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Ottawa, September 9, 2004
2004-048

Speech by the Honourable Ralph Goodale, Minister of Finance, at a Newsmaker Breakfast hosted by the National Press Club

Ottawa, Ontario

Check Against Delivery

With the federal election behind us, a First Ministers’ Meeting just around the corner, and a new session of Parliament about to begin, I’d like to talk today about implementing the agenda in our election platform, and how we plan to pay for it.

To be sure, it’s an ambitious agenda-reflecting the aspirations of an ambitious country. And, as promised, we will implement it just as quickly as the Government’s financial resources allow. But we should never allow ourselves to fall back into deficit.

That “bottom line” is firm because the policy of balanced budgets is right. It has the unmistakable support of the vast majority of Canadians. And, I note with some satisfaction, no political party in the recent election advocated a return to deficit financing. All supported balancing the books!

After nearly three decades of continuous red ink prior to 1997, Canadians are reaping the tangible benefits of sustained fiscal responsibility-over a period of some seven years now. And we cannot-we will not-squander our hard-won gains.

The previous “vicious circle” of annual deficits, rising debt, higher interest rates, high taxes and slow-or no-economic growth has been replaced by a “virtuous circle” of seven consecutive surpluses, a declining debt burden, rising consumer and business confidence, the largest tax reductions in our history, low interest rates and consistently strong economic performance, with a world-leading rate of job creation.

A robust fiscal position has provided the Government with the wherewithal to deal with unpredictable but inevitable surprises (sudden security threats, health emergencies like SARS and the impact of BSE, for example), while also investing progressively in the key priorities of Canadians such as health care, children, education and innovation.

And here’s a telling point-since moving into surplus, Canada has ranked first among Group of Seven (G-7) countries for growth in living standards. In fact, the average standard of living of Canadians has increased more in the past seven years than it did over the previous seventeen.

Sustained balanced budgets and putting the debt on a steady downward track have also restored Canada’s Triple-A credit rating in financial markets. Since this effectively sets the standard for the whole country, everyone benefits-from provinces and municipalities to individuals wanting to buy a home, start a business or run a farm.

Our virtuous circle is also a mark of distinction for Canada among all our partners in the G-7. Every one of them is currently operating in the red. Canada (and Canada alone) has been able to balance its books year after year-global turmoil and unprecedented domestic shocks notwithstanding.

But a virtuous circle is far from preordained. There is nothing automatic about it. And if we are to continue to reap its benefits, we must continue to respect its principles-living within our means, staying consistently in the black, behaving prudently.

With that as context, our agenda begins with health care. Medicare holds a special place in the hearts and minds of Canadians. More than just another social program, it is a statement of our citizenship, the eloquent commitment of a caring society.

Our publicly funded health care system is also a competitive advantage in a tough global economy and a key driver of research and innovation.

So it is, quite rightly, the top priority of Canadians and the top priority of their governments. To that end, the Prime Minister will sit down next week with his provincial and territorial counterparts to work on a plan for the long-term sustainability of medicare.

To be sure, new money will be an important part of the discussion.

With health spending at 10 per cent of gross domestic product (GDP), Canada ranks as the fourth biggest spender among the 30 countries in the Organisation for Economic Co-operation and Development. Altogether, the combined total of all public and private spending on health care in 2003 amounted to more than $121 billion. That works out to health care costs of about $15,000 on average per year on behalf of the typical Canadian family of four.

Around the world, virtually every other industrialized nation is also facing huge health care pressures. This is not just a Canadian problem. But that does not make it any less important-or any less urgent-for Canada to reform and renew medicare, not for just a year or two, but for a generation.

That is why the Government of Canada is already reinvesting more than $65 billion in incremental federal funding through the last two federal-provincial health accords (in 2000 and 2003).

Indeed, once we won the critical fight to end deficit financing and balance the nation’s books, federal health funding has steadily increased-by 2001, reaching the levels it was at before the deficit fight began.

By next year, our funding will be more than 40 per cent higher than its previous peak in 1993-94, and it will continue to rise year after year. In absolute dollar terms, that translates into an additional $7.5 billion in cash for the provinces that year alone.

On top of all that, the landmark Romanow Commission made a number of recommendations about how to reform medicare and the funding required to pay for it. The Government of Canada, as promised, will meet the financial benchmarks set out by Mr. Romanow in his 2002 report.

Specifically, we will fill the so-called “Romanow gap,” which he described as having three components:

First, the Government of Canada should invest $15 billion in new funding by 2005-06 to support specific health priorities. This we have partially done, and we will finish it.

Second, we must get the annual “base” for ongoing federal cash contributions up to the appropriate level, which Mr. Romanow calculated for 2005-06. This we will do.

And third, we need to create an escalator to come into effect at the appropriate time to ensure growing and predictable funding for the provinces and territories in the future. This we will also do.

Now why is this important? It’s important because this funding will be aimed at improving access to core services by ensuring an adequate supply of health professionals with the facilities and equipment they need. And all of this leads directly to shorter waiting times. That is the priority of Canadians and that is the priority of our government.

At the same time, we know that funding is only part of the equation. Simply throwing new money at old problems will not resolve our medicare challenges.

To be sustainable in the long run, our health care system requires important, thoughtful reform. We are anxious to pursue that reform with our provincial and territorial partners, and with health care providers, to achieve shorter waiting times, to improve access to primary care, to strengthen home care services, to ensure a drug strategy that is responsive to the needs of Canadians, to formalize a better Canada Health Act dispute resolution procedure, and to promote transparency and accountability to the public.

So, how expensive is all this health care investment? In our platform, we committed $9 billion over five years in new federal money to respond to Mr. Romanow and to get to work right away on home care and waiting times.

At the same time, we could not put an explicit price tag on two other things-an annual federal health funding escalator and a reasonable approach to pharmaceuticals, because we knew a lot more discussion was necessary.

Furthermore, provinces have asked for higher equalization funding as part of the health care renewal discussions. Both health funding and equalization are important. Both merit consideration at the upcoming First Ministers’ Meeting.

What we want to achieve is an end to yearly intergovernmental feuding over funding and a durable long-term agreement to deliver better health care results.

All in all, the health item on our agenda is big. And it is number one.

But addressing health care above other priorities does not mean addressing health care instead of all other priorities. Canadians want to see real progress on many other important fronts too.

Accordingly, in addition to health, we pledged to increase funding over the next five years for early childhood development, learning and care by $5 billion; to provide up to $6.5 billion for cities and communities; to boost support for low-income seniors, the disabled and their caregivers by $2.5 billion; to invest $2.3 billion in new economic growth and jobs; and to increase spending on defence and other peace and nation-building initiatives by up to $3 billion. All over five years.

Please note-in the spirit of constructive federalism-many of these initiatives will involve the transfer of significant new resources to the provinces and territories. Indeed, more than half of our platform commitments mean more money for other levels of government.

All told, we tallied the fully costed measures in our platform at between $26.3 billion and $28.3 billion over five years-at a minimum. I say “minimum” because (as with health), where we could not nail down every detail and its price, we left some margin for manoeuvre.

For meeting the serious requirements of Aboriginal Canadians. For easing the lingering impacts of BSE on our livestock sector. And for other items, including some inevitable surprises, because there always are. These will all cost yet-to-be-determined amounts of money-and not trivial amounts.

In addition, there will be pressures for targeted tax measures aimed at improving our social and economic performance, and we will have to consider these too.

To make all of this balance, a finance minister must always respect that most basic of accounting relationships-debits and credits. Measuring what’s going out against what’s coming in. It has to add up!

So what do we know about our revenues? What are the projected resources the Government can expect over the coming five years?

An interesting feature of the financial debate during the recent election was the overwhelming agreement-virtually unanimous-among all the political parties (government and opposition), all the well-known private sector modellers and forecasters, all the economists and commentators-almost all agreed upon the likely size of our revenues, the money coming in! There was no serious dispute on revenues!

The disagreement was entirely on the other side of the equation-the expenditures going out, what they should be, and the rate at which they would grow over time.

Forecasting is certainly not an exact science. Sometimes projections are spot on, but sometimes they can be way off. For example, a small error of just 2 per cent in estimating revenues-one way or the other-could either eliminate or double our annual Contingency Reserve.

So we have to be careful about planning to spend money we only hope to have as opposed to what we know we will have. There are many countries around the world in deficit today because they forgot that basic distinction.

As you know, in October or November of each year, we prepare our updated economic and fiscal forecast for the coming five-year period, based upon the average of the independent analyses done by private sector economists.

While it is still very early in the process this year, I can tell you that we are more optimistic today about our future prospects than at the time of the budget in March or the election in June, given recent economic developments and monthly fiscal results published so far this year.

For example, look at the most recent information on the National Accounts-that is the overall value of the Canadian economy-released by Statistics Canada on August 31st, just last week.

It shows Canada’s annualized growth rate for the first quarter of 2004 has been revised upward-from 2.4 to 3 per cent.

For the second quarter, the figures show that the economy grew at an annual rate of 4.3 per cent-much faster than private sector economists had predicted in the spring, and well above the 2.8-per-cent growth rate in the U.S. economy.

And equally important, nominal GDP growth, which determines the tax base, was over 10 per cent in the second quarter of this year, reflecting higher commodity prices, higher profits and higher personal incomes.

We’ve also received positive reports recently on trade and consumer confidence.

What all of this means is that our national economy seems poised to do better than expected in 2004, and this will mean greater revenues-and more fiscal room for our government and indeed for provincial governments also to work with this year and going forward.

Furthermore, these latest data also suggest that the final results for last year, 2003-04, should show higher than expected revenues, and hence a better fiscal outcome, due to significantly higher than expected levels of nominal income in early 2004.

The Canadian economy has shown surprising resiliency despite more than 20-per-cent appreciation in the dollar, the impacts of SARS and BSE, a big power blackout, hurricanes and forest fires-all the factors that had private sector economists concerned about “downside risks” to our economic performance.

The final figures for the last fiscal year will become available, as usual, around the beginning of October.

Of course, there are always uncertainties and unknowns, including geopolitical tensions around the globe and the impact of higher oil prices over a protracted period of time.

Such uncertainties raise two sets of issues, to my mind.

First, good management requires that we equip ourselves with the best possible projections. To that end, I am launching a comprehensive review of how we do our economic and fiscal forecasting. Such a review was last done in 1994, and much has changed since then-including the shift to accrual accounting by the Government of Canada.

The time has come to test our assumptions and make sure that we are still using best practices-benchmarking ourselves against the best in the world. It is my hope that such a review could be completed in time for the next federal budget.

The second issue is the importance of a sensible, sustained debt repayment plan. There are many good reasons to pay down debt.

Simple fairness demands that future generations not be saddled with a huge debt they did not incur. Right now, even after the progress we’ve made in eliminating the deficit and reducing debt, annual servicing costs are still the largest single item of expense of the Government of Canada-close to what we spend on seniors benefits and employment insurance combined!

Unless we continue to reduce our debt burden, the inheritance we leave our children and grandchildren will be a heavy mortgage on their futures.

We also have to begin to prepare now for an aging population. In Canada, the real force of this demographic trend will hit when the baby boomers begin to retire around 2010-a little over six years from now.

As the largest generation ever leaves the workforce, a much smaller one will be left to take its place. This will have at least two profound effects on our society-first, there will be greater demand for the social programs we value, particularly health care; and second, there will be fewer people working to support these programs.

The less old debt we are still carrying in 2010 and thereafter, the more flexibility we’ll have to meet emerging demographic pressures.

That is why we are committed to our $3-billion Contingency Reserve going to debt reduction if it is not needed to deal with true contingencies. And that is also why our last budget announced a new goal of reducing Canada’s debt-to-GDP ratio-the size of our debt relative to the size of our economy-from its current level of about 40 per cent to 25 per cent within 10 years.

Achieving a 25-per-cent debt-to-GDP ratio will mean that less government revenue will have to go to pay interest charges, and billions more will be available to help make up for fewer Canadians in the workplace and to help pay for the increased services our aging population will need.

So a steady, practical, ongoing debt reduction plan is critical-and that’s exactly what we have put in place.

This is all part and parcel of solid, responsible money management. And it’s important-just as our ongoing expenditure review process is important-because even with better recent economic results and better prospects for the immediate future, the Government of Canada is still facing financial demands, pressures and obligations that substantially exceed our fiscal capacity.

In addition to the large costs associated with health care and with equalization, we also share the burden with the provinces for many other issues of common concern-post-secondary education, social services and the well-being of children, infrastructure and communities, the environment, agriculture, immigration, culture and heritage, regional economic development, housing and homelessness, innovation and research. There are growing financial expectations in each of these important areas of joint engagement.

Plus, we carry federally the direct responsibility for the public pensions of an increasingly aging society, employment insurance, international diplomacy, foreign aid and world trade, national defence and national security, and the lion’s share of the funding required to deal with national emergencies such as SARS or BSE or natural disasters. Again, in all these fields, we face significant and growing demands on our federal resources.

And of course, there is still that federal debt of more than $500 billion-which, incidentally, is nearly double the size of all provincial and territorial debt combined. Just keeping it current consumes about 20 cents out of every dollar of federal revenue.

No one should doubt the serious responsibilities carried by provincial governments in this country. But at the same time, in fairness, it also needs to be noted:

• that both orders of government have access to all of the same major tax bases;

• that some provincial revenue sources (like royalties and lottery proceeds) are not available to the federal government;

• that federal fiscal responsibility, balanced budgets and debt reduction save interest costs for all Canadians (including provincial governments);

• that recent improvements in national economic performance will boost provincial revenues as well as federal revenues;

• that the Government of Canada is already committed to substantial increases in its annual multi-billion-dollar transfer to assist provinces and territories-most notably for health care, equalization, child care and communities; and

• that just like the provinces the Government of Canada too has serious responsibilities to discharge.

Canadians expect both orders of government to manage their tax dollars prudently and productively, to stay out of deficit and to make smart choices among important competing priorities. At the end of the day, Canadians expect our ambitious agenda to be matched by a solidly balanced budget.

I am a total optimist about Canada’s economic and social prospects. I believe that with our platform agenda, we have before us a period of potential prosperity and progress unmatched since the Second World War.

But an absolute precondition-and the essential foundation for any future success-must be our faithful adherence to fiscal discipline, strong management and prudent behaviour.

As we savour our accomplishments we need to remind ourselves of the crucial principles that got us here!