Canada's 1997 Budget

Head Table Guests

Barry Campbell, M.P., Parliamentary Secretary to the Minister of Finance; Kenneth Battle, President, Caledon Institute of Social Policy; Patrick Johnston, President and CEO, Canadian Centre for Philanthropy; Dr. Fraser Mustard, President, The Founders Network and Bell Canada Fellow of the Canadian Institute for Advanced Research; The Venerable Harry St. Clair-Hilchey, Priest-in-Charge, St. Paul's Anglican Church, Bloor Street; George L. Cooke, President and CEO, Dominion of Canada General Insurance Company; Dalton McGuinty, M.P.P., Leader, Ontario Liberal Party; Anne Golden, President and CEO, United Way of Greater Toronto; John A. Campion, Partner, Fasken Campbell Godfrey, a Director of CBC and a Past President, The Empire Club of Canada; William Blundell, Member, National Forum of Health and Chairman, Manufacturers Life Insurance Company; Margaret Murphy, Representative, Canadian and P.E.I. Association for Community Living; Charles V. Keating, Chairman, Access Cable Television Limited; The Hon. Michael Wilson, P.C. Vice-Chairman, RBC Dominion Securities Inc. and a Director, The Canadian Club of Toronto; J. Robert S. Prichard, President, University of Toronto; Stanley Hartt, President, The Canadian Club of Toronto and Chairman, Salomon Brothers Canada; and Tony Fell, Chairman and CEO, RBC Dominion Securities.

Introduction by Julie Hannaford

Our guest today, The Honourable Paul Martin, is no stranger to The Empire Club of Canada and The Canadian Club of Toronto, having addressed our clubs on three occasions before today. For those of you who have joined us on all three prior occasions, you will no doubt have noticed the tradition that appears to have evolved around the Minister's introductions. This tradition was developed by our President John Campion in 1994 and crystallised by him in March, 1995, when he introduced The Honourable Paul Martin again at a joint meeting of The Empire and Canadian Clubs. John's introductions began and ended by configuring the Minister within an historical context that encompassed three centuries, the Seven Years War, the triumph and tragedy of King George III and the travels of Vladimir Ilyich Lenin through Switzerland, Germany, and Russia.

That tradition means that I am obliged to begin my introduction in the year 1600, and ramp us up bit by bit into 1997. Three factors prevent me from doing so. The first is that John Campion is sitting at our head table, the second is that Rogers Cable 10 allots a limited amount of time to these broadcasts, and the third is that our guest today has established an historical and political context in the past three years worthy of its own recognition.

Before he was elected in 1988 as an MP for the federal riding of LaSalle-Emard, Paul Martin was Chairman and Chief Executive Officer of Canada Steamship Lines, and a Director of seven Canadian companies. His academic background is philosophy and law.

When he first came to The Empire Club of Canada and The Canadian Club of Toronto, in October, 1994, Paul Martin spoke about the need for a sea change in government. He was confronting a deficit that in 1992-1993 was $41 billion, and $45 billion in 1993-1994. He told us: "The opportunity for the Canadian economy has rarely been brighter. But there is one great storm cloud on the horizon. It is debt. It is a storm cloud that has been building for decades. It is a storm cloud that no government has had the will to address. We have too much to lose by letting it persist."

Mr. Martin put it somewhat more bluntly about a week prior to his address to our joint clubs, when he stated on budget day: "We are in hock up to our eyeballs."

On March 2, 1995, Mr. Martin addressed our joint clubs again. He reported then that the underlying deficit would come in at about $35 billion, $4.4 billion below the target of $39 billion. He established a target for 1995-1996 at $32.7 billion, and for 1996-1997 at $24.3 billion.

He promised to meet the targets he set in both years. Today, The Honourable Paul Martin addresses our joint clubs, having made fiscal history: as we all know, he not only met his targets, but bettered them.

If we need an historical context into which Mr. Martin's address today can be placed, we might find it in The Financial Times of London, in the lead editorial published yesterday, which read: "Many a European Finance Minister will have read Paul Martin's budget speech to the Canadian Parliament on Tuesday, and wept. Consider the highlights: a record-breaking decline in public borrowing, falling interest rates, low inflation and best of all, a long-awaited upturn to economic growth. All this, and in an election year. It was not so long ago," the writer goes on to say, "that Canada was staring into the abyss."

There are any number of explanations for the fiscal good news delivered on Tuesday. Some say the deficit reduction arose because of the help from a decline in short- and long-term interest rates. Others say that it was aided by a decade or more of development of a political consensus around the need for deficit reduction. Still others point to the time it took to develop a popular consensus around the acceptance of an end to spending. Many, however, say that all this would not have happened without our guest, who made the promise to reduce spending, who resolved to keep the promise, and who had the guts to see it through, and who may well be alone responsible for restoring popular belief in the meaning of a political promise.

Ladies and gentlemen, please join me in welcoming to The Canadian Club of Toronto and The Empire Club of Canada, The Honourable Paul Martin.

Paul Martin

Last week, we brought down our fourth budget. Although the measures it contains range across the spectrum, they relate to one overriding goal. And that is the need to build both a stronger economy and a stronger society.

When we came into office, Canadians knew this task would take time. They knew it demanded persistence. And they knew it required a plan of attack. That plan is in place. It has been acted upon--and built-in every one of our budgets.

The first element of the plan was to establish confidence in the country's management of its financial affairs. I believe we have done that. The second element has been to take action in areas that have an immediate impact on growth and jobs--initiatives that would also serve as a bridge until the full impact of our effort to keep interest rates down took hold. The third element was to make key investments that will strengthen the prospects for longer-term economic growth. And the final element was to focus on investments to strengthen the social underpinnings of the nation.

Let me now put the budget in the context of this plan. As far as the nation's financial health is concerned, this year we will not only meet, we will substantially exceed, the deficit target we set during the 1993 election campaign. That target was three per cent of GDP, or about $24.3 billion. We can now safely say that even after including our budget's new spending the deficit for 1996-97 will be no higher than $19 billion. This is more than $5 billion lower than our target--about $9.5 billion below the previous year. In fact, it is the largest year-over-year decline in the deficit ever recorded. Our budget also makes it clear that we are firmly on track to meeting our deficit targets for the two years ahead--two per cent of GDP for 1997-98 and one per cent of GDP for 1998-99.

As a result, two major milestones are within reach. First, by 1998-99, the government will be able to finance its deficit internally, without having to go to the financial markets for any new borrowing. In other words, for the first time in over a quarter of a century, we will not have to go to the markets for new money to pay for government programmes, nor to pay for interest on our debt. New borrowing requirement is the way many other countries measure their deficits--the United States, Japan and Germany, for example. By 1998, according to this measure, Canada is expected to have a small surplus, and as such, will have the best financial record of any member of the G7. This is a turnaround of truly historic proportions.

The second milestone involves the debt. The ultimate measure of a country's financial health is its ability to manage its debt. That ability is best measured by what is called the debt-to-GDP ratio. Over the past two decades, Canada's debt-to-GDP ratio has been rising relentlessly. However, as a result of the actions we have taken, it is now stabilised. Soon, Canada's economy will be growing faster than our debt. The debt will become more manageable.

This is not of academic interest only, because what it really means is that more and more of the taxes Canadians pay will go to providing the services they need, rather than to pay bondholders. Only a few years ago the speculation among experts was about how large Canada's debt-to-GDP ratio would get. Today, it is about how fast the ratio will fall.

The payoff from all this, in terms of the everyday lives of Canadians, is unmistakable. As a result of the discipline that has been brought to the country's finances, interest rates are down dramatically. They are down in absolute terms--by almost five and a half percentage points in only two years. What is even more significant is that they are down in relative terms. For the past 20 years, short-term interest rates in Canada have averaged two percentage points above those in the United States. Today, they are about two and a quarter percentage points lower. This has not happened because of luck. It is a direct result of the confidence created by the fiscal course Canada is on.

Furthermore, the impact of lower interest rates is now taking hold. In the last four months, for instance, 85,000 jobs have been created by the private sector--and what is equally significant is that almost all of these have been full-time. Those sectors of the economy that respond most quickly to lower interest rates are growing strongly. Housing re-sales and the sale of consumer goods are just two examples. There is a strong consensus among forecasters--not only here but internationally as well--that in terms of economic growth in 1997 none of the seven major industrialised countries will do better than Canada. As a result, most Canadian forecasters are projecting that employment will increase by between 300,000 and 350,000 jobs during the course of this year.

Now it is clear that one of the reasons Canadians have supported our efforts to reduce the deficit is their belief that this will lead to a stronger economy, one that will create more jobs. And so, the question is: "Is the pay-off coming?" And the answer, very clearly, is "yes."

Now, some would say, having created the right fiscal conditions, that the role of government should now be to disappear from view. This is not a perspective that we share.

Globalisation and restructuring create real economic opportunities. But we also know that they can impose very real costs. The fact is that short-term interests of the market do not always address the long-term needs of the nation.

The role of government is not simply to stand aside. Its role must be to stand with those Canadians having difficulty adjusting to a turbulent world. And so, in this budget as in previous budgets, we are taking direct action to promote economic growth and the creation of jobs.

Short- and medium-term initiatives include trade promotion, including the unprecedented success of the trade missions led by the Prime Minister, the extension of the Canada Infrastructure Works Program for another year, the recent announcement of new programmes to provide jobs and of equal importance, experience for young Canadians and substantial acceleration of our initiative to link virtually every community in Canada to the communications technologies of the future. These investments are designed to have an immediate impact on growth--and to help bridge the gap to the stronger job creation that is now expected.

But in our view, as well, the role of government does not stop there. In constructing our economic plan, it was very clear that we had to look ahead, to invest for the long term, to take the actions today that are necessary to prepare Canada for a new century. We knew we had to broaden the notion of infrastructure--to take it beyond its traditional meaning to include post-secondary education, knowledge, and innovation. These are the building blocks of the new wealth of nations.

For example, Canadians know that a better education equals better jobs. That is why they are concerned about access to, and the affordability of, that better education. And so, in our budget, we announced measures that will, at maturity, provide $275 million per year in increased tax assistance to students and their families, to workers trying to upgrade their skills and parents wanting to save for their children's education. Students will get larger tuition credits. They will receive more help in paying back their loans. The period of time those facing difficulties can defer making Canada student-loan repayments is being extended from 18 to 30 months. In addition, we are strengthening incentives for parents to invest in Registered Education Savings Plans. And we are allowing individuals to transfer unused RESP income into their RRSPs if they have room.

Canadians know that just as broader and better access to higher learning is essential for success, so too there is another part to the equation. And that is the quality of the research facilities at our universities, our colleges and our hospitals, so that students have world-class tools with which to learn. This is where leading-edge skills are developed--skills that are necessary if Canada is to keep pace with a world on fast-forward and skills that form the foundation, the root system, for the creation of new products and new services in Canada--in other words, new jobs. And so, to renew our research infrastructure, we are establishing the Canada Foundation for Innovation with an $800 million investment. Through partnerships with research institutions, the private sector or the provinces, these resources could very well lead to $2 billion in needed investment.

Let me emphasise how much of a departure this represents from the norm of government initiatives. The Foundation will be set up outside government. It will operate independently of government. Investment decision will be made solely by a board of directors, the majority of whom will be drawn from the private sector and the research and academic communities. Why are we doing this? Our position is very clear. If we fail to invest in the infrastructure of innovation, we will short-change the next generation. We will fail the country of tomorrow. It's as simple as that.

Thus far, I have spoken about strengthening our economy. But equally pressing is the need to strengthen our society. Clearly, for Canadians, our publicly funded universal health-care system is at the top of that list. Our commitment to the principles which underpin our healthcare system is unequivocal. They will be preserved. They will be protected. And they will be enforced. The ultimate test of a nation is its will and capacity to support those who are most vulnerable, to sustain the programmes on which everyone of its citizens depends.

But commitment to these principles does not mean adherence to the status quo. Indeed, maintaining these principles requires moving beyond the status quo. The point was hammered home recently by the National Forum of Health. The Forum makes it clear that the challenge confronting Canada's health-care system is not the overall amount of financial resources available. It is the efficiency and effectiveness with which they are spent. In direct response to the Forum's recommendations, we are providing $300 million over the next three years, every dollar of which will be devoted towards furthering innovation in the health-care system, better delivery of health-care services to Canadians.

In the same context, that is the need for a stronger society, let me turn now to an important issue which flows not from this budget, but from the commitment made in previous budgets--to protect Canada's retirement income system. Last week, an agreement was announced between the federal government and eight of Canada's provinces to preserve the Canada Pension Plan--to sustain it by strengthening its financing, reducing costs and improving the pension fund's investment practices.

My purpose today is not to review the details of this agreement, but I do want to go on record concerning some fundamental points. First, in the absence of the action we are taking, the CPP would not have been financially sustainable over the longer term. Some have said, if the federal government and the provinces had simply allowed contribution rates to increase to cover expenses on a pay-as-you-go basis, it would have meant that those rates would have had to be almost 50 per cent higher in the future than those we have agreed to--14.2 per cent versus 9.9 per cent. We did not want to saddle young Canadians with such an unacceptable burden--a burden which by itself would very likely have caused the plan to collapse. The increase in CPP contribution rates we have announced is not some first instalment, with more still to come. Shared equally between employees and employers 9.9 per cent is as high as the rate will go. It will not rise again.

Second, CPP premiums are not a tax. They are an investment in retirement savings. The government cannot spend this money. It will be invested at arm's length to gain stronger returns. It is money Canadians will get back and plus in their retirement. Indeed, the entire purpose of our reform is to make sure that Canadians can rely on it. They would not have been able to if we had not acted. They will be able to because we have.

The debate that is currently taking place is not about choosing to increase contribution rates. It's about choosing to preserve the Canada Pension Plan. The opposition to what we and eight provinces have done stems not from the details of the federal-provincial understanding, but from a fundamental disagreement over the very concept of the public pension system itself. We, the signatories of this agreement, come to this question with a very different set of values, one which goes to the essence of the kind of society we have created and wish to retain. We believe in a decent retirement for all of our citizens, from coast to coast. And we believe that coming together to safeguard a national savings plan--one with shared risks and shared benefits--is the fairest, most secure way to accomplish this aim.

This priority is also reflected in our actions relating to the other two pillars of our retirement income system. With the introduction of the new Seniors Benefit in 2001, we will have taken action to make the public pension system in Canada secure and sustainable for future generations while fully protecting all current seniors. The same reasoning applies to the third pillar of our retirement income system--tax assisted savings such as private pension plans and RRSPs. Despite the need to bring the deficit down, we have left in place almost $16 billion per year of tax incentives for Canadians to save for their own retirement. Indeed, in this budget, we have introduced a new provision which will restore lost RRSP room for workers who quit pension plans before retirement. This will make the retirement saving system fairer. Taken together, we can say today that no other industrialised country in the world has done as much as Canada has to come to grips with the challenges of an aging society. In so doing, we have looked ahead--securing pensions for this and future generations.

So far, I have spoken about our efforts to sustain existing national programmes. But government must also focus on the roots of the social problems of the future, addressing them before they arise. Clearly, the most effective and productive investment we can make as a nation is in our children. The evidence is clearly there. Every dollar spent on a healthy and secure childhood today, avoids the spending of many more dollars tomorrow.

The challenge is clear. Our children require services, whether that is health care, or remedial help, good nutrition or income support. Yet for too many children, those services and support are not there. In particular, in most parts of the country, children lose these supports when their parents move off welfare into the work force. It is bad social policy and bad economic policy when the price parents pay for joining the work force is to see the circumstances of their children actually worsen. And so, our budget takes the first step in improving the current system. We are providing an enriched and equal level of support for all low-income families. This is a platform on which the provinces will be able to build--giving them the flexibility to devote the appropriate funds for the services and support working families need. Our budget provides $600 million in new federal funds as of July, 1998, in addition to the $250 million increase in child benefits announced in the 1996 budget. This means that $6 billion will be provided annually to Canadian families under a new Canada Child Tax Benefit.

Some have said this is not enough. Let me be clear. It is absolutely critical that we and the provinces move forward together. This is a national project, not a federal programme. The new resources we are providing must lead to the provinces providing improved services and support for Canadian children. That, after all, is the entire point of this exercise. Discussions with the provinces in the weeks and months ahead will be critical to ensuring that the down payment we have announced serves its intended purpose. To those who seek further federal funding, this is a first step. It is not the last word. As I said in the budget: "This can be but the beginning. We will provide additional resources--as soon as we can afford it." The reason is very clear. Opportunity denied in childhood too often means chances lost as an adult. The future of Canada's children is the future of the country itself.

Thus far I have spoken about our expenditure priorities. Let me deal briefly with the other side of the budgetary equation--taxation. Our goal can be expressed in two words: lower taxes. In not one of our budgets has there been an increase in personal income tax rates. Indeed, both this year and last year, we have not raised taxes at all. In fact, both this year and last year we have put in place selective tax cuts where their impact would be greatest. For example, this year's budget proposes selective tax cuts for low-income families, for charities, for Canadians with disabilities, for students and workers pursuing higher education and for parents saving for their children's future education. In addition, the turnaround in interest rates that has flowed from fiscal restraint has put billions of dollars into the hands of Canadians.

With this as background, I'd like to discuss briefly the suggestion made by some that now is the time to consider a broadly based tax cut. Our position is very clear. We would like to reduce taxes further. But to put in place a broadly based tax cut now would be irresponsible. Indeed, this debate is only possible because of the headway we have made in reducing the deficit over the last three years. Let there be no doubt. Paying for a major new tax cut now would require cutting government programmes still further. This would put in jeopardy the core priorities of Canadians. Quite simply, we refuse to sacrifice health care, education or pensions on the altar of premature tax cuts. There will be a time to consider a broadly based tax reduction. But as we have said, we will not do it until we know we can afford it--and until we know it can be sustained.

Before closing, let me just summarise the underlying philosophy of the budget, as prelude to the discussion to follow. I have spoken about many aspects of our fourth budget. But the most important issue, in the end, is the whole of the budget, not just the parts. It is the goal we have been pursuing and the progress we are making in reaching it. It is no exaggeration to state that only four short years ago the economic future of our country was at risk. We were at the edge of a cliff. The country had to be pulled back. That is why we acted--out of necessity, not ideology. And so, as I draw to a close, let me just say one thing. There can be no going back. The days of overreaching, over-spending governments are over. Nor can there be a return to the time when government could not, or would not, set priorities--and as a result spent too much on what didn't matter and not enough on what did.

What government does with its scarce resources, shows what its values are. Our government has set its priorities and we are investing in them. While continuing to bring the deficit down, we are providing substantial new resources to invest in jobs, in health care, in education, in our children. This is a reflection of our values. Eliminating the deficit is but a means to an end. It is not the end itself. Our purpose is not to serve the interests of bondholders. It is to restore our ability to serve the needs of Canadians. It is to return freedom of action to Canada, to give back to Canadians the capacity to design a new destiny for their country.

This, I believe, we are well on the way to doing. We have made substantial progress these last three years--progress that goes far beyond the arithmetic of the numbers. Rather than being forced to focus solely on problems inherited from the past, we are now able to look forward and invest in the promise of the future. Rather than being restricted to short-term measures alone, we are now at the point where we can look to the long-term investments Canada requires. Rather than being preoccupied solely with saving our essential national programmes, we are now in a position where we can consider together how to make those programmes even stronger.

Looking to the future, we believe we must continue to be true to the primary principle that has always governed our country--that the role of government is to look to both the social and economic needs of the nation. There are those on the extremes of left and right who believe it is possible to separate the health of society from the health of the economy. Some believe it is possible to maintain and strengthen the services on which Canadians depend--like health care or education--without ensuring a strong and growing economy. They are wrong, because it is only the resources generated by economic growth that provide us with the capacity to support a strong society. Still others believe that as long as the needs of the market are taken care of, individuals can take care of themselves. They too are wrong. A rising tide does not lift all boats. And an economy will never be strong if too many are left out in the cold.

The balance between a strong economy and a strong society is not the lowest common denominator. It is, in fact, the highest common ground. This goes to the very heart of Canada's national mission, the legacy that has fallen to us to carry forward. That mission lies in the pursuit of the balance between individual success and responsibility for those around us--the balance between reaching forward to the future, and reaching out to those in need and the balance between recognising the opportunities that arise from competition and acting on the obligations anchored in collective compassion. From decade to decade, from century to century, putting that balance to work in ways that lift the whole nation up has been the essence of our spirit, or our achievement of the Canadian dream. It is an unending journey, a quest of constant renewal, with each new generation rising to the challenge of a new time.

I have just described Canada's 1997 budget. Its underlying philosophy however was best described many years ago by a Canadian who spoke to his time and generation, in words that echo through to ours: "A nation thrives on confidence and falters with fear. The principle purpose of (our) measures is to banish fear and restore faith in our economy and our future. If, in the years ahead, we continue the balanced development that results from courageous investment--in our productivity and in our people--we will continue to build, in freedom, a structure that will stand the hazards of the years. It will endure because it centres, not on hate and despair, but on faith. It will endure because it takes its inspiration--not from the needy or the wealthy or those in between--but from the widespread conviction of Canadians that the welfare of each is the welfare of all." Those words were spoken by the first Paul Martin, some 44 years ago. That faith abides. The conviction lives on. Its strength must not, and shall not, diminish.

The appreciation of the meeting was expressed by Stanley Hartt, President, The Canadian Club of Toronto and Chairman, Salomon Brothers Canada.