronto
The Hon. Chairman: Catherine S. Swift
President, The Empire Club of Canada
Head Table Guests:
Rev. Canon Kimberley Beard: Senior Pastor, St. Paul On-the-Hill Anglican Church, and Director, The Empire Club of Canada
Gregory Cohen: Grade 12 Student, North Toronto Collegiate Institute
Jaime Watt: Chair, Navigator Ltd., and Director, The Canadian Club of Toronto
Tony Gagliano: Executive Chairman and CEO, St. Joseph Communications
Arturo S. Elias: President and Managing Director, GM of Canada Limited
Allan P. O’Dette: President, The Canadian Club of Toronto, and Director, External Relations and Public Affairs, GlaxoSmithKline Inc.
Lisa A. Baiton: Vice-President, Government Relations, Environics Communications Inc., and Vice-President, The Empire Club of Canada
The Honourable Tom Hockin: Chair, Expert Panel on Securities Regulation
Tim Hockey: Chair, Canadian Bankers Association, Group Head Personal Banking and Co-Chair, TD Canada Trust
George Cope: President and Chief Operating Officer, Bell Canada.
Introduction by Catherine Swift:
I would like to thank the Honourable James Flaherty for agreeing to be with us so early in the morning after what must have been a very long day yesterday. I was in Ottawa yesterday as well, and I’m pretty tired after just commenting on the budget. I can only imagine how it must be to have delivered the budget, dealt with all of the post-budget interviews, and then come here to share your perspectives with us. We really do appreciate it.
Jim Flaherty was first elected to the House of Commons in 2006. He served as a Member of Ontario’s provincial legislature for the constituency of Whitby-Ajax from 1995 to 2005. During this period, he held a number of posts. Under Premier Eves, he served as the Minister of Enterprise, Opportunity and Innovation. Under Premier Harris, he was the Deputy Premier, Minister of Finance, Attorney General, Minister Responsible for Native Affairs, Minister of Labour and Solicitor General and Minister of Correctional Services.
He graduated from Princeton University and has a law degree from Osgoode Hall Law School. He was called to the bar in 1975 and practised law for more than 20 years before entering politics. He is also the Past President of the Head Injury Association of the Durham Region.
Ladies and gentlemen, please join me in welcoming the Honourable James Flaherty.
Well, good morning. I was worried when I saw Catherine this morning with the chain of office. I thought it was the mayor of Toronto for a moment. But I’ve got over that shock. I’m okay now.
I did the budget yesterday in Ottawa and sensed it was a momentous occasion in Canada. Then I called home last night and spoke to one of my sons and thought he’d ask me about the budget but he said, “You know, Dad, Whitby’s favourite hockey player, Adam Foote, has been traded to Colorado.” That’s what’s important. That’s what’s happened today. And the Leafs didn’t do much and that’s important too. But the Leafs did beat the Senators the other night, 5-0, which caused some sadness in Ottawa which is, I hope, cause for rejoicing here in Toronto. And the Habs traded a goalie I understand. All of these momentous things happened in Canada yesterday, but I’ll bore you now with a bit of talk about our budget in Canada, where we are and where we’re going.
It’s good to see Premier Harris here. It’s good to see councillors from the City of Toronto here. We made a very important step, a permanent step in Canada yesterday, when we announced that the sharing of the federal gas tax will be permanent. This is a major step forward. I’m departing from what I’m supposed to talk about here but it’s a major step forward. The mayor of Montreal, Mr. Tremblay, in the pre-budget consultations talked to me specifically about this, saying how important it was to the municipalities to have permanence so they could plan ahead. It’s just like business. It’s the ability to plan ahead with certainty in terms of funding for municipal infrastructure in Canada. We provided that certainty yesterday to our municipalities large and small across Canada.
It is a pleasure to be here this morning. It is our third budget as the Government of Canada. Somebody asked me yesterday, “Are you surprised it’s the third budget?” Yes, I am. If somebody had asked me two years ago whether I would do three budgets and two economic statements, I would have bet against it. I would have thought it was unlikely. They asked me this morning, “Are you surprised that the Official Opposition party is going to support the budget?” Yes, I am, I suppose because they brought me a shopping list and said they wanted me to spend billions of dollars on A, B, C, D, E and F. We’re not doing it, but they’re supporting the budget anyway. I thank them for their support. It’s important that they think this through and that they support the important steps that we’re taking in terms of our economic plan for Canada. And it is a plan.
We took office in 2006 and there was not an economic plan for Canada. We developed an economic plan for Canada in 2006. It’s called Advantage Canada. For those of you who wonder where we’re going, it’s on the Web site. It sets out exactly what we intend to accomplish in office as the Government of Canada: an entrepreneurial advantage; a fiscal advantage; a tax advantage; an infrastructure advantage; and a knowledge advantage for Canada.
The steps we took yesterday were additional steps in implementing that plan for our country. It will result in our country having a higher quality of life and a higher standard of living.
So then what did we do yesterday? The most important thing we achieved yesterday was continuity, the cumulative effect. We saw the slowdown coming in the United States. That is important. There is also global credit insecurity. We have our own challenges in Canada with asset-backed commercial paper. As you know, Purdy Crawford is leading the group in Montreal that’s been working on that issue with some degree of success which is important. But we also see the slowdown in the U.S., the housing sector in particular, which is in recession in the United States. We saw it early on. We saw it last year. That’s why we acted last year to create a stimulus for the Canadian economy.
What is that stimulus? The stimulus is 1.4 per cent of our GDP. It’s huge. It’s about $21 billion. When does it take effect? It takes effect now. It started January 1. On October 30 in the economic statement we made retroactive many of our tax reductions and we made historic business tax reductions for Canada on October 30, which began on January 1, 2008. We’re going to reduce the federal business taxes in Canada to 15 per cent by 2012. We encourage the provinces to get to 10 per cent by 2012. I’m thrilled that Carole Taylor, the Minister of Finance in the province of British Columbia, and Premier Campbell have moved in that direction last week. The province of Alberta is already there. I encourage, I plead the government of Ontario to move in that direction.
The government of Ontario today has the highest taxes on new business investment in the country. This is at the same time the current premier of Ontario says that he’s worried about business. Well, if you’re worried about business, business doesn’t need bandaids. Business needs long-term structural change like they’re doing in British Columbia, like they’re doing in Alberta. My goodness, the taxes on new business investment in Quebec are 50-per-cent lower today than they are in the province of Ontario. This has to be fixed. I’m going to continue to plead with the province so that when the budget is announced this spring it provides some relief to businesses in the province of Ontario. This will happen if there is concern about this province, my home province, the province in which I was treasurer for a time, thanks to Premier Harris. And it was a time, going back to then, 2001–2002, of some limited economic growth, about 1.5 per cent real growth in GDP in 2001–2002 in the province of Ontario. When I heard yesterday some of the critics saying we’re running the surplus close to the line, I’ve seen this movie before. We’ve done this before. We have the ability in government—some might not believe this—but we do have the ability in government to control spending. We do have the ability to reduce taxes. We’ve done both in the Government of Canada under the leadership of Prime Minister Harper over the course of the past two years. And this is important in terms of preparation.
As I say, we knew that there would be an economic slowdown in the United States eventually. It is now happening, so we took the steps, the important steps in terms of reducing taxes, paying down debt, to make sure that we in Canada were prepared for this economic slowdown.
When I was in Tokyo two weeks ago at the G-7 finance ministers’ meeting and when I was in Davos at the World Economic Summit and when I meet with my colleagues internationally in the emerging economies, I’m proud as a Canadian to be able to say that we have the strongest economic fundamentals in the G-7. We’re the only country in the G-7 that is running a surplus, that is reducing taxes at the same time as paying down public debt. When I describe this to my colleagues, the other finance ministers in the G-7, I can tell you they look at Canada with tremendous respect because we have our economic fundamentals in order. All of that is important as we go through a time of some economic slowness.
I can assure you that we will stay in a balanced budget position in Canada. We’ll continue to run a surplus, albeit a smaller surplus for the time being.
Then there are those that say we should use the surplus for something else. The opposition critics came to me when we were preparing the budget, and I met with them, as one is supposed to do. The NDP, the Liberals and the Bloc all came with shopping lists. This is the old-fashioned way. How much more money can we spend on A, B, C, D, E, big long lists? How much?
I said to them, “We’re close to the line the next couple of years. Have you heard about the world economy, the global economy? Have you heard about the housing recession in the United States? Do you recognize that that has certain effects upon our economy and our economic growth in Canada?”
Nevertheless, there were presentations of large spending demands. Had I agreed to any of the demands of any of the opposition parties, our budget would be in deficit this year and next year in Canada. So we didn’t agree to any of them but I thanked them despite that for their support for our efforts in the budget that I announced yesterday.
Why are we reducing debt? It’s a good, legitimate question. I’m happy to see the students here from Riverdale. Let me talk for a moment about reducing debt and why it’s important for our country. It’s not important in today’s terms or tomorrow morning’s terms. It’s important in the long run. If we look at Canada and we look at Canada’s future, Sir John A. Macdonald used to say, “Look a little ahead, my friends.” If we look a little bit ahead, we see how morally deficient it is for us to live high on the hog now and pass our debts on to the next generation. That’s you. Why should you pay, students from Riverdale, for benefits that we have today because governments are living above their means?
We’re not doing that anymore. The International Monetary Fund and the Organisation for Economic Co-operation and Development and so on write reports that call it intergenerational equity. Well, it is intergenerational equity but it’s another way of saying it’s not fair to pass on today’s debts to the next generation. So we’re moving against that.
We’ve paid down so far in two years about $37 billion of debt. That’s about $1,500—a little bit more than that—$1,500 for every man, woman and child in Canada. Every time we reduce the public debt, we use what we call the Tax Back Guarantee. Every time we reduce public debt we reduce taxes on individuals, families in Canada. That amounts to a significant amount, about $2 billion now, given what we’ve done so far. So that’s reducing debt, reducing taxes.
Yesterday we did something that I’m very proud of actually and that is we introduced the Tax-Free Savings Account. I know it’s going to take a while for the importance of this initiative to strike people, but in 1957 the government of the day introduced something called the RRSP, which we all take for granted now. There has not been a significant savings initiative tax-wise in Canada since 1957.
So we did this yesterday. It’s very significant. It’s also not inexpensive. It starts off being inexpensive but as savings accumulate tax-free in tax-free savings accounts in Canada it becomes quite expensive over time—20 years out it becomes something like $3 billion a year.
Why are we doing it? We’re doing it to encourage savings in Canada. It’s sound, conservative fiscal policy. The United States and the United Kingdom have these types of accounts available but we didn’t in Canada. Over time it will be very significant not only for young people accumulating tax-free dividends, accumulating tax-free capital gains, accumulating tax-free interest. Warren Buffett would love this. It’s the miracle of compound interest, tax-free in Canada. This is going to become a very popular measure for all Canadians. We estimate that within the next 10 to 20 years, 90 per cent of savings by Canadians will be tax-free in Canada. This is a tremendous impetus toward saving.
In terms of other tax measures, yesterday we made an important decision and announced that with respect to the environment, $240 million is going to be paid in 2007–2008 in order to move forward with carbon sequestration, a huge capital project, which happens to be in Saskatchewan.
There are concerns about the auto sector and the forestry sector. The U.S. recession in the housing market harms those two sectors of our economy dramatically. The Prime Minister in January announced the $1 billion fund, the Community Development Trust, to assist communities, assist workers.
We extended yesterday for three more years the targeted initiative with respect to older workers. This is to help older workers between the ages of 55 and 64. Those ages worry me, actually. I won’t retire yet. This initiative helps older workers adjust between the time that they are required to retire and the time they receive benefits from our older age security system. We extended that by $90 million over the course of the next three years.
In the auto sector—this is a matter of some concern—we reduced taxes in October on business generally. The effect on the auto sector is about $1 billion over the next five years. That’s $1 billion.
In addition, yesterday we announced $250 million for the Auto Innovation Fund. This is not particularly new. Several years ago in the province of Ontario when it had Conservative governments and I was the Minister of Economic Development and Allan Rock was the federal Minister of Industry, we did the same thing essentially in order to encourage innovation in the auto sector because you know and I know that in Canadian manufacturing if we’re going to succeed, we’re going to succeed because we are more competitive. And we’re only going to be more competitive if we’re more productive. And we’re only going to be more productive if we’re more technologically sophisticated. So we have to be more innovative. It’s as fundamental as that.
That’s why yesterday we created that fund of $250 million over the next five years to assist the manufacturing sector, in addition to $400 million for the new access road at Windsor-Detroit, and in addition to $34 million for research into automotive technological issues in Canadian universities. So the total stimulus to the auto sector in Canada is more than $1.5 billion from the Government of Canada. This is important. It’s an important industry not only for the assemblers but also the parts manufacturers in Canada.
In the forestry sector, this is a time of restructuring. This is a sector that affects not only Ontario but British Columbia, Quebec and parts of New Brunswick, certainly other parts of Canada. We are helping, as I say, through the Community Development Trust. The industry will survive. The industry will become a strong Canadian industry again. But in the meantime we’re offering support through research and innovation and development so that it will become a more competitive, a more productive, a more innovative industry in Canada.
Now moving back for a moment and looking at the big picture, we have a strong economy. Our fundamentals are strong. We have the lowest unemployment rate in 33 years in Canada. We also have the highest rate of participation in the Canadian work force ever. We also have the highest rate of labour mobility ever in Canada— people moving about our country seeking employment and gaining employment. We’ve had some job losses in some sectors of the economy, particularly manufacturing. But what we’ve seen is that those persons who have had to adjust have adjusted. They’re getting jobs, good jobs, particularly in Ontario in the expanding financial-services sector where there are high paying jobs, good jobs. That’s why the unemployment rate now is at its lowest level in 33 years.
As I say, our economic fundamentals are solid. Inflation is low. Interest rates are low. Because of our strong economic fundamentals in terms of monetary policy, the Bank of Canada has room to exercise its monetary jurisdiction with respect to interest rates. As you know, in the last setting of interest rates by the Bank of Canada, Governor Dodge indicated that it was likely there’d be some movement with respect to interest rates, further movement by the Bank of Canada in the future and the new governor, Governor Carney, I’m sure, will use his discretion as he moves forward with respect to monetary policy for Canada.
Having said all of that, and having ignored what was written for me, I do want to say in conclusion—and you’ll welcome the “in conclusion.” I will conclude shortly.
We live in a great country. Our economic fundamentals are strong. We have great universities. I see some of the university presidents here today, some of the community college leaders. We have to move forward with a knowledge economy. The strength of Canada in the future, the economic strength, is not going to be to compete in low-level, low-paying jobs with emerging economies. It’s going to be to build on our strengths, to build on our people, on the best and the brightest through our universities, through our colleges.
We moved forward again yesterday with that knowledge advantage. We have to recognize that the future of our country is in its people. We have to build the infrastructure we need in this country which is why we have the largest infrastructure program federally in the history of Canada since the Second World War—more than $33 billion. It’s why we created an Office of Public-Private Partnerships so that we can lever that to more than $100 billion in Canada. It’s why we’ve reduced taxes dramatically in our country. It’s why fiscally we’re being conservative and cautious in our predictions and in our prognostications so that we make sure that our country has balanced budgets. It’s why we’re encouraging entrepreneurship in Canada by reducing the tax burden, by reducing the paper burden, by reducing the regulatory burden on small and medium-sized businesses in Canada.
It’s all part of the plan. We are fortunate in this country that our economic fundamentals are solid. We are fortunate that our country is united. My friends, my fellow Canadians, we have a brilliant future together.
The appreciation of the meeting was expressed by Allan P. O’Dette, President, The Canadian Club of Toronto, and Director, External Relations and Public Affairs, GlaxoSmithKline Inc.