Challenges We Have Met and Challenges Ahead

Introduction:

Honoured guests, Head Table guests, members of The Empire Club. Please accept my best wishes for a very prosperous and happy new year, and help me welcome our first guest of the new decade, Neville Nankivell.

Talk of a new decade may bring a smile to Mr. Nankivell. His career with Financial Post began with him reporting our concern with the influence of the central bank on Canadian business. That was three decades ago.

Abraham Rotstein wrote in 1965 that, "Much will have to change in Canada if the country is to stay the same". Well, much has certainly changed. We are the same. Neville Nankivell's academic achievements include a degree in economics from the University of Western Australia and a post-graduate degree in Management Studies from the University of Toronto. His career with the Financial Post has paralleled that great paper's emergence as the leading financial publication in the country. He has been it's financial reporter, managing editor, editor, editor-in-chief and publisher. He spearheaded the design which changed the paper and won a gold medal in competition with 1,400 others. He now heads the Financial Post company which publishes, runs conferences, operates a radio network and a databank service.

Few in our country are better qualified to talk about our country, to tell us about the challenges we have met, and the challenges ahead. Ladies and gentlemen, Neville Nankivell.

Neville J. Nankivell:

As the new decade begins, many of us are still reeling from the astounding events that ended the 1980's. Certainly the world's political landscape has been changed almost beyond recognition--and at breathtaking speed. While perhaps not nearly as mesmerizing as what's happening in Europe, the political and economic life of our own country is also at a crucial turning point.

For example:

- The Meech Lake impasse could trigger the breakup of Canada. How do we avoid that?

- The Free Trade Agreement has hurled us into a cauldron of new competition. Are our industries up to it?

- The country's tax and debt burden keeps growing. How big a threat is this to our prospects for growth?

On the positive side, we have had an exceptionally long period of uninterrupted economic growth. We're in a slowdown right now, but that's to be expected at this point in the business cycle. Most forecasters (including The Financial Post's economics unit) think any recession will be short-lived and relatively mild. They are not predicting anything like what happened in the early 1980's.

As for the debt and deficit problem, the government claims it is making some headway. If so, things should get better in that critical area rather than worse. And as for national unity, we managed to cling together before Meech Lake--even if with a fair amount of fractiousness. So what's wrong with the status quo if Meech Lake doesn't pass?

Well, let's put these issues in perspective. For business, ~.. certainly the 80's were turbulent years. As the decade began, business was still being battered by the legacy of interventionist policies (FIRA, the NEP) and a truculent labour force. We had one of the worst strike records in the world.

Management deserved brickbats too. Swaddled by protectionism, many of our chief executives were still far too inward looking and had not yet gripped the reality of emerging global markets. Not surprisingly, Canada's competitiveness internationally had slumped to a dismal 11th among the industrial nations. (World Economic Forum surveys).

In 1980-81, a phenomenal run-up of interest rates ended with the economy's crash. It was a landing hard enough to give us a close call with depression. Many of our major companies, overloaded with debt, were forced into the most traumatic reorganizations since the 1930's. But out of the crucible, the survivors emerged leaner, more durable, more businesslike. Our politicians became less interventionist. Government, at last and wisely, started to move aside and introduce more market-oriented policies. Our companies sharpened their competitive position, and Canada's world competitiveness ranking started to climb again, to sixth in 1987 and to fourth last year, its best position ever.

The most significant shift in policy direction came with the historic Free Trade agreement with the United States. The debate over Free Trade was the real story behind the 1988 election. For the first time in our history, protectionism failed to carry the day. To me, the FTAs ratification was a decisive step forward in our economic maturity. It recognized the new economic order sweeping the world. It recognized the relentless integration of the world's markets, the world's economies. It also signalled a certain political maturity on the part of Canadians. And certainly it was a coming of age for corporate Canada whose support for the deal was widespread, among big firms and small. This was a clear indication of the growing sureness in the ability of our companies to compete effectively in the new global economy. Such widespread business support simply wouldn't have been possible a decade or so earlier.

True, the Free Trade agreement has been hotly, contentiously in the news again as assessments of the first year of its 10-year-phase-in take place. Its opponents are blaming it for the loss of thousands of jobs in Canada--perhaps as many as 70,000, they say, from plant shutdowns and layoffs. Some political leaders are still threatening to tear up the 1,500-page treaty if they are returned to power. (Which says more about the strength of their wrists, as John Crosbie has said, than their judgement!)

There's no doubt that a massive restructuring and rationalization of Canadian industry is under way. Indeed, it had started before the F"I'A was signed. Job losses in certain industries and locations have been part of the process. (The high value of the Canadian dollar has of course also been a factor).

But consider these facts:

- In the first year of the pact the economy did continue to grow, even if at a slower rate (the downturn had been long predicted, FI'A or not).

- There was a sharp rise in investment in manufacturing, nearly 30 percent. It could be argued that much of the capital investment surge was related to gearing up for wider markets and that helped to delay a downturn occurring earlier. (It was business spending not consumer spending that had been keeping the upturn going).

- There was net new job creation in Canada in 1989, about 250,000 net new jobs. In Ontario alone, 87,000 net new jobs were created.

- Gross inflows of direct foreign investment into Canada have continued to run at exceptionally high levels over the past three years. Between 1980-85 they ranged around $3.8 to $4.8 billion. By 1987 this had jumped to $10.3 billion, in 1988 $8.3 billion, and for the first three quarters of 1989 had already surpassed that figure at $8.7 billion.

These inflows are the best barometer of outside confidence in our long-term prospects. And, clearly, a lot of this new industrial investment has been done with an eye on opening and securing wider access to U.S. markets from a base in Canada. An increasing proportion of it has been coming from Europe and Japan. This kind of money-on-the-line confidence in Canada is a striking change from the often negative attitude that outside investors had toward us in the early 1980's. What about concerns that the FTA will spell the death of our health-care system, harm the environment, weaken our education system, destroy our culture? Well, it looks as if in some areas the Americans might just want to harmonize with us rather than the other way around. Some of their business and political leaders are now suggesting the U.S. should seriously consider Canadian-style medicare, for example.

In any case, it will be probably take at least five years to have a well-grounded assessment of the trade deal's economic impact. But I'm convinced that by the end of the decade, when the FTA is fully phased in, it won't be much of an issue at all. The forces driving global economic integration will see to that. Look at Europe '92 and at what's happening in the economies of Eastern Europe, in the U.S.S.R., and yes, even China.

The important point about the FTA is the positive effect that will come from the dynamics of the adjustment process, as painful as some of this may be for some companies, some industries, some regions over the next few years. Canadian manufacturing is still far less productive, on average, than its counterpart in the U.S. Real output per U.S. worker remains the highest in the world. The goal of our adjustment process is to eliminate the gap, to make us more efficient. And we have to be, given the already high degree of integration that exists between the U.S. and Canada. Restructuring will leave us better prepared to compete globally and at home. The F"I'A also sets up mechanisms to resolve trade disputes that already exist between our two countries. The process isn't perfect, but it is better than what we had and it should make the outcomes more predictable.

Certainly the sweep of restructuring is reaching into all major companies and transforming whole sectors of Canadian industry. New corporate alliances are being struck, often with foreign partners, for example, the superbrewery merger between Molsons and Elders/Carling. This will build the base for expanding markets in the U.S. as well as bringing about efficiencies in Canada. And there's our own alliance at The Financial Post with the Financial Times of London.

To me, our embracing of a more open and competitive Canada says we are willing and able to take on not just the Americans but the world. And that is the right path--the only path--to be on now.

The real risk to our economic prosperity is not in ending a century of economic isolationism. It is in letting our debt and deficit problem spin out of control This truly is the height of fiscal folly, and it is happening now.

It's easy enough to blame government for this. And I do. But as Canadians we have developed a gluttonous appetite for new and expanded government programs and an amazing acquiescence to the tax grabs governments impose to finance them. When faced with a choice, we seem far more inclined to accept higher taxes than to urge or support cuts or even a pause in government spending. Just look at the last federal budget. Tax hikes outstripped spending cuts by almost three to one. Those spending cuts were pretty modest, yet still aroused strong opposition. Or look at the provincial side. Ontario and Quebec are collecting record revenues and still raising taxes. The provinces have been reluctant to make spending cuts. Many have raised taxes to make up for the reduced subsidies from Ottawa.

Our business community has been hit hard--by Ottawa and the provinces. In the last federal budget business was hammered with more than a billion dollars of additional taxes. But do we fully realize that the average personal tax rate is now just over 50 per cent of cash income for the average Canadian family (Fraser Institute estimate). We're not talking about the bite on the really well-heeled. This is the tax take from average families.

Interest payments on the federal debt now account for almost 30 percent of federal spending versus 20 percent in 1984. In the past four years alone, interest payments on the debt have risen 50 percent. This year they will equal 35 percent of all budgetary revenues. That figure was less than 15 percent in the late 1970's. In just two to three years, shortsighted governments have given us the reputation of a high tax country again, reversing their earlier efforts in lowering taxes. This means we're in danger of wasting our hard-won post-recession gains. Meanwhile, our trade competitors have been reducing taxes on income, personal and corporate, to a substantially greater degree than Canada. No wonder some foreign investors are starting to become uneasy about us again.

Perhaps our complacency will be shaken as the impact of tax grabs by all levels of government begins to show up in our take-home pay. Or as plant expansion plans are cancelled. Or as an aging population faces dwindling resources for its retirement. What is clear is that our tax system is no longer up to carrying the load our governments are piling on it. And our much-needed tax reform program is now in a shambles.

Now, I have deliberately avoided lumping the Goods & Services Tax (the GST) into my criticisms of tax grabs. That's because I believe the GST is a long overdue, necessary part of fundamental reform of our patch-work-quilt system. We have to shift the tax bias toward consumption and away from savings. It's personal savings that ultimately fuel productive investments.

Sure, I'd prefer a GST rate even lower than 7 percent. It isn't, because the government won't apply it to a broader base and because it hasn't been determined enough in putting the brakes on spending. The government won't include food because it believes that would be a political minefield. But exempting food is dead wrong in principle, and Mike Wilson knows that. Still, the GST is a rational, sensible tax. Don't forget, it replaces, not adds to, the Manufacturers Sales Tax. The MST must be among the most irrational, scatterbrained, and just plain stupidest taxes in the world. It taxes investment. It favours imports over domestically produced goods. It penalizes exports. It distorts consumer choices. Good riddance.

The federal government says it's committed to reducing the deficit. And to be fair it has made some progress. The deficit has dropped as a percentage of GDP. But with the economy slowing and interest rates still high, we now learn the deficit might balloon again to the $35 billion level. If that happens, our worst fears come true. If rates stay at these levels the deficit will double in five or six years. We'll be caught on a treadmill of borrowing even more to pay the accumulating interest on a spiralling national debt. The cost of servicing the debt is stupendous, now $40 billion a year and the fastest growing segment of government spending. The interest bill takes more than 75 percent of all federal personal taxes! Government borrowing will crowd out private credit demands. The Bank of Canada will have even less room to manoeuvre than it does now. Interest rates will remain artificially high. And so will the Canadian dollar.

The problem with our debt and deficit dilemma is that what we seem to have is an unspoken national policy of guns and butter. However, you can't win a war without putting your economy on a war footing; without being prepared to make some real sacrifice. We won't win our war on the deficit unless we 'get serious about reducing government expenditures. Raising taxes to bring in additional revenues to cover the shortfall is not the answer. We'd have to raise them by another $5 billion just to keep the deficit from getting worse. But to do that at this point in the business cycle when the economy is clearly softening would be foolish. Hitting corporations with higher tax loads when their profits are weakening, hitting in-. dividuals whose real incomes aren't rising--that doesn't make economic sense to me. And to be known as a high-tax country again will scare off outside investors, and knock business confidence domestically. It's starting to happen. I hear it when I travel abroad. I hear it here at home.

There is no shortage of other places in the world in which to invest, in which to locate new factories, create new jobs, and make a decent return on your investment. With its many natural advantages, Canada should be a great place to do business. We could have so much going for us. But we are deluding ourselves if we think our natural advantages can overcome other business considerations, such as our competitive position on taxes. We have to create the right commercial environment, one that encourages and sustains decisions to invest for long-term growth. Government must wake up, call for a pause in proposals for new and expanded programs, and stop the drift to higher taxes.

Finally, Meech Lake. l wish I had the answer to that one. I'm unhappy with certain aspects of the Meech Lake Accord. But not passing the agreement may be worse than passing it. On balance, I don't think the potential problems outweigh the risk of another protracted, divisive, and potentially shattering crisis of unity only a decade after the last one almost tore us apart.

All our problems pale before that prospect. A parallel accord is one way, politically, to get Meech Lake through and get us out of the present bind. By that, l mean agreeing to do things in the second round that weren't done in the first round, or agreeing to clarify or correct some of the things done in the first round. In other words, agreeing now on the agenda for the second round. Anyway, it's now up to the political leaders who started it to figure out how to finish it. All of them, not just some of them.

Above all, we must stop increasingly careless talk in responsible circles that staying together doesn't really matter. Keeping Quebec within Confederation does matter. With the Free Trade Agreement and increasing economic integration, within North America and globally, it becomes even more important for Canada to stay whole. Don't the forces driving the single-market concept of Europe '92 tell us anything about the direction in which we should be going? Instead of draining ourselves dry in debate about the possibility of breaking up, we should concentrate our political energies on breaking down the myriad of still-stifling trade and investment barriers that exist within our own borders. That should be our top priority for the early 90's.

It's time to smarten up, Canada, and realize we need all the muscle we can muster. In short, we need each other.

The appreciation of the meeting was expressed by Harry Seymour, Managing Partner, Waterston Financial Inc. and a Past President of The Empire Club of Canada.