Speech by the Honourable Jim Flaherty,
Minister of Finance
August 6, 2010
I can’t thank you, David McGown enough for that overly kind introduction. As I listened to your words, I was in fact reminded of Lyndon Johnson.
LBJ once responded to a kind introduction – an introduction in the same generous vein as the one I have just received – the following way:
“My father,” he said, “would have enjoyed it. But my mother, she would have believed it!”
And speaking of LBJ, I think I am correct in believing that every Minister of Finance to ever hold office in Canada – and around the world – shares a certain affinity with him.
After all, it was Johnson who once pledged, while asking business leaders to keep prices down to protect consumers, that he’d in turn ask labour to keep their wage demands in check.
“And I will lay the cards out just as straight for them as I do you,” LBJ said. “That way everyone will know the score. It’s just like the conversation at the card game when one of the boys looked across the table and said: ‘Now, Hank, play the cards fair. I know what I dealt you.”
Now, I understand that you were privileged last evening to hear from Margaret MacMillan, the author of the seminal Paris 1919, and one of the leading historians and thinkers of our time. Many of you might be also aware that Professor MacMillan is the great-granddaughter of David Lloyd George, one of the giants of 20th century world politics.
I have long been interested in this shrewd Welshman – particularly after I embarked upon a career in politics.
“What do you want to be a sailor for?” Lloyd George once said to a young man who sought his advice. “There are greater storms in politics than you will ever find at sea! Piracy, broadsides, blood on the decks. You will find them all in politics.”
Like all politicians, in any era, I can attest to the validity of Lloyd George’s observation.
I want to salute Professor MacMillan and the memory of her illustrious ancestor.
I also want to salute one of my predecessors, the Right Honourable Paul Martin, whom you will be hearing from this afternoon. Before his service to Canada as our 21st Prime Minister, Mr. Martin was of course a ground-breaking Minister of Finance.
Paul’s father, Paul Martin Sr., was one of the finest gentlemen to serve in public life during Canada’s most formative years of the last century. He graced the cabinets of four Prime Ministers and authored some of the most significant pieces of legislation in Canadian history.
The Martin family’s tradition of public service is one that Canadians of all political stripes recognize and are grateful for.
Thank you very much for the opportunity to be with you today. It is a high honour to deliver this address – particularly in light of the leading role this conference has played in Canadian and international public policy discussions for almost 80 years.
As a Conservative, I feel right at home here.
One of the ‘greats’ of my party’s past – John George Diefenbaker – often participated in your discussions as an MP. Mr. Diefenbaker served as a Vice-President of the Canadian Institute of Public Affairs in 1954, 1955 and 1956. In this capacity he chaired sessions of the Couchiching Conferences during that crucial period in Canadian and world affairs.
Your alumnus, Mr. Diefenbaker, was not an economist. In fact, in 1963, he noted that “eventualities are matters that arise and you have to wait till they arise before you realize that they have.”
Hearing that, one might suggest that he could have been a great economist …
But I digress.
Instead, Mr. Diefenbaker was a lawyer, one with opinions about economists mind you.
He once told the following story about their craft.
“I am reminded of the old college graduate in economics who went back to his alma mater to visit his son who was following in his father’s footsteps,” Diefenbaker said. “The son showed him his examination paper and the father was astounded to find that it was exactly the same paper he had (sat for) thirty years before! So he went to see the head of the economics department and confronted him with the discovery he had just made. ‘What kind of a department,” the man asked, ‘is this, that sets the same papers, asks the same questions of students year after year?’ ‘Well, said the professor, “the questions don’t change, but the answers do!’”
If there is one thing that Couchiching has provided over the past 78 years it has been just that:
And in doing so, your 2010 organizers, panellists and presenters and those here only to observe, are acting in the best traditions of Couchiching: You are punching above your weight. One only has to think of the legacy of a brilliant federal public servant named Escott Reid.
It was he who came to the shores of this lake in the 1940s and provided the intellectual framework for what we know today as NATO.
Mr. Reid, like so many others who have come to this place, punched above his weight.
Canadians, when we consider our nation’s economic performance both leading up to the crisis of 2008 and after, have also been punching above our weight as a nation.
We just don’t like talking about it.
Well, I will break that very Canadian mold today.
I’ll actually say it.
By any economic indicator, Canada is punching above its world-wide economic weight class.
It brings me particular pleasure to say this as your 2010 discussions are taking place so soon after – to paraphrase the theme of this conference – a watershed event for this country: the economic summits in Canada that brought world leaders together to set out a course for strong and sustainable economic growth.
Canada played a pivotal role in drawing out this roadmap to recovery, both in what we did to prepare for a global crisis – and the way we responded when it arrived.
It only makes sense, then, for me to recount the extraordinary events of recent years at a forum that was around during the last great global crisis of this magnitude in the 1930s.
Over the past couple of years we have witnessed – and, I believe, made – history of our own.
Just as this Institute has done, our nation has once again answered the call in global efforts to make the world a more stable place for all.
If that isn’t a nation of 33 million punching above its weight, I don’t know what is.
It is important to put the economic crisis that the world has faced in context.
In August 2007, a credit crisis emerged, initially in the form of sub-prime mortgages in the United States.
By October 2008, this crisis had grown exponentially.
The world faced potentially the most serious economic crisis since the Great Depression.
By later that fall, the full effects of the crisis were being felt outside credit markets, as the recession hit the real economy.
Thankfully, in Canada, we had prepared.
We had run balanced budgets, and paid off a massive amount of debt – some $40 billion during our government’s time in office.
Of course, as the crisis intensified, I and hundreds of others were on the campaign trail for the federal election that was to be held on October 14, 2008.
The economic news was getting worse.
Frequent discussions were being held among international finance ministers regarding what should be done about a looming serious recession – one that was not foreseen by the economists.
In Canada, we took some immediate decisions to help alleviate the troubles in credit markets.
First, we decided that the government would purchase CMHC-insured mortgages back from lenders, to increase liquidity.
Second, we decided we would guarantee the wholesale debt of banks, to enable them to have certainty as they lent to one another again.
I made the first announcement on Friday, October 10 in the morning, in Ottawa.
Then that afternoon, I was in the Cash Room of the US Treasury for a meeting of G-7 Finance Ministers and Central Bank Governors.
I’ve been to lots of these meetings over the course of more than four years now, but this was a different kind of meeting.
Financial markets were teetering with uncertainty.
Hank Paulson opened the meeting by saying, basically, that we’re in a lot of trouble.
Some European ministers spent time expressing some pointed opinions about the US financial system and its contribution to the crisis, passing around a chart that showed what had happened to credit spreads since Lehman Brothers collapsed.
As a group we faced the reality that some highly leveraged European banks were carrying toxic assets. British banks had failed, American banks had failed and some of the German regional banks had failed.
It was unclear whether the markets would even open on the following Monday.
But the story of that weekend has a promising ending, as it became a glowing example of what can be accomplished with global cooperation.
After the recriminations and stridency had abated, we tore up the communiqué – one of the sort that officials agree to well in advance of meetings like this.
In the place of a long, dense communiqué, we agreed on a five-point plan.
I, among others, insisted that we have something simple, on one piece of paper, in order to restore confidence. Fundamentally, what we agreed to was to not let any more banks fail.
Then, the next morning at 7 AM, we met with then-President Bush in the Roosevelt Room of the White House, and he endorsed the plan.
The meeting of the International Monetary Fund followed, then later in the afternoon we had a meeting of the Council of the Ministers of Finance of the Americas. This was followed by a G-20 meeting. President Bush attended part of that meeting.
By that evening, everyone had agreed to the five-point plan, which was significant in terms of restoring confidence at that time, in the middle of October 2008.
What we began to establish that weekend was the importance of global economic cooperation, in a way that had never been attempted previously.
The Summits began. First of all in Washington in November 2008. The format was (and is) a preparatory meeting of Finance Ministers followed later by the Leaders meeting.
Last year in Pittsburgh the G-20 was established as the premier forum for international economic cooperation, with a clear mandate to continue its prominent role well beyond the economic crisis.
In Toronto, we set our sights equally high: on ensuring the world’s economy would never come so close to crisis again.
Prime Minister Harper summarized the Toronto accomplishments after the summit:
- Firm targets for advanced economies on deficit reduction and reduced debt burdens: countries would cut deficits in half by 2013; and stabilize or reduce debt to GDP ratios by 2016;
- An agreement to move forward on the second stage of mutual assessments each country will take to achieve strong, sustainable and balanced growth;
- Higher and better quality capital standards throughout the global financial system; and
- An extension of our shared pledge not to introduce new barriers to trade – a commitment originally made during the height of the global crisis – for another three years.
This continued collaborative, long-term approach coming out of the Toronto summit makes for a future far more hopeful than the treacherous past we have just lived through.
Of all G-20 nations, Canada has a particular reason for post-Summit optimism.
Our nation has weathered the deepest, most synchronized global downturn since the 1930s in far better shape than other major industrialized countries.
The decline in our economic output was the smallest of our G-7 counterparts.
Canada has virtually recouped a recession’s worth of economic decline and, with more than 400,000 jobs created since July 2009, virtually all of the jobs lost during the downturn.
The IMF expects that Canada will be the fastest growing economy among G-7 countries in 2010 and the second-fastest growing economy among G-7 countries in 2011.
At a time when other countries, including our largest trading partner, still struggle to get their economies back on track, this success cannot be put down to mere luck.
And it is so-called ‘ordinary’ Canadians who deserve the most credit.
Consumer confidence in Canada has remained relatively strong.
As my hero Robert Kennedy once said: “Most of our fellow citizens do their best – and do it the modest, unspectacular, decent, natural way which is the highest form of public service.”
We also owe our enviable position to how we prepared for the unexpected, and how we coped once it arrived.
Canada had the lowest total government net burden in the G-7 at the onset of the crisis.
In 2007, Canada’s net debt stood at 23 per cent of GDP, less than half the G-7 average.
This prudence means the G-20 commitment to cut our deficit in half and reduce our debt-to-GDP ratio by 2016 is not only possible; we have already set out the course to achieve it in our most recent budget.
Canada took other steps before the global downturn that continue to serve us well.
Long before world leaders met to confront a global emergency, our Government put in place permanent, broad-based tax reductions that helped position Canada to withstand a global downturn.
Actions taken by the Government since 2006, including those in the Economic Action Plan, which I will turn to very shortly, provided $220 billion in tax relief over the 2008-09 fiscal year (when the crisis was at its worst) and the following five fiscal years.
That means that, as other nations face the prospect of tax increases due to unsustainable budget deficits, Canadians can benefit from tax relief that is both permanent and affordable.
We also made innovation a government priority, virtually from the day we took office.
Budget 2010 provided $1.4 billion in new science and technology funding. This builds on the $2.2 billion we invested in Budgets 2006, 2007, and 2008 and the $4.9 billion in additional funding provided in Canada’s Economic Action Plan.
This helps explain why Canada’s investments in higher education research and development as a proportion of the economy are now the highest in the G-7.
Canada’s Economic Action Plan
This preparation put us in a good position, but the magnitude of the crisis required an extraordinary response.
As the economy began to slow in December 2008, I began to engage in the pre-budget consultation process I had used in previous years.
But it was clear that this budget would require more.
Our government launched an even broader consultation, one that would bring in all the voices we needed to hear from across the country to develop a plan to shield Canada as best would could from the crisis.
One of the new consultation mechanisms I established was the Economic Advisory Council.
Chaired by former BC Finance Minister Carole Taylor, it brought together some of the brightest and most prominent business and academic minds in the country, to help advise the government on responding to the recession.
I met with my provincial and territorial counterparts in the lead-up to budget as well, in mid-December in Saskatoon, to help assemble a united federal front in the fight against the crisis.
At the same time, we were all dealing with some fallout of our own.
We were working to resolve the issues surrounding non-bank asset-backed commercial paper.
And we were coming to terms with the depth of the recession, and what the Canadian economy could expect in the months and years ahead as forecasts were revised and re-revised seemingly daily.
We can see the data in retrospect now.
But at the time, we saw and agreed – at all levels of government – on the need to act quickly and boldly.
The result from our government was Canada’s Economic Action Plan, unveiled in Budget 2009.
I presented it in the House of Commons on January 27, 2009 – the earliest budget in Canadian history.
Through the Economic Action Plan, we acted quickly and decisively once tough times arrived.
Working in concert with our G-20 partners, we introduced the plan to confront a global economic downturn head-on.
It is a two-year plan designed both to protect and create jobs and improve Canada’s long-term growth and prosperity.
The plan worked, helping Canadians through the worst of the global turmoil.
It brought more tax relief, more training opportunities for unemployed Canadians, more modern infrastructure and more investments in innovation.
These Action Plan efforts helped individuals through the worst of the recession.
Real consumer spending has increased in each quarter since the Action Plan was implemented.
We estimate that the plan added almost two percentage points to economic growth, on average, in the last three quarters of 2009.
The Plan also ensured it would last only as long as it was needed, with a clear-cut exit strategy to return to budget balance:
- An end to temporary stimulus measures by the end of next March, as scheduled;
- Targeted measures to limit the growth in direct program spending; and
- A comprehensive review of government administration and overhead costs that will identify opportunities for future savings.
This three-point plan will place our net debt ratio on a clear downward track when the debt burdens of other nations are expected to escalate even higher.
An enviable Canadian brand
Canada today is in a position other nations can only envy.
I have observed that envy first-hand.
As all of you discuss the threats and opportunities of the global economy in the coming days, I want to leave you with a sense of how others see us.
In travels that in recent months have taken me to China, India, the U.S., Korea and South America – even Toronto – I can tell you that Canada is viewed in a way that can only be seen as admiration.
When I went to New York days before the Canadian summits, the same day an update on Canada’s Economic Action Plan was released, I was able to highlight that Canada was not only hosting the world; it was leading it.
By several key measures – job creation, economic growth, the stability of our financial sector, and relatively low public debt – Canada is performing markedly better than most advanced economies, and all G7 nations.
On the fiscal side, the IMF expects Canada will be the only G-7 country to return to balance in the next five years.
Next year the federal deficit is projected to be less than three per cent of GDP.
In other words, what is a starting point for Canada will be a destination for nations struggling to get a grip on their finances.
The IMF projects our net debt ratio will stand at 31 per cent of GDP in 2015, less than one-third of the G-7 average of nearly 95 per cent.
By way of contrast, the U.S. debt-to-GDP ratio is about 67 per cent, the UK’s is about 75 per cent, and Japan’s is about 115 per cent. All are likely to worsen over the course of the next several years.
Relatively speaking, we have sound fiscal strength.
This made-in-Canada resilience in weathering the global recession is also a testament to the stability of Canada’s financial sector, not to mention the prudence of Canadians themselves.
Canada’s banks and other financial institutions were better capitalized and less leveraged than their international peers going into the global recession, in part reflecting a strong financial regulatory and supervisory framework.
When I first went to China as Canadian finance minister in January 2007, I recall it being suggested to me that Canadian banks were not only boring but also excessively risk averse. During my trips last August and this Spring, some of my counterparts mentioned to me that the Canadian banking system was very solid, very stable and appropriate in its risk taking. It’s been a big change from 2007 to 2010.
I note that the World Economic Forum has ranked Canada’s banking system as the soundest in the world for two consecutive years.
Combined with that stability is a highly competitive business tax system and open trade environment making Canada increasingly attractive to investors and entrepreneurs – the best place to do business in the next five years, in fact, according to the Economist Intelligence Unit.
This year Canada has an overall tax rate on new business investment that is the lowest in the G-7, and Canada’s tax advantage will only grow as our tax rates continue to fall through 2012: a major competitive advantage.
At the same time, Canada not only kept its economy open during a global recession, we unilaterally eliminated tariffs on imported machinery and manufacturing inputs, in the process becoming the first G-20 nation to become a tariff-free zone for manufacturers.
And all of this, I might add, was entirely consistent with the approach to the economy our Government has followed since we first took office.
Advantage Canada, the Government’s long-term economic plan, recognized that Canada must put in place the elements that will enable individuals and businesses to effectively compete with the best in the world.
It was a strategy that served us well once economic distress rippled across our borders.
That is why it is becoming increasingly clear to international observers that the initiatives put in place since 2006 are making Canada much more competitive internationally.
Where we go from here
It adds up to a future that looks far more promising than what confronted us two years ago.
However, history is an account of what actually happened, not what should have. To turn to RFK again – whom I was privileged to hear in person during my own undergraduate days at Princeton – he reminds us:
“History is a relentless master. It has no present, only the past rushing to the future. To try to hold fast is to be swept aside.”
Ladies and gentlemen, as I work in conjunction with other finance ministers in the G-20 in the days ahead, I assure you that Canada will not be swept aside, as RFK warned against.
And we will never hold fast.
The good intentions endorsed in Toronto must lead to actions in the months ahead if the world is to demonstrate that the lessons of a crisis have been heeded.
The financial turbulence that occurred in Europe in the weeks leading up to the Toronto summit highlighted the importance of putting the fiscal positions of G-20 nations on a sustainable track before markets compel them to.
That is why Canada will continue to push for firm, realistic consolidation plans that will result in lower deficits, reduced debt and greater global economic stability.
I continue to organize and chair the in person and telephone conferences of the G-7 Finance Ministers and Central Bank Governors.
In terms of financial sector reform, Canada will keep working to build on the momentum that occurred in Toronto, while keeping the global focus on what matters – building a more resilient financial system by improving the quality and quantity of capital, discouraging excessive leverage and strengthening oversight and supervision.
We will do so with the same tenacity Canada demonstrated in dousing attempts to introduce a misguided and punitive global tax on the financial sector.
For Canada and all nations, our work is far from finished.
Much more effort and determination is required if we are to make the Toronto Summit the economic legacy it deserves to be.
In setting the scene for this conference your Web site asked an important question: can a crisis be seized as a great opportunity for innovation in government, business, and social policy – and, if not, will we miss the best time to change what needs to be changed?
I say, seize the opportunity!
We have come too far, and achieved too much, to fall back into the complacency that allowed the global economy to be thrown into turmoil.
Canadians should be proud that our country played such a critical role in overcoming a global downturn.
Yet we cannot let up now, when our nation is increasingly being called upon to show global leadership.
Canada responded to a crisis from a position of strength.
Constructive and thoughtful exercises like the Couchiching Conference will keep our country strong.
I know all of you will play your part. Couchiching’s legacy demands it of you.