The Economy in Transition

Introduction:

At this moment, in the comfort of this room, we are untouched by the chaos that prevails in so many corners of the world. Our guest speaker knows first hand about the suffering and deprivation of those victims of war, plague, famine and political upheaval. Perhaps it is time for us to take stock of the Red Cross, in itself an empire on which the sun never sets.

It is my view that, both at home and abroad, this organisation with its history and tradition is taken too much for granted. It is fortunate that one of Canada's contributions is its young, dynamic Secretary General. George Weber took on the appointment in 1983 at the age of 37-the youngest ever to hold this position.

He is responsible for more than five thousand employees nationwide, a budget of some two hundred million dollars, the administration of sixteen health and community services programmes in Canada, international disaster-relief operations, and the future development of the Canadian Red Cross.

Mr. Weber's affiliation dates back to his formative years when he joined the Quebec Division's Water Safety Programme. In 1973, he volunteered for a special International Red Cross relief operation in Vietnam. He then joined the staff of the Geneva-based league of Red Cross and Red Crescent Societies, serving as a relief officer and chief delegate. He was responsible for Red Cross relief operations and disaster preparedness in Rwanda, Mauritius, Cap Verde, Nepal and the Philippines. halfway through its third year in office and Mr. Wilson has held the both uncomfortable and controversial position of Minister of Finance throughout the administration. In fact, today's Toronto Star says, "If Brian Mulroney was to shuffle his senior ministers tomorrow, he would have great difficulty in finding a replacement for Mr. Wilson. He is just hitting his prime."

Last week, Michael Wilson presented his spring Budget. At the weekend, he represented Canada at the Paris meeting of finance ministers of the six major industrial countries. Monday, he spoke to The Canadian Club in Montreal. If this is Tuesday, it must be Toronto. We are indeed grateful that the Minister could arrange to fit us into his hectic schedule.

We are looking forward to hearing him elaborate on last week's Budget and give us, we hope, some views on the tax reform proposals he is expected to publicise later this spring. Ladies and gentlemen, please welcome the Honourable Michael Wilson.

Honourable Michael Wilson

I am delighted that my parents are here at the head table. My mother has been getting quite a bit of publicity recently, and, for those of you who are wondering, she has read my speech and she has approved of the words that I'm using in the speech.

It's great to be back in Toronto after a very exciting, romantic weekend in Paris. I want to just make a couple of comments on the meeting that we had in Paris before moving on to the other parts of my text that the chairman has referred to.

It was a very important meeting that addressed some quite serious problems and I think much was accomplished. There were some important decisions reached, decisions designed to engender a greater degree of stability in the foreign exchange markets.

More importantly, we made decisions that have resulted in our deciding to deal with the underlying causes of that instability in the exchange markets and, equally importantly, we set in process a series of meetings that will take us from here to the Venice Summit, so that there will be an ongoing reconsideration of the decisions that we've taken to ensure that they are meeting the right objectives.

I think this is important because, after the G-7 meeting last September, we did not have this follow-through with additional meetings. Now we have that, and that will give us an opportunity to review and to build on the decisions we took this past weekend. It was important that Canada was in attendance at that meeting; there were important decisions taken and important business was done, and it was extremely important for us as a country to ensure that our interests were properly accounted for at that meeting, so that we could have an opportunity as well to contribute.

Now, as the chairman has said, I had a Budget last week, my third. It's being described by journalists in a number of ways. I would describe it as a low-profile Budget. I'm sure that Bob Nixon (Ontario Treasurer) is going to have a low-profile Budget a little later on this spring. He's got nothing else in mind but balancing the Budget-good management-but it was designed to be just that.

Many of you in this room are managers, many understand the importance of good management. And good management, like good Budget is not necessarily measured by large numbers of new initiatives.

I think what we measure ourselves by is by setting ourselves objectives and fulfilling those objectives, making sure that we follow along the path we have set for ourselves. In this case, the path was established in November 1984, with the agenda for economic renewal.

We set out our objectives then and since that time we have followed the directions that we established in a very consistent and coherent way. This has not stopped us from taking a number of important decisions as time went by in dealing with the number of the problems facing our country.

Some of them are high-profile spending initiatives, others are nonspending initiatives, but most of them have come forward in the context of the integrated plan that we set out two and one-half years ago. Many of them have been related to dealing with the basic structural problems, improvements in the environment that we want to establish to allow private-sector growth and activity. This is, again, what we were discussing in Paris last weekend: the importance of dealing with the underlying problems facing our country.

When we did the agenda paper two and one-half years ago, we were facing an economy that was in a post-recession limbo. An economy that was in somewhat unstable health and that was losing competitive position relative to some of our trading partners. The agenda didn't pull any punches. It addressed frankly and honestly the crucial economic challenges we were facing at that time.

The most pressing of those challenges was the matter of our fiscal management. We were facing increasing deficits and a mushrooming public debt that had become a serious threat to the economic stability and confidence in our country. To restore that vitality and confidence, we had to reduce the deficit and constrain the growth of public debt.

The agenda also stressed the need for a new direction in public management. Before we were elected, there was too much government intervention in the economy, whether by regulation or by subsidy. This was turning off potential investors, choking off private initiative and creating obstacles to growth. So we set about developing a new approach to the role of government.

We put our faith in the capacity of the private sector to work more effectively and face the challenges facing us in job creation and export growth and development of new economic opportunities. We needed to restructure some of our economic policies and give the private sector that freedom to move, to do the job it could do best.

So the agenda paper was a blueprint for action and that's what we have pursued steadily and consistently for two and one-half years. We made a good deal of progress in that time. In fiscal management, we got the deficit down from $85.5 billion when we came in to $34.4 billion, and to $32 billion this year. Next year, our target is $29.3 billion and that's a drop of 24 percent in just three years.

This progress has helped us to get a better handle on the public debt. When we came into office, the public debt was growing at a rate of twenty-three percent per annum-had been doing so for the previous three or four years.

That growth in the public debt will now be down to eleven percent, but, just as important as reducing the deficits and controlling the debt is how we were doing it. When we took office, government spending was growing at fourteen percent per annum. We've cut that growth rate to an average of 2.8 percent since the start of our mandate. About sixty-nine percent of our actions in getting down the Government deficit have been on the spending side.

It hasn't been a simple or an easy task; it has needed tough decisions. It has needed an ongoing discipline in managing ourselves within that framework that we had established. Having done that, we've been able to face some unforeseen developments. You're very much aware of these: the problems we have had in the West with our farmers and with the oil and gas industries. Despite these unforeseen and somewhat extraordinary pressures, we have been able to bring programme spending for this current fiscal year to hit the target that I set in February 1986 of $89.4 billion.

So, in spite of these difficulties, we haven't been blown off course. We have set our targets, we have adjusted, we have reprioritised and we have met the target that we set for ourselves.

In talking about fiscal management, I hope Canadians will take satisfaction in the progress we are making and see it as more than just reducing some numbers, but see it as a way in which we are making the lives and the futures of Canadian people healthier and more productive, because it has to do with building confidence.

We are re-establishing the fiscal position of the Government of Canada and our ability to manage our finances responsibly. This added confidence is helping Canadians such as you to have confidence in the future so that you can go out and build and grow and create those job opportunities for other Canadians.

It is also important for younger Canadians who are just leaving school to have a sense that their future is there, that it is not going to be burdened by the heavy interest costs that this growing debt will build up. I've been very encouraged in the meetings that I've been having with high school students and university students.

They understand the problem of debt. They understand when I talk about the deficit. They understand that those of us in this room who are getting a little more white in our hair (I blame it all on my father), they understand that we have been receiving services as individuals from the Government of Canada for which we are not paying in taxes. They know that the cost of those services will be borne down the road and that they are the ones who'll be bearing that cost.

Fiscal responsibility has been one of the cornerstones of our programme for economic renewal, but our renewal strategy has always been far broader than that. It has meant reorienting the rote of government to provide a better framework for economic growth and the creation of jobs. It has meant making government less of an obstacle to change and to innovation. It has meant adopting policies that incur entrepreneurship and risk taking and create a climate conducive to innovation and to new enterprise.

It has meant striving to make the economy more dynamic, more resilient, more flexible and more competitive internationally. It has meant affirming our faith in the private sector, and has also meant bringing about changes with equity and openness in a manner consistent with Canada's traditions of compassion, tolerance and social justice.

Now the renewal program, when fully implemented, will have an impact on just about every dimension of life in Canada. To date, we've made considerable headway. I want to review some of the progress we have made.

Programmes with problems of regulation have been a major obstacle to economic growth. We have made it a priority to deal with some of those key regulatory problems. We've begun to introduce new business framework legislation. You're aware of the work that we've done on the Competition Act, but also on the Patent Act and, soon to come, the Bankruptcy Act. The Competition Act was legislated last summer and is providing long-overdue stability to the competitive environment.

The Patent Act will lead to a stronger position for intellectual property in Canada and, by supporting this, will lead to a greater degree of investment in research and development. On the regulatory side in energy and the transportation and financial services side, we've again made good progress. The importance of deregulation in the transportation sector cannot be overemphasised, because of the size of the country. In all of the major areas of transportation-air, rail, shipping and trucking-we made progress to provide improved access to safe efficient transportation service at the lowest possible cost.

The national energy programme was our first major achievement in deregulation. We have removed the heavy burden of regulation and the highly discriminatory taxes on that very important sector of our economy. Oil-price deregulations cleared the way for a more market-oriented energy sector. The Western accord and the Atlantic accord have given the private sector the freedom and the scope to take the initiative again in the future. Deregulation of natural gas prices is very important in opening up the market both domestically and internationally.

Before Christmas, my colleague Tom Hawkin released his proposals to modernise the financial services regulations. These new regulations will permit more competition in the industry, will open up more products to people who want to save or invest and do so in an environment that provides a greater degree of protection than in the past for individual savers and investors.

Another way that we are getting government out of the way of the private sector is by privatising Crown corporations that are no longer required to meet public policy goals. Privatisation can bring increased vitality to the companies involved as well as to the economy as a whole.

We can stimulate the performance of the economy but we can also insure a greater degree of assurance for those people who are working in those companies. DeHavilland here is probably one of our best examples of success in privatising companies. We've already privatised eight companies, the most recent being TeleGlobe Canada. We're reviewing possible future moves involving such other Crown corporations and Air Canada and Petro-Canada.

In addition to removing government-made obstacles, we've been promoting private-sector growth in a number of ways. One of the first is in the area of investment, so important to creating jobs right across the country. We wanted to make it clear to people both within and outside Canada that Canada welcomes investment and welcomes foreign investment. Our changes to the Foreign Investment Review Agency and the changed mandate for Investment Canada to encourage investment have been very important in the increase of foreign investment coming to Canada in recent months. This little amount of friendliness has gone a long, long way.

In 1986, three billion dollars of foreign direct investment has come to Canada, seventy percent more than in 1984. Portfolio investment reached a level of something in excess of twenty billion dollars in 1986, about double the level in 1984. Now this isn't just money coming in. It's money coming in and actively working in Canada to create jobs. In many cases, it brings new technology, it brings export opportunities, it is a key part of the success that we have as a country and the success that we've shown in our economic performance. It's a strong indication of the growing international business confidence in our economic management. We've seen this recently in a number of reports-reports from the OECD, the International Monetary Fund, the European Management Foundation and, most recently, the Kinoe Report from Japan.

This Kinoe Report contrasts with a comparable report about ten years ago. Many of you will remember it, the McKeeter Report, which was so damning in its criticism of what we were doing in Canada that it did so much to turn off Japanese and other Far Eastern investment in Canada.

We have also recognised the importance of small business as the epitome of private initiative, and the prime source of new jobs in our economy-about eighty percent.

In both the May 1985 and February 1986 Budgets, 1 took specific measures to encourage investment in small business because we knew that the small-business community was the bedrock of individual initiative and could be counted upon to perform and create those jobs.

Research and development is clearly a key to future prosperity and economic security for Canadians. Technological know-how and innovation will be crucial if our industries are to stay competitive with the rest of the world. I've introduced changes in previous Budgets to encourage the development of research initiatives in this country, particularly in the private sector. More recently, a week ago yesterday, the Prime Minister held the first meeting of his National Advisory Board on industrial science and technology, which we're counting on to provide us with more ideas on how we can move forward in this important area.

Now all of these initiatives are designed to improve the competitive position of the Canadian economy. We know that is the best way that we can create jobs. If we are going to take advantage of the competitive position, we have to have access to markets and here we've embarked on a two-track approach. One is the multilaterial approach; we've been at the forefront of countries encouraging the start of the multilateral negotiations that got their formal kickoff in Uruguay in September. The other is the negotiations we have under way with the United States. We know that the task is going to take a long time to complete, so it's very important that we move ahead quickly with the discussions with the United States to ensure that we can achieve a comprehensive agreement that offers clear benefits to Canada. I am pleased with the way that the discussions have been going and am confident that we will be able to achieve that type of agreement.

Now, Mr. Chairman, this has given you some indication of the breadth of the programme we are undertaking and if I can make a small commercial announcement-I know you as a publisher would allow me to do this-we have a little booklet that came out with the Budget documents that sets out the range of things that I have been discussing with you today and I encourage you all to read this.

Now all of these initiatives together have been producing a strong economic performance. When I was going over on the plane to Paris this past weekend, I was comparing what we were doing relative to the G-7 countries. I used to do this regularly when I was the finance critic in the early '80s and I found at that time that, in many cases, we were number six or number seven. Right now we are number one or number two and some cases number three, but we are doing well compared to our international trading partners. In real growth, we were number one of the seven last year and, since September 1984, we have been number two, only a shade behind Japan.

In employment growth, we are clearly number one, far outpacing the other countries. Our short-term interest rates are a little bit higher but they have come down to the lowest point that we've seen in ten years. Inflation has been stable around the four-percent level and we look to that to go lower this year. Five-year mortgage rates are down to their lowest level and that, together with the growing consumer confidence has resulted in housing starts at levels in excess of two hundred thousand per annum on an annual basis for the last seven or eight months and that is without the artificial stimulus of any government subsidy programmes. Only the stimulus of individuals with confidence in the future seeing that they're going to be able to afford a house.

That is what this Government is trying to do. That is the essence of what we mean when we're saying that we want to put more confidence in the private sector, more confidence in market forces and see those market forces working. We have a strong record compared to the other countries and we want to build on that record.

Now, Mr. Chairman, let me close with a few words on tax reform. This is a very important initiative in our goal to build our competitive position-and 1 make that reference to our competitive position because many other countries are going through the same process. We are all very much aware of what is happening in the United States, where reforms were announced last year. But Japan and Germany and a number of the other European countries, Australia and New Zealand are all in various stages of tax reform. So it's very important that we stay in the mainstream of this international movement.

I've been concerned, though, since November 1984 with the number of faults in the existing tax system. The tax burden is unfairly distributed. Rising personal income tax rates have become an increasing deterrent to individual initiative and an obstacle to economic growth.

We have a complex maze of tax preferences and incentives that have created a score of problems and inequities within the tax system. The federal sales tax is seriously flawed. So we set out in the November '84 agenda paper as a key objective our desire to improve the tax system and have been doing so over the course of the past two and one-half years. But as this international movement began to increase, it gave us an opportunity to pull things together and look at the over-all question of tax reform in an integrated way, looking at personal, corporate and sales taxes.

In the process of developing our proposal, which I'll be releasing later this spring, 1 can't emphasise too much the importance of the consultations. I have been setting forward in a number of speeches the objectives we have been following and the development of our proposal and this has given the private sector an indication of where we are going, what our objectives are, and how to apply those objectives to their own particular circumstances. This has created a good public debate which we have taken advantage of in the formulation of our plans.

I've been very clear as to what the goals are. In each of the three main areas of taxation, we want to lower rates and broaden the tax base; but the way to lower rates is to reduce or eliminate tax preferences. A wide range of tax exemptions and deductions loaded into the tax system by successive governments over the past number of years has to be reviewed, because we know that, the fewer the tax preferences, the broader the tax base and the lower the tax rates. As a result of lowering tax rates by broadening the tax base in this way, a minority of Canadians who have been heavy users of tax preferences would find themselves paying more taxes, but the large majority of individual taxpayers will-pay less tax in total.

In addition to lowering personal income tax rates, I want to reduce significantly the number of tax brackets. Lower tax rates would mean that all taxpayers would be able to keep more of the additional dollars that they earn in the future and that is a powerful incentive for productive new economic activity. Fewer tax brackets would make this incentive easier to comprehend while making the system generally simpler to deal with.

I'm also considering the conversion of personal exemptions and some deductions to tax credits. Exemptions provide greater benefits to those in higher tax brackets than to those in lower brackets, so with the system of tax credits, lower-income taxpayers would benefit more than they do now, while higher income earners would benefit less.

Converting exemptions into credits would also reduce the number of low-income persons who now pay personal income tax. As part of the comprehensive tax reform, I also plan to build on the refundable sales tax credit that I introduced in the last Budget. If we increase the credit and pay it frequently, we can make the personal tax system more progressive.

Let me turn now to corporate tax reforms.

I want to ensure that profitable corporations pay their fair share of tax. As many of you know, there has been a large backlog of corporate tax losses from the recession. These have had, and will continue to have, an impact on corporate income tax revenues. I've expressed my concern about tradein and losses by some companies and its impact, not only on the share of the tax burden carried by profitable corporations, but also on the stability of the tax system.

Reducing tax preference is the key to keeping corporate tax rates competitive with those in other countries. We must ensure that the corporate income tax structure is positive for our efforts to maintain and enhance the job-creating ability of our economy.

And this same goal is central to our efforts to develop a fair and more effective federal sales tax system. The current federal sales tax is too narrowly based and, as a result, the rates of tax are higher than they should be and they bear too heavily on a relatively small proportion of manufactured products. Even worse for a country so dependent on international trade, the federal sales tax bears less heavily on imports than on domestic goods and there is also a hidden tax on Canadian exports. The result is that it's costing Canadians valuable jobs. Canada needs a better-designed federal sales tax, with a broader base and lower rates, that gives equal treatment to a wide range of goods and services.

As I noted a moment ago, an integral part of sales-tax reform must be the inclusion of a generous refundable sales tax credit; that is essential to the fairness of that tax system.

So to sum up. Mr. Chairman, our proposal for comprehensive tax reform will be designed to make our tax system fairer and more effective. As an integral part of our renewal programme, it will help strengthen the economy and improve the quality of Canadian society. In my remarks today, I've tried to bring you up to date on the progress we have made on our programme for economic renewal.

We have a wide panorama of economic policies, but the key objective in all of these is to improve the competitive position of the Canadian economy. That has been the essence of the coherent, consistent strategy we have been following during that time. As we continue to implement the various parts of this strategy, we can expect to see further improvement in the way our economy performs and in our ability to compete with the rest of the world. Sound, steady management will continue to be essential. We intend to provide that type of management, as we have done throughout our mandate. But there is still much to be done. Tax reform will be a big job. But I believe this Government is up to that challenge and I am also fully confident that Canadians are also up to that challenge.

Nona Macdonald, President of The Empire Club of Canada:

Once again the Honourable Michael Wilson makes history at The Empire and Canadian Clubs. This capacity audience bears witness to that. Indeed, we may have to hold a future meeting with the Minister at Maple Leaf Gardens in order to accommodate all those who wish to hear him.

Once again, too, you have presented us with sound and solid evidence that your financial management is in keeping with the projections of last September, when you spoke to both our clubs. When I thanked you at that time, I commended you for steering us on an even keel, and I commend you again for staying the course in those frequently rough waters both at home and abroad.

We thank you for reviewing these encouraging economic facts with your usual clarity and thanks, too, to- your staff and to the staff of The Canadian Club of Toronto and The Empire Club of Canada for arranging this mammoth meeting.

It has been an honour to join you at this head table of distinguished guests, and, on behalf of all, may I emphasise our appreciation today and our anticipation for that tomorrow when you announce the details of the tax reforms that you have previewed today.