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Ottawa, April 10, 1995
1995-032

Notes for an address by the Honourable Paul Martin, Minister of Finance, before the Keidanren Business Association and the Canadian Chamber of Commerce in Japan

Tokyo, Japan
April 10, 1995

Delivered text is official version

I would first like to thank the Keidanren and the Canadian Chamber of Commerce in Japan for the opportunity to be here with you.

My purpose today is straightforward -- to lay before you Canada's new economic course -- one of sustained economic growth, of restored fiscal responsibility and of the pursuit of new opportunities and partnerships across our shared Pacific ocean and around the world.

Let me begin with the state of the Canadian economy. Across the board, indicator after indicator, our economy is stronger now than it has been in years. In 1994, Canada's economic growth led the G-7 -- with real GDP growing by 4.5 per cent. We are expected to lead again in 1995. Almost half a million jobs have been created in the past year -- a very substantial achievement for a country with a population of 29 million.

Domestic business confidence is greater today than at any time since 1979. Canada's level of exports has never been higher - growth in the fourth quarter was the strongest in more than ten years. Our current account deficit was cut in half in the last year.

This track record reflects remarkable improvements in our cost competitiveness which for instance, compared with the United States -- reached its best level in over four decades as 1994 drew to an end. This is much more than the result of currency fluctuations. It is also a consequence of strong productivity growth. Canada's unit labour costs fell 1.3 per cent in 1994,the first annual decline in almost 30 years. Canada remains one of the lowest inflation countries in the world. The targets that we set with the Bank of Canada will make sure that we stay that way.

Our track record and trends on those last two factors -- productivity and inflation -- guarantee that even through downturns, Canada's competitiveness -- when compared to other countries -- will be strong.

That being said -- there are two clouds that loom over our country's horizon.

The first is the uncertainty that some would create over the future of Quebec. As a Quebecer. Let there be no doubt -- that challenge will be met. Quebecers do not want Canada, their country, torn apart.

The second is the debt and deficit. Dealing with that challenge was the purpose of our budget. So let me get right to it.

Our overall objective is to bring the deficit of the Government of Canada down to zero. We will do that by firmly applying an approach that is already paying off -- setting firm, short-term deficit goals -- rolling two-year targets -- until the deficit is erased.

Those short-term targets are the most effective spending control anyone could impose on governments. Now, on the way to balancing the books, we have two immediate targets to meet -- a deficit of $32.7 billion in 1995-96 and $24.3 billion in 1996-97 -- or 3 per cent of GDP.

Make no mistake - we will hit those targets. But of equal importance, the downward track established by the actions taken in our budget will continue in the years thereafter.

Let me summarize the scope and significance of our actions. Over the next three years, our budget delivers cumulative savings of $29 billion, of which $25.3 billion are spending cuts. This is the largest set of actions in any Canadian budget in nearly half a century. The budget delivers almost 7 dollars of spending cuts for every 1 dollar of new tax revenue. And there is no increase in personal income tax rates, for the second year in a row.

By 1996-97, we will have reduced government program spending from $120 billion in 1993-94 to under $108 billion -- a decline of 10 per cent. To provide context, let me compare that achievement to trends in the United States. In 1992-93, the program spending ratio of our two national governments was the same -- about 17 per cent of GDP.

But based on the latest budgetary projections, by 1996-97 program spending by the Government of Canada will have been cut much deeper -- down to 13.1 per cent of GDP or about 3.6 percentage points lower than the United States. In fact, by that year, Government of Canada program spending will be at its lowest level since 1951 in relation to the Canadian economy.

Look at another comparison -- by 1996-97 - our equivalent to the U.S. deficit on a Unified Budget Basis, in other words, our financial requirements, will be down to 1.7 per cent of GDP.

This is substantially lower than the projected U.S. federal deficit of 2.7 per cent of GDP for 1996-97. Indeed, in that year, our financial requirements -- on a national government basis -- will be lower than what is projected for any G-7 country.

Most importantly, 1996-97 will also mark a major milestone. The debt of the Government of Canada will no longer be growing faster than our economy. The debt-to-GDP ratio will have begun to decline. Let me emphasize very strongly -- we are absolutely committed to keeping this ratio on a permanent downward track.

Now, look more closely at the implications of our approach.

Once again, our budget is deliberately based on economic assumptions that are more cautious than those of most private sector forecasters. And we are backing up those assumptions with very sizeable contingency reserves. What that means is if reality conforms to the average private sector forecast - which is more optomistic than our assumptions - the deficit in 1996-97 could be brought down below $19 billion - in fact, some $5.5 billion less than our budget projects. Our financial requirements would fall to slightly less than 1% of GDP.

We have always said -- that our targets were the least we could do -- not the best we could do.

We have also said from the beginning that our 3 per cent interim target was a station on the way -- not our ultimate destination. Our aim is permanent fiscal remission.

We will reach that goal by totally redesigning the structure of government spending -- redefining the role of the government itself in the economy. We believe that government should do what only government can do best -- and leave the rest for those who can do better -- whether business, labour, or the voluntary sector.

For example, everyone in this audience will know both the challenge and the need to address agricultural and transportation subsidies. Previous governments knew the need for reform, but did not act. We are acting.

Transportation subsidies are being eliminated. Direct agricultural support programs are being substantially reformed and spending on them is being significantly reduced.

Across government, total spending on business subsidies will go down by 60 per cent in the next three years. We are moving forward to privatize and commercialize many government operations.

Our view is straightforward. If government doesn't need to run something, it shouldn't. And in the future, it won't.

As a result of our reforms, overall departmental spending will be cut by almost 19 per cent in just three years. These are real cuts in real dollars.

Our transfers to Canada's provinces are being put on a more sustainable basis, and at the same time being made more flexible so that provincial governments can adapt to address their own regional needs.

Finally, on Unemployment Insurance, we intend to table reforms later this year that -- together with Canada's strong economic performance -- will reduce the overall size of the program by a minimum of 10 per cent. And this comes on top of the 12 per cent reduction in the size of the program introduced in last year's budget.

One of the bottom-lines of our budget is that we are either ending -- or putting a lid on -- the kind of demand-driven programs that send deficits up dramatically during economic downturns. Our structural reforms will keep the debt-to-GDP ratio on a permanent, steady decline.

That then summarizes our course. Our spending reductions are without modern Canadian precedent. We have assured that our deficit targets will be met. We have taken the steps now that guarantee we will go well beyond them in the future. But our efforts are not over. Reform will go on. New targets will be set. And we will not let up.

Together with the extraordinary health of the Canadian economy, these actions, we believe, make Canada once again one of the best places in the world to invest. For this reason, the Government of Canada will focus its resources strategically on areas where it has a true comparative advantage.

No G-7 country relies more on trade than does Canada. We depend on open, assured and fair access to foreign markets. We are committed to liberalized international trade throughout the world. That was reflected in our strong efforts to secure agreement on the Uruguay Round. It is demonstrated by our support for the expansion of NAFTA.

And here, in the Pacific Region, we are vigorous proponents of liberalized trade. Our view of regional trade agreements has always been that they do not run counter to global efforts. They bolster them.

In the Pacific, as in the Western hemisphere, Canada sees the purpose of liberalized trade as being about bringing down walls between partners inside -- not putting up walls to competitors outside.

Economic growth in the Pacific has far out-paced that of any other region of the world for the past three decades.

The Asia-Pacific region's share of the world economy now exceeds 50 per cent. Trade among Asia-Pacific countries has been increasing at a pace 50 per cent higher than for the world as a whole. Canada has already seen the benefits of the Asian miracle. Indeed, in 1983, we began to trade more with the Pacific Region than with Europe. And today, we export about 50 per cent more here than we do to the European Union.

Our goal as a government is to make our Pacific economic relations even stronger. I have already described Canada's welcoming investment climate. We also produce many of the goods and services that developed and developing countries alike in the Pacific need -- in transportation, telecommunications, energy, building materials, agri-food products, environmental technology, engineering services, and of course our natural resources.

That is one of the reasons the Prime Minister of Canada mounted his first major trade mission to Asia -- one that was an unprecedented success. But we look to the Pacific not simply as a market -- but as a model. In our view, an outward looking nation must not only sell abroad, but learn abroad.

For a country like ours, the achievements of Japan are compelling. With few natural resources, a larger population, and limited land, Japan has set new standards of economic productivity and growth -- the lessons of which are being adapted throughout this region and around the world. Novel patterns of co-operation, of team work, between government and business. Highly effective links between science and industry. Cooperative approaches between management and labour. And a compelling consensus on broad economic and social goals. The resulting productivity growth has inspired Canadians -- even as it has challenged us to keep up.

Looking to the future, whether on investment, or trade, or the expansion of regional co-operation throughout the Pacific, Canada looks to Japan as a partner for progress. One of our goals is to build on the dramatic break-through of last year -- when Asia-Pacific leaders defied the predictions -- and agreed to aim for free trade across our region by the year 2020 -- building a new bridge across the Pacific.

In Bali next week, I will be meeting with my fellow Finance Ministers from the Asia Pacific Economic Co-operation forum -- to continue that dialogue. Part of that discussion will focus on ensuring that investment and capital are available to fulfill the promise of the Pacific. An open environment for trade and investment - including capital flows - is absolutely essential for sustained economic growth in our region. The challenge is to manage and balance a global capital market that is at once integrated, instant and intense, on the one hand, with the reality of a multitude of distinct fiscal and monetary regimes, on the other.

Our dialogue in Bali will look at this issue -- and will provide us with valuable input leading to the G-7 Finance Ministers meeting in Washington on my return, followed by the Halifax Summit this June. At that Summit, based on work mandated in Naples last year, leaders will be focusing on modernizing the multilateral institutions that have been so essential to global economic development and growth over the last half century.

Speaking for Canada, we do not seek change for change's sake. But we do support reform to make those institutions as functional in the future as they have been in the past. Clearly, we should do everything we can to give those institutions a better capacity for early warning -- and for quick and adequate response when necessary - to avoid destabilizing financial crises.

As we look for reform that works, we must bear in mind that we all share a stake in ensuring that the gaps between developed and developing countries do not grow -- but in fact narrow. In closing let me say that as we look to the future, it is compelling to note how much our two countries have a shared stake in a prosperous Pacific of stable growth, open trade and mutual co-operation.

Achieving that goal requires vision and action abroad -- and responsibility and renewal at home.

In Canada, we are committed to precisely that course. Keeping inflation down, improving our productivity still more, putting our fiscal house in order, creating opportunity abroad.

Our two countries have built a firm foundation which has brought major benefits and returns to our peoples -- whether through trade or secure investment. The initiatives we are taking in Canada ensure the future can only be brighter.

The past century has been an Atlantic century. The next century will be the Pacific century. Canada is confident of our role in this new world. And you can be more confident than ever in the future of Canada. Our new course is clear. And we will succeed -- together.