The Canadian Economy: Building Economic Pathways Commensurate With Global Ambitions

Monday, October 1, 2007 - 01:00
Hon. James M. Flaherty

Hon. James M. Flaherty

The Editor interviews the Hon. James M. Flaherty, Canadian Minister of Finance.

Editor: Mr. Flaherty, would you tell our readers something about your background?


Flaherty: I had the benefit of a good high school education, which helped me value both academic achievement and sports. I was a good student and not too bad a hockey player, and the McGill Invitational Hockey Tournament provided me with an exposure to some of the American universities. I went on to spend four terrific years at Princeton.

Editor: What led you to a career in public service?


Flaherty: Although my parents had never been elected to public office, they were involved in community issues. Family discussions were often focused on public affairs. At Princeton I belonged to the American Whig-Cliosophic Society, and I recall visiting Washington and meeting, among others, John McCormack, the Speaker of the House of Representatives, and George Meany, head of the AFL/CIO at the time.

When I returned to Canada to attend law school that interest in public affairs continued. As a practicing lawyer I was involved in a variety of political campaigns and fundraising efforts, but I did not seek political office myself. In time, my wife and I came to the conclusion that one of us should enter the political arena. I was the first to take that step. Today we are both involved, she as a member of the Ontario Parliament and I as an MP in Ottawa and Prime Minister Harper's Finance Minister.

Editor: You have been Minister of Finance for a year and a half. What have you found to be the principal challenges of the office?


Flaherty: There are a number of challenges. Minister of Finance is the best job in government because of its perspective on virtually everything. I spend about 30 percent of my time on international finance forums - G-7, the World Bank, the International Monetary Fund, and so on - which is an extraordinary privilege but challenging as well.

One of the particular challenges we have in Canada is regional disparity. All of our regions are growing, but the West is growing at a much faster rate than other regions of the country. That creates a unique set of challenges for the national government. When one is engaged in provincial politics the focus, of course, is on provincial issues, but the national government must be concerned with the big picture. The equalization issue is a good example. Each jurisdiction in Canada is entitled to offer public services at a reasonably comparable level with the other jurisdictions, and it is the federal government's responsibility to redistribute federal tax income to make this possible. Needless to say, there is not always agreement on what is equitable. We have attempted to address the equalization issue rationally and on the basis of a principled formula, and I think that the resolution we have come up with will stand the test of time.

A second major issue that was addressed during Prime Minister Harper's first year was the income trust situation. Conversion to the income trust vehicle meant synthetic high yields and the diversion of money necessary for investment and reinvestment elsewhere. With respect to this issue, we determined to change the tax rules over time, a controversial decision but one which, I believe, was correct.

Editor: Wherever there are challenges, there are opportunities. What does Prime Minister Harper's agenda for the Canadian economy call for?


Flaherty: When we took office in 2006, there was no economic plan for Canada. We went about the business of preparing our first budget with a medium- and long-term economic plan called Advantage Canada. This was published in October 2006. We started implementing it in March 2007, and we will continue with implementation in our fall economic statement and in the budget for next spring. In Advantage Canada we are attempting to create a fiscal advantage for the country, a tax advantage, a knowledge advantage, an entrepreneurial advantage and an infrastructure advantage.

I mentioned our efforts with respect to equalization with the provinces. In addition, we have undertaken major federal infrastructure commitments with respect to both the Pacific Gateway and the Atlantic Gateway. These are very important for economic growth. We have made major investments in Canadian universities, particularly with respect to research and development.

On the fiscal side, we are being careful to maintain balanced budgets and pay down debt. Canada has the strongest economic fundamentals of all the G-7 nations, and when I meet with our G-7 colleagues they are unanimous in their praise for our ability to provide services and pay down debt while, at the same time, reducing taxes and keeping the budget balanced. We intend to continue along these lines.

Editor: World oil prices have never been higher. For Canada that has both a good side and a not so good side. Would you share with us your thoughts on gasoline tax policy in Canada?


Flaherty: We are taking away a capital cost allowance and an accelerated capital cost advantage for our oil industry. This is a rapidly-maturing sector in the Canadian economy, and we need to create incentives for a greener approach to the development of the oil sands. Essentially, what we are taking away on the tax side we are reinvesting in terms of encouraging development in an environmentally sensitive way.

With respect to gasoline pricing, there is always criticism that the federal consumption tax is too high in light of Canada being a major producer of oil. Canada is also an international trading nation, however, and we do not believe it is in our interest to be protectionist with respect to gas prices at the pump.

Editor: The value of the Canadian dollar has risen substantially in recent years - no doubt for all the right reasons - but this has had an impact on Canadian exports to the U.S., Europe and elsewhere. Is this a significant issue for Canada at the moment?


Flaherty: The manufacturing sector - particularly in Ontario and Quebec - is certainly facing a challenge as a result of a strong Canadian dollar. The rapid acceleration of the value of the Canadian dollar makes planning difficult, and for this reason we have created an accelerated capital cost allowance for the manufacturing sector which provides a two-year 100 percent writeoff for new equipment and machinery. The way to protect Canada's manufacturing industry is to encourage innovation and productivity, not enact protectionist barriers.

Editor: Would you share with us your thoughts about Canada's competitive position vis-a-vis China and now India?


Flaherty: This is an interesting time internationally. World growth is anticipated to be better than five percent this year, and while we still have a billion people living in abject poverty the world as a whole is getting richer. China and India are developing large middle classes, and these people will be the consumers of some of the things that Canada produces.

Canada is one of the world's great sources of commodities, and this is of great interest to China in particular. Access to Canadian commodities through British Columbia is excellent. We have also had great success in promoting our financial services industry abroad. On the manufacturing side, we have a number of Canadian enterprises - automobile parts manufacturers come to mind - with operations in China. The Chinese appear to like doing business with Canadians.

Editor: You have also spoken on Canada's willingness to take a leading international role in combating terrorist financing and money laundering. Would you tell us about this initiative?


Flaherty: This is part of a worldwide concern in having integrity in international capital markets. Over the past 18 months the G-7 finance ministers have discussed this issue on several occasions. China, which is increasingly important to the international capital markets, has participated in these discussions as well.

One of the ways of fighting against terrorism and those who would commit terrorist acts is to interrupt their funding. The prosecution of money laundering cases is particularly important, as it is in combating organized crime and the international drug trade. We have excellent sources of intelligence, and one of the most important aspects of this initiative concerns intelligence gathering and intelligence sharing. In this connection, Canada now abides by an OECD recommendation that we not enter into tax treaties with any jurisdiction that refuses to share information with us on terrorist financing.

Let me also say that Canada and the U.S. have excellent relations with respect to North American security. I have dealt with both John Snow, the former Secretary of the Treasury, and his successor, Hank Paulson, on a variety of banking and financial transaction issues - some of them difficult as a consequence of different confidentiality and privacy laws in Canada and the U.S. - and the level of cooperation has been outstanding. We have common concerns about security, but at the same time we recognize that we have no interest in slowing commerce and impeding travel across the long undefended border we share. Getting the balance right is a challenge, but one which both Canada and the U.S. are meeting. In this area, the use of technology is of great benefit.

Editor: What about the future? Where would you like to see the Canadian economy in, say, five years?


Flaherty: I would like to see the continuation of significant economic growth, together with balanced federal budgets and all of the provinces showing surpluses.

Canada should have a world class infrastructure, and that is going to entail a tremendous amount of work over the coming years. If we are to continue to compete in the world's markets, we must have the economic pathways commensurate with our global ambitions.

We are continuing to rebuild the Canadian armed forces, and we will be significantly further down the road in five years on that initiative, which includes the assertion of our sovereignty in the North.

In terms of the economy I would like to see Canada stronger in the knowledge-based industries and in innovation. As an emerging energy superpower in the world, we need to expand our ability to develop and manage knowledge. And, as we achieve economic growth, we need to be increasingly sensitive to the environment and to growth that is environmentally sensible. Canada possesses, in addition to all of its mineral wealth, 18 percent of the world's water. Managing that resource responsibly is essential for Canada and for the entire world.

Editor: Is there anything that you would like to add?


Flaherty: Just about all of the issues that I deal with have legal implications. Lawyers have a great deal of experience and expertise to bring to any intelligent discussion of issues of public concern, and I would encourage them to participate. They have much to offer, and the opportunities are there. The resolution of just about any problem is improved by an infusion of the kind of analytical skill that most lawyers possess, and we all benefit from a better resolution.