The Canadian Economy: Well Positioned To Meet All Of The Global Challenges

Sunday, June 1, 2008 - 01:00

Editor's note: Set forth below is a summary of remarks made by the Hon. James M. Flaherty, Canada's Minister of Finance, at a luncheon hosted by the Canadian Association of New York on April 23 of this year. Mr. Flaherty was educated at Princeton and Osgoode Hall Law School in Toronto and practiced law for 20 years prior to entering politics. He has served as Minister of Finance since the inception of the Harper government in February of 2006.

Let me begin by saying something about what we - and specifically what I - have been doing over the past two years plus. A great deal has been accomplished.

The Canadian budget is probably not a show-stopper with this or any other audience, but I assure you we take a great deal of pride in having passed not one but three budgets, something that I did not think possible when the Prime Minister asked me to be Finance Minister in a minority government a little over two years ago.

We have also succeeded in restoring fiscal balance in the sharing of tax revenues between the federal government and the provinces. There was some initial resistance to the formula we devised, but the whole subject of fiscal imbalance seems to have disappeared from the agenda of meetings of the Canadian premiers. That is because the formula is fair and the returns to the provinces are predictable. The premiers can make their plans knowing what their transfers from the federal government are going to be.

Our economic plan for the country, Advantage Canada, is the prism through which we look at public policy issues. Through that prism we have created a global market strategy, a science and technology strategy, drafted two Throne Speeches, issued two fall economic statements, passed three budgets and presented five budget bills, the last of which is currently before the House of Commons.

All of these things have been accomplished in the context of a minority government. We have 125 members in a 307-member House of Commons, and I assure you we have no friends in the other three parties. The one clear failure we have had as a government is that of engineering our own defeat.

When I was in New York in 2006 I spoke about Canada's solid economic fundamentals, and I encouraged people to think about investment opportunities in the country. That continues to be the case, but much has changed over the course of the past two years. Canada has come face to face with global challenges, including international fiscal turmoil, and the U.S. slowdown has had an impact on important sectors of the Canadian economy. The U.S. is our largest trading partner, so an economic slowdown here has a profound effect on our exports. A strong Canadian dollar has left several sectors of our economy struggling, including manufacturing, tourism and agriculture in some areas. We are seeing increasing economic competition from the emerging economies - China, India and Brazil in particular. In addition, with an aging population and a shortage of skilled workers, we are experiencing many of the same challenges that other developed countries are seeing.

Having said all of this, let me assure you that Canada is well positioned to meet all of its challenges. Our economy is resilient, and we are working from a position of strength. The country has a balanced budget, and it will continue to be balanced. Unemployment is close to its lowest point in a generation. Interest rates are low. Inflation is low and remains stable. Canada is on the best fiscal footing of all of the major Western industrialized countries, with the largest budgetary surplus as a share of GDP and the lowest debt burden among the G-7 countries.

As Prime Minister Harper is fond of saying, Canada is an emerging energy superpower. We have the second largest petroleum reserves on earth - second only to Saudi Arabia - and we are the largest exporter of oil to the U.S. We are the world's second largest producer of hydroelectric power, and we rank third in the production of natural gas. We are the largest producer of uranium and the largest exporter of forest products in the world. Our natural resource wealth is simply staggering. Over the past ten years the total value of Canada's energy, mineral and timber reserves has doubled to more than a trillion dollars.

Of course, no country can rely solely on its good fortune in natural resources or geographical position to weather the global challenges we are seeing today. We believe in structural economic stimulus that is long-term, permanent and sustainable, and to this end we are in the process of reducing business taxes. We believe, in addition, that Canadians pay too much in taxes as individuals so we have reduced personal income taxes - not enough, but we have made a start. On federal debt, we do not think it is right for a government to run deficits and accumulate debt that must be passed on to future generations. We've created something called the Tax-Back Guarantee, and every time we pay down public debt we take the interest savings and use it to reduce income taxes. This is a way of enabling people to see directly the value of reducing public debt. Our total tax relief will come to about $200 billion over the period 2007 to 2013, which will take us to the point where the level of taxation will be about what it was in the 1960s, when John Diefenbaker was Prime Minister of Canada and John Kennedy was President of the United States. This is major tax reform in the Canadian context. We are doing it because we wish to encourage economic growth, prosperity, entrepreneurship, investment and reinvestment in Canada. And we believe it is one of the principal underpinnings of an economy that is strong and resilient enough to meet all of the global challenges.

I mentioned the turmoil currently affecting global financial markets earlier in my remarks. A couple of weeks ago I attended the G-7 finance ministers' meeting in Washington, where we received the unanimous recommendations of the Financial Stability Forum. As presented by the financial press, these deal with the risk management practices of financial institutions, lending practice disclosure, dealings with credit rating agencies, and the like. They were unanimously supported by the G-7 finance ministers, and we look forward to implementing them in our respective jurisdictions. Let me add that in Canada our economy has had a relatively small exposure to the subprime market. That, together with our strong economic fundamentals, has been very helpful in the current global financial climate. Our banks have not invested heavily in securities backed by subprime mortgages, and less than three percent of the outstanding mortgages in the country are part of the subprime market. At the same time, the Canadian housing market remains sound. It has not experienced the stresses that we see in some regions of the U.S. Housing starts and home sales remain good, a reflection of both affordability and positive economic conditions.

On monetary policy, the Bank of Canada has lowered its rate by 50 basis points. At the same time, we are moving forward with legislation in the House of Commons to enable the Bank of Canada to be more flexible in providing liquidity to financial markets. During recent months it has become apparent that the Bank of Canada needs more flexibility in that regard.

With respect to capital markets reform, the U.S. has taken a number of bold steps to deal with financial market pressures. I've spent a significant amount of time with Secretary of the Treasury Paulson on the blueprint for a modern financial regulatory structure, and we are following this discussion with a great deal of attention. In the Canadian context this is of particular importance, since we propose to review the American blueprint in light of our own circumstances and structures in developing our own package for regulatory reform. This may be one of the positive results coming out of the recent difficulties for both the U.S. and Canada.

A related concern is the fact that Canada does not have a federal securities regulatory agency - an SEC. We are alone among the Western industrialized countries in having that regulation on a province-by-province basis, which is impractical in a time when capital should, and does, move freely. We are moving toward a national securities regulator, and a panel is addressing the issue now. Their report, I trust, will enable us to draft legislation to this end in the not too distant future. Having a national securities regulator would bring Canada into step with the rest of the developed world.

This year marks the 15th anniversary of NAFTA, the North American Free Trade Agreement among the U.S., Mexico and Canada. President Bush, President Calderon and Prime Minister Harper have met recently, and one of the principal issues they addressed concerns the future of free trade. I can assure you that Canada's position continues to be one of unqualified support for free trade. Over the past 15 years trade among our three countries has grown exponentially, tripling from pre-NAFTA levels to just under $900 billion in 2007. Not only has this contributed significantly to the economic growth and standard of living in the three counties, but it strengthens cooperation in a whole host of areas. And it serves to secure our common borders while facilitating legitimate travel and trade. We believe that NAFTA and the concept of free trade are fundamental to our prosperity and our security.

To conclude, let me reiterate that Canada is well positioned to weather the current situation. Our economic fundamentals are sound, and our economy is resilient. We have a balanced budget. We are reducing public debt. We are in the process of providing broad-based tax relief, and we are committed to controls on spending. Our support for free trade and all of the things it represents is unconditional. Since coming to office, Prime Minister Harper has sought good relations with all of our neighbors in the Americas, and the antagonism and confrontation that at times informed our relations in the past have been replaced by cooperation and collaboration. This government is taking a forward-looking approach both domestically and abroad. Canada is a land of great opportunity, not only for Canadians but for those seeking sound investment opportunities. Canada has a brilliant future, and everyone is invited to participate.