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Monday, January 12, 2004
2004-002

Speech by the Honourable Ralph Goodale, Minister of Finance, to the Regina & District Chamber of Commerce at the launch of pre-budget consultations for 2004

Regina, Saskatchewan

Check Against Delivery

Good morning, everyone. I must begin this morning by thanking the Regina & District Chamber of Commerce for hosting this gathering to launch the Government of Canada’s pre-budget consultations for 2004.

I know this is a busy week for the Chamber. You have your annual dinner coming up on Thursday. So I am grateful that your Executive and Staff could squeeze yet another event into an already crowded calendar. And thanks to all of you for coming this morning.

The Regina & District Chamber of Commerce has long played a constructive role not only in the economic affairs of this community, but also in pursuit of all the other things that contribute to a high quality of life-always striving to make Regina a better place to live and work and raise a family, always recognizing that a strong economy and a strong society are mutually interdependent.

I have had the honour of serving as Canada’s minister of finance for exactly one month today. Assuming that responsibility is a daunting challenge at any time, but perhaps especially so as Canadians grapple with a number of critical choices in the months ahead which will set our course as a nation for the next decade and beyond, as we make the transition from the issues of yesterday to the challenges of tomorrow.

One choice is already made. The Government of Canada must become much more inclusive and respectful in the way it deals with this country’s outlying regions-especially western Canada.

It may be a small point but in that spirit, I have specifically selected Regina-a location closer to Broad Street than Bay Street-to give my first formal address as finance minister and to launch our national pre-budget consultations. As far as anybody can remember, this is a first!

But the selection of Regina and Saskatchewan as a starting point in preparing the next federal budget goes deeper than the mere fact that this is my hometown. The venue speaks to the values and principles that are found here in Canada’s heartland-values and principles which have contributed much to the building of the nation and are central to our identity as Canadians.

For one thing, people in Saskatchewan fully understand that “good government” is about living within our means. It is about fiscal discipline and balanced budgets. Respect for the taxpayer’s hard-earned money. Careful spending. Prudent management. Transparency. Accountability. And value for money.

Saskatchewanians value entrepreneurship and enterprise. We have also been among the world’s most innovative social policy pioneers. And we appreciate the essential linkage between those two-our ability to sustain highly valued social programs depends upon a strong performance economically.

These are among the key principles that will guide me as finance minister, and our new government, in facing the challenges and choices of the future-especially as we assemble our first budget. So Regina is a good place to begin. My consultations will extend across the country over the next few weeks.

Prime Minister Martin has defined the ultimate goal-a decade of historic achievement for Canadians, a decade in which we:

• strengthen the social foundations of Canadian life;
• build a truly modern 21st century economy; and
• ensure Canada’s place in the world as one of relevance, influence, dignity and pride.

Sound government finances are an absolute prerequisite to everything we seek to achieve.

Balancing the federal budget in 1997-98 was a watershed event for Canada. It required a lot of discipline and sacrifice on the part of ordinary Canadians. And that must not be squandered. Fully 90 per cent of Canadians say keeping our books in the black is the Government’s Fiscal Job Number One.

And it is only common sense. If we had not taken the decisive fiscal action we did in the 1990s, Canada’s public debt today would likely exceed a trillion dollars. That’s a number so big it’s almost unfathomable!

More practically, can you imagine facing the global security turmoil of 9/11 and its ongoing aftermath, plus mad cow disease (bovine spongiform encephalopathy or BSE), severe acute respiratory syndrome (SARS), West Nile virus, floods, drought, a hurricane, unprecedented forest fires and a huge power blackout-all hitting within a few short months-if we still carried a $40-billion annual deficit? The nation would be a financial basket case!

But instead, despite all of these unexpected shocks (meaning extra costs and lower revenues), Canada is the only Group of Seven (G-7) country today with a balanced budget and a surplus, while investing in health care and learning and other priorities, and also reducing both taxes and debt.

This is all part of a practical, balanced approach to fiscal management which provides the foundation for both ongoing economic growth and secure social programs. I have been asked about our continuing commitment to lower debt and taxes. At a time of slower growth and greater uncertainty, should these commitments be maintained?

On the debt, you will remember that it peaked in 1995-96 at about 68 per cent of gross domestic product (GDP), and since then it has been on a steady downward track-downward because of solid overall GDP growth, and downward because we have paid off more than $52 billion. The debt-to-GDP ratio now stands at less than 45 per cent. Canada has gone from carrying the second worst debt ratio in the G-7 to now the second best.

Rankings like that-improvements like that-are important. They tell the world that Canada is well managed. They are one reason behind our transformation from being described, less than 10 years ago, as a candidate for membership in the Third World to being the Maple Leaf Miracle of today.

But it is more than just vanity or international one-upmanship. Our debt paydown in absolute terms has resulted in an ongoing annual saving of $3 billion on debt-service costs. That is more than all available prudence factors for this fiscal year. In other words, if we had not paid down our debt by that $52 billion since we first balanced the books, we would be back in the red once again, right now.

To save more on interest charges and for the sake of our fiscal credibility, we need to keep Canada’s public debt on that steady downward track from year to year. Our objective is for both GDP growth and an annual paydown in the order of $3 billion-pushing Canada’s debt-to-GDP ratio down to 25 per cent.

But some will say, with the pressures we face on issues like health care or National Defence, the needs of children, cities or innovation, isn’t this a time to invest in these priorities, rather than just paying down more debt? My answer goes back to the principles of a balanced approach. We need to do both.

Yes, but the critics argue, you always cry wolf. You say the situation is very tight every year, with no room to manoeuvre, and then when the books are finally closed-surprise, surprise-there are several extra billions of dollars that we didn’t expect that just automatically go against the debt.

I understand that frustration. Indeed, I have expressed it myself in my previous roles around the Cabinet table. But the response should not be an apology for prudence-an apology for consistently under-promising and over-performing. Would we want it the other way around? Let me make three quick points in this regard.

First, for more than two generations, previous finance ministers had exactly that opposite problem. They promised balanced budgets but delivered ever-rising deficits. And that’s how we got burdened with an albatross of debt-a debt which hangs like an expensive mortgage over the futures of our children and which, for their sake, we need to continue to reduce.

Second, for the six years since we first achieved a balanced budget, we have benefited from the best economic growth rates in the Western world. And with that rising economy, year after year, it was relatively “easy” to overshoot on the positive side, and sometimes by a considerable margin. But times have changed.

Economic growth rates have clearly slowed, and there is now a risk of undershooting our performance targets. To allow that to happen would be a fiscal travesty. So care is called for, bearing in mind that a revenue miscalculation of just 2 per cent can mean a shortfall of $3.5 billion-easily the difference between black ink and red.

Third, our official projections and modelling are not done just in-house by secret government analysts. We use public data and the calculations are provided by a broad range of private sector firms. The Department has tried to be open and inclusive to take the mystery out of the process, to reduce the risk of year-end surprises. And I am looking at additional ways to be more forthcoming and transparent-in how the arithmetic is done, in how frequently it is done and reported, and who gets involved. For example, I want to see more western and Atlantic firms engaged in our analysis and projections.

Now let me turn to that question about tax reductions. As you know, we are now heading into the fifth and final year of a five-year federal tax reduction program. This program, when fully completed, will have saved Canadian taxpayers just over $100 billion altogether-the biggest tax cut in Canadian history.

As you may have noticed just before Christmas, Mr. Jack Layton, the Leader of the federal New Democratic opposition, opened a debate, calling for cancellation of the business portion of federal tax reductions and for the reimposition of higher corporate tax rates, back at 28 per cent. He suggested that the new tax advantage to be gained by Canadian companies in this current year would be $4.4 billion, and it would be better, in his view, for the Government to scoop that amount and spend it.

But Mr. Layton overestimated the incremental value of the business tax reductions this year by a margin of 300 per cent. He espoused principles of arbitrary taxation which went out of fashion about the time of the Boston Tea Party. And his views stand in direct contradiction of what provinces like Saskatchewan have argued for. The Government here wants an extension of the corporate rate reductions to benefit the natural resources sector, which we are now doing.

Most importantly, our whole Five-Year Tax Reduction Plan has been and continues to be an integral element in that balanced mix of initiatives which have provided a solid Canadian rate of economic growth, the creation of some 3 million net new jobs, low and stable rates for both inflation and interest, a modest tax advantage compared to U.S. business locations, improved Canadian competitiveness and better productivity.

Specifically, for the coming fiscal year, after the corporate tax rate reductions, private sector forecasters expect the Government to gain increased corporate tax revenues-up some $1.3 billion to $24.8 billion. Lower rates. Part of a balanced approach. Better overall economic performance. And more revenue, not less.

Of greatest significance, out of the full tax cut package of $100 billion over five years, 75 per cent of the benefit has flowed to families-especially lower-income families-through such means as the Canada Child Tax Benefit. Another 15 per cent has gone to cut employment insurance premiums. And only 10 per cent is directly related to business income.

As for the future, we should strive to continue to ease the overall tax burden on Canadians-especially those in modest-income circumstances-as and when our resources, and good sense, will allow.

So what are Canada’s current economic prospects? Quite frankly, they are mixed. I mentioned earlier that our pace-setting economic growth rates between 1997 and 2002 were sharply reduced in 2003 by an unprecedented combination of shocks and disasters (SARS, BSE and the like). At the same time, the Canadian dollar has soared by more than 20 per cent against the U.S. dollar, and that has contributed to a decline in the volume and value of our exports over the past four quarters.

All in all, private sector forecasters now believe the Canadian economy grew by just 1.6 per cent in 2003. And that’s about half of the growth originally expected at the time of last year’s budget.

On the positive side, despite all the unexpected turmoil we have had to absorb, our economy looks poised to achieve stronger results in 2004:

• For one thing, robust growth in the United States should help to attract more Canadian exports into that crucial marketplace, but I should add a caveat about the impact of our dollar’s rapid appreciation and certain other problems like the ongoing border trouble for Canadian beef.

• Domestically, both consumer and business demand remain positive in Canada.

• Employment growth has picked up. Over the last four months, the Canadian economy has added another 219,000 new jobs.

• And inflation remains below the midpoint of the target range set by the Bank of Canada, meaning interest rates also remain low and stable.

On balance, private sector forecasters predict that Canada is likely to achieve economic growth close to 3 per cent this year. That will be up from 2003, but still below the 3.5 per cent originally expected for 2004. Indeed, it would take a sustained growth rate of more than 5 per cent through this year for Canada to make up all the ground lost during its recent less-than-forecast performance.

So this gets me back to my basic point about prudence, balance and the need to make intelligent choices. Our immediate challenge for 2003-04 is keeping ourselves in the black while honouring an extra undertaking to try to provide the provinces and territories with an incremental $2 billion for health care.

Our estimated surplus at the moment-our entire cushion-is no more than $2.3 billion. If this estimate holds true to the end of the fiscal year, then we will have the extra cash for health. But our remaining contingency fund would be a skinny $0.3 billion-far too close for comfort. More unpleasant surprises could still be in store, as we have recently learned yet again with mad cow disease.

So, within five days of taking office, we launched a series of measures to build a more reasonable margin for 2003-04, and to achieve a greater degree of certainty:

• detailed scrutiny of every discretionary expenditure item remaining in this fiscal year;
• a hold on major, new capital spending (not including infrastructure projects and military helicopters); and
• a cap on the overall size of the public service.

The provinces and Canadians can be assured that we are doing everything we possibly can to deliver that incremental $2 billion for health this year, short of deficit financing.

For 2004-05 and ongoing, we have two large objectives. Both are challenges. Both involve critical choices.

First, we need to find permanent savings from existing federal program expenditures of $1 billion per year. The 2003 federal budget assumed this basic internal reallocation from lower-priority to higher-priority investments. The assumption is embedded in the fiscal framework.

But the work is not yet done. We found the necessary savings for 2003-04, but not for subsequent years. My Cabinet colleague from Winnipeg, Reg Alcock, the new President of the Treasury Board, has been assigned the task of identifying where and how this permanent reallocation can be achieved, and I have no doubt he will succeed.

You may recall Mr. Alcock’s role as chair of the parliamentary committee that blew the whistle, loud and clear, on the whole Radwanski affair. He is not the sort of guy to shrink from a challenge. He will propose the choices that need to be made. On an overall federal program expenditure base of more than $130 billion annually, he is determined to find that necessary $1 billion for reallocation.

But more than that, Reg and I, the Prime Minister and our new government want to build a whole new “culture” in relation to good governance and responsible government spending-a culture based upon respect for taxpayers, an evergreen assessment of Canadians’ changing priorities, program performance measurements, and the direction of precious resources to things that matter most in Canadian life.

The Prime Minister has created an Expenditure Review Committee of Cabinet to lead a rigorous government-wide examination of every form of spending and to report on potential new directions by this coming fall.

With respect to every federal program, the committee will ask a number of tough questions:

• Is the program still in the public interest?
• Is the Government’s role legitimate and necessary?
• Is it within proper federal jurisdiction?
• Is there an appropriate private sector role?
• Are Canadians getting true value for their tax dollars?
• Can program efficiency be improved?
• At the bottom line, is it all affordable?

In the end, we need to keep the size of government growth within the growth of the economy overall. We need to achieve the best marginal use of every tax dollar. We need to provide honest, ethical, efficient management. We need strong internal comptrollership and effective, timely audits. And we need conscientious political oversight and accountability.

All to what end? To fulfill public expectations-to repay the public’s trust by delivering a fresh, new policy agenda that is relevant and contemporary, ambitious and transforming. We need to make the right choices up front, to empower ourselves with the flexibility and the resources to even contemplate such a new agenda, and then the right choices for what gets onto that agenda-the content.

My pre-budget consultations are about both. I have already talked about the empowerment part-finding the financial space for new ideas. As for content, here are some possible questions.

How can we reduce waiting lists for health care and make quality care more readily accessible? Is it just a matter of money? How can the system be reformed to ensure Canadians get the outcomes they want?

Where does education fit in comparison to health care? Is Canada doing enough to foster lifelong learning and equitable access to all forms of post-secondary education?

Are Canadians well enough positioned as innovators in the knowledge-based, technology-driven and skills-intensive “new economy” of the 21st century? What are the next steps toward greater global competitiveness and world-class productivity?

How can we strengthen our local communities, both large and small? How do we attract more investment and more skilled immigrants? How do we more thoroughly engage Canada’s large and growing population of Aboriginal youth? Are we prepared for the aging and retirement of the big baby-boomer generation by 2012?

And what about Canada’s place in the world? Foreign policy? Defence policy? International trade? Our relations with the United States? Border security and economic security in a North American context, and without diminishing Canadian sovereignty? What does it take and what does it cost?

Such questions and issues don’t lend themselves to simple answers. They demand careful thought, priority setting and choices. But I trust the wit and wisdom of Canadians to provide astute guidance. That’s what these consultations are all about.

With a new prime minister at the head of a new team of ministers at the beginning of a new century, I believe we, together, can confront our immediate fiscal challenges with confidence-making the successful transition from past to future.

And with that success under our belts, Canadians can indeed be empowered for an upcoming decade of new achievement-greater economic growth than ever before, stronger social foundations based upon enduring values, and a relevant, respected, compassionate performance in global affairs.

Let’s choose, together, to make it so.

Thank you.