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Ottawa, June 3, 2002
2002-047

Statement by the Honourable John Manley, Deputy Prime Minister and Minister of Finance of Canada before the Annual International Monetary Conference

Montreal, Quebec

First of all, I want to thank Sir John Bond and members of the organizing committee for this opportunity to speak to you.

As the newly appointed Minister of Finance, addressing this conference is extremely important, both for myself and the Government. Clearly, a great deal has happened in the last 24 hours. Indeed, I have only been in my position less than a day.

But let me assure you, in no uncertain terms, that although individuals might change within government, our priorities and objectives have not and will not change. That means balanced budgets, reduced debt, low and stable inflation, tax cuts and key investments, which have been the foundation for Canada’s success in recent years will remain so in the years ahead.

I know that the Prime Minister and the Governor of the Bank of Canada have been looking forward to speaking to you. Let me welcome you to Canada and to Montreal - the world’s second largest francophone city.

You represent the world’s leading banks and financial institutions, spanning some 26 countries. Your reach is truly global. This conference has played, and will continue to play, an important role in addressing some of the most pressing economic and monetary questions of the day. No doubt your meetings here in Montreal will be no exception.

Clearly, this has been a very trying year for the world. We have had to deal with the shock and aftermath of the terrible events of September 11 and the enormous challenge of a synchronized global economic slowdown.

In the face of these developments, banks and financial institutions around the world stepped up to the plate and played a critical role on several fronts. You provided much needed liquidity to markets and you have worked hand in glove with governments in the battle to end the financing of terrorism in the world.

All of this being said, you couldn’t have chosen a better time to hold your conference in our country. We’ve come a long way since 1995, when The Wall Street Journal made us an honorary member of the Third World. At that time we faced some serious fiscal and economic problems and we had lost our triple-A credit rating. Today, our nation’s finances are among the healthiest in the G-7, our economy is among the fastest growing and our triple-A rating has been restored.

Now, this turnaround in our fiscal and economic performance did not just happen. It is the result of a systematic plan, which the Government of Canada has followed for several years. And, make no mistake, we will not veer from it in the future.

The first component of that plan was not only to get rid of deficits, but also to pay down debt. We have recorded five consecutive surplus budgets, including last year’s. We will likely be the only G-7 country to do so as well this year and next. These surpluses have allowed us to reduce our national debt by more than $36 billion.

As a result, our debt-to-GDP ratio has fallen from 71 per cent to 50 per cent and will continue to drop in the foreseeable future. Equally impressive, we believe, is that our market debt, as a percentage of GDP, has decreased to 40 per cent and it too will continue to fall.

There was a time when Canada’s total net debt, as a share of GDP, was second only to Italy’s among G-7 countries. Today, only the United States and the United Kingdom rank better than Canada.

Canada’s current account moved into surplus in late 1999 and has remained so, despite the U.S. economic slowdown. As a result, our level of foreign indebtedness, as a share of GDP, has shrunk dramatically from 45 per cent in the mid-1990s to under 20 per cent in 2001. This is its lowest level in 50 years and it is expected to be below that of the United States for the first time on record.

A second key component of our economic plan has been to establish and consistently meet inflation targets. In fact, Canada was a pioneer in taking such an approach. In 1991, the Government and the Bank of Canada agreed to adopt explicit targets to hold inflation inside a range which is now one to three per cent.

The results speak for themselves. We have kept inflation within that target band throughout the past decade and, since 1995, we have had one of the lowest inflation rates in the industrialized world.

Finally, thanks to our success in reducing the debt and consistently meeting our inflation targets, we have been able to maintain relatively low interest rates. For example, in the face of the last year’s global economic slowdown, the Bank of Canada reacted quickly and decisively and lowered interest rates 10 times over a 12-month period, shaving nearly four percentage points off its overnight rate. This gave our economy a timely and welcome boost.

A third key element of our plan has been to substantially reduce personal and corporate taxes. In October 2000 we implemented the largest tax cuts in our history - worth more than $100 billion over five years. Much like the interest rate reductions by the Bank of Canada, these cuts provided timely stimulus to a slowing economy.

But, that is just part of the story.

Not only has our tax-cut plan given individuals and families a well-deserved break - in fact, 21 per cent on average - it is creating a distinct tax advantage for investing and doing business in Canada. For example, by the end of this calendar year corporate income-tax rates in Canada will be below those in the U.S. and, by 2005, the gap will be five percentage points.

On capital gains, our top tax rate is already two percentage points lower than the typical rate in the U.S. and we have a $500,000 lifetime capital gains exemption for small business shares that simply has no equivalent south of the border.

Together with advantageous R & D tax credits, our tax system is, more than ever, boosting entrepreneurship, innovation and investment in our country.

And make no mistake, we will continue to cut taxes as resources permit.

A fourth element of our plan has been to invest aggressively in education, research and innovation, and health. Our goal has been to put our economy in a position to lead, not to trail technological change. Getting to market second or third means getting to market too late. It is important that Canadians be first movers and increasingly we are.

Those, in a nutshell, are the key elements of our long-term plan. They help explain why both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) expect our country to lead all G-7 nations in economic growth this year and next.

Just as the success of our economic and fiscal plan cannot be doubted, there should be no doubt about our commitment to stay the course in the years ahead. What will never waver is our determination to balance our budgets and reduce debt, meet inflation targets, cut taxes and make key strategic investments.

The fact is, through initiatives such as the North American Free Trade Agreement (NAFTA), Canada has gone through a fundamental change in the structure of its economy and in the mindset of its people - a mindset now rooted in the knowledge economy and reflecting a vision unlimited by distance or borders.

That being said, you are not gathered here to discuss Canada’s economy, although I’m sure you understand our pride at what has been a remarkable fiscal and economic turnaround. Allow me, therefore, to take a few minutes to discuss some issues we need to face squarely as members of the global community.

The first is the need to ensure confidence in the integrity of global capital markets in the wake of the Enron situation. Clearly, both accounting standards and disclosure practices must keep up with changing times.

Common sense suggests we must ensure that auditors are independent of the corporations they audit and that there is adequate oversight to ensure that independence and the quality of services.

That being said, however, a key to building investor confidence is improving corporate governance. Companies need to convince investors that they are governing themselves with integrity and in the best interest of shareholders.

Some aspects of corporate governance, such as rules for audit committees, can be imposed by legislation or regulation. More importantly, however, good governance comes from within - from corporate leaders who set the standards, demonstrate the values and develop the culture that inspires - and merits - investor confidence.

We know that there will be changes in the United States. But, all of our countries have a stake in finding answers that suit our needs and circumstances, and that will inspire confidence in our capital markets.

A second, but no less important, issue for the global economy is the worrisome re-emergence of protectionism. This is a crucial challenge not only for a trading nation like Canada, but for all nations. We have made huge strides over the last few decades in establishing a rules-based international trading system.

More goods and services are being traded today than ever before. But, in recent months we have seen the rising tide of protectionism in the United States. Given that Canada shares not only a continent with the world’s only superpower, but also the largest bilateral trading relationship in the world, we are obviously concerned.

This is a global issue. It requires a global response.

We must have a system of international trade that allows goods and services to move freely across borders, while giving countries the right to seek redress against unfair trading practices. That has to be a priority of the Doha Round of the World Trade Organization (WTO). This is important for strong and advanced trading nations like Canada, but it is even more important for less developed nations. That is why we continue to work with other like-minded countries to ensure the global community governs itself effectively and to ensure that no single country can write the rules of the game for others.

This brings me to the last global issue I would raise. It is one where your voices must be heard, as members of the international banking and finance community - the need for a stronger rule of law in international finance. In short, we need to deal more effectively with the kinds of financial crises we have seen over the past decade.

My predecessor, Mr. Martin, has played a leading role on the international stage in this area. These issues will be high on the agenda when I chair a meeting of the G-7 finance ministers in Halifax next week.

Positive steps have been taken in recent years. For example, the Financial Action Task Force was created to protect the integrity of the international financial system. The Financial Stability Forum was created, based on the recognition that national and international capital markets have become more closely integrated than ever.

But, as the Argentine situation demonstrated, more is required to reduce the economic, financial and social costs of international financial crises. The ultimate answer may be an international bankruptcy court, as advocated by my predecessor.

But, in the meantime, we can improve fairness and predictability for countries facing debt crises. Ideas such as collective action clauses to allow for the renegotiation of countries’ debts and emergency standstills that provide breathing space from debt servicing obligations are key elements of work being done by G-7 finance ministers and central bank governors in this area.

In conclusion, let me say that governments have a role and responsibility in making our global community work better. But then, so do you.

Therefore, as you discuss matters related to international financial stability and global economic growth here in Montreal, I urge you to keep that uppermost in your mind. Because, when all is said and done, globalization must be about raising the standard of living for all.

It must be about giving every man and woman - no matter where they are born and where they choose to live - the opportunity to succeed and to secure a better tomorrow for themselves and for their families.

That certainly is part of our government’s agenda. I know it is part of yours, as well.

Thank you.