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September 21, 2004

Speech by the Honourable Ralph Goodale, Minister of Finance, at a meeting of the Calgary Chamber of Commerce

Calgary, Alberta

Check Against Delivery

Good afternoon everyone. Greetings and good wishes from the Government of Canada. And thank you for providing an opportunity for me to report on Canada’s economy as our new government heads toward its first session in a new (and very different) Parliament.

This will be a challenging Parliament. Minorities impose greater obligations upon all members, on all sides of the House, to be alert and conscientiously engaged on all of the issues all of the time. Nothing can be taken for granted.

But the Government and the opposition share a common obligation to make this Parliament work. Canadians are not interested in partisan game-playing. They want to see a productive Parliament—generating measurable results.

From the Government’s perspective, we begin with our election platform.

It was endorsed by Canadians in the vote in June, and it now becomes our working agenda. An ambitious agenda for an ambitious country! And as promised, we plan to implement it just as quickly as the Government’s financial resources will permit.

Our bottom line is clear. We must not allow this country to fall back into deficit. Voters are virtually unanimous on this point. And I note that every political party during the election made a point of supporting the fundamental principle of balancing the books.

Why is this consensus so unmistakable? Because, after nearly three decades of continuous red ink prior to 1997, Canadians have now—for seven consecutive years—seen the tangible benefits of sustained fiscal responsibility. And it’s a heck of a lot better than the alternative!

Until the mid-1990s, the Canadian economy was caught in a chronic "vicious circle" of annual deficits, rising debt, high interest rates and high taxes, slow (or no) growth and lost jobs.

Through disciplined effort, that has now been replaced by a "virtuous circle" of seven consecutive surpluses, declining debt, rising consumer and business confidence, the biggest tax reductions in history, low interest rates and consistently strong economic performance, with a world-leading rate of job creation.

Last week, we all saw a prime demonstration of what a robust fiscal position means. It means having the freedom and the flexibility to make a major investment in the number one priority of most Canadians—our health care system.

If we had not won the battle to balance the federal books back in 1997—and if we had not kept them balanced every year since—the Government of Canada could not have committed at the First Ministers’ Meeting to $41 billion in new health funding over the coming decade.

Our fiscal strength gave us the capacity to meet and surpass all of the financial benchmarks in the Romanow Report and all of the financial commitments on health in our platform.

Instead of never-ending feuds over health funding, we now have a long-term deal which every province and every territory supports, which they have all signed, which includes the best terms ever on transparency and accountability, and which allows everyone to focus on the real substance of shorter waiting times, more health care professionals and better equipment, improved primary care, home care and drug coverage, better services in the North and for Aboriginals, more health innovation, and improved public health and wellness.

And beyond health, fiscal responsibility (and the virtuous circle of economic results that flows from it) have also allowed us the scope to invest since 1997 in other key priorities too—the well-being of families and children, skills and learning, science and technology, infrastructure and housing, the environment, defence and international affairs.

We have also had the flexibility, and the wherewithal, to deal with those unexpected but inevitable "surprises" that crop up in virtually every fiscal year—like multi-billion-dollar court rulings, sudden security threats following the 9/11 tragedy, last year’s outbreak of severe acute respiratory syndrome (SARS), and the painful lingering impact of bovine spongiform encephalopathy (BSE).

With respect to BSE, for example, the federal government’s cost to date is just over $1.8 billion—an expense item that was totally unheard of before May of last year. We could cope with this nasty surprise (and others) because of careful, prudent budgeting.

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

Our virtuous circle is also a mark of distinction for Canada internationally—among our partners in the G-7 group of countries. 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.

Furthermore, since moving into surplus, Canada has ranked first in the G-7 for growth in living standards. In fact, the average standard of living of Canadians has increased more in the past seven years than in the previous seventeen.

But a virtuous circle of economic results is far from preordained. There is nothing "automatic" about it. If we want to continue to reap its benefits, we must continue to adhere to its principles—living within our means, staying consistently in the black, planning carefully and behaving prudently.

The pressures in front of us are enormous.

For example, First Ministers will meet again on October 26th to settle some big issues around equalization and Territorial Formula Financing. The dollar figure has already been set through a federal proposal that we tabled last week. It amounts to some $33 billion in incremental payments to the provinces and territories over the next 10 years.

Plus, from the election, the Government of Canada has commitments to honour with respect to cities and communities; early childhood development, learning and care; seniors, the disabled and their caregivers; Aboriginal Canadians; the innovation agenda; defence and foreign affairs.

There will also be worthy arguments advanced for further targeted tax measures to improve Canada’s social and economic performance—reducing the burden on middle- and lower-income Canadians, for example, and increasing Canadian competitiveness.

And again, there will be those unforeseen surprises to cope with. There always are.

As Finance Minister, I have to make all this fit into my fiscal framework. And to do so, I have to respect the most basic of accounting relationships—debits and credits. Measuring what’s going out against what’s coming in. It all has to add up!

My normal planning cycle for the next federal budget, at the usual time in February or March, has just begun. It starts every year about this time with the August 31st release of Statistics Canada’s reports on second-quarter economic results.

According to established practice, all those figures are now being assessed by some 20 independent, private sector economists whose advice we solicit. The setting of our fiscal framework is not, therefore, some secretive in-house exercise. We do not just pick our favourite economist to tell us what we want to hear. We engage a broad cross-section of the best available input.

In early October, the official audited financial report for the Government of Canada for the last fiscal year (2003–04) will be released.

By mid-October, based on the final figures for last year and the most current information for this year, four independent forecasting firms in the private sector will provide us with their detailed fiscal projections for the next five years.

It is the average of all this external analysis that establishes the new fiscal framework to be published in our fall fiscal update in November.

While much work remains to be done, some very encouraging signs have emerged since the last federal budget in March and the election campaign in June.

In the August 31st data from Statistics Canada, for example:

• Canada’s annualized economic growth rate for the first quarter of 2004 was revised upward, from 2.4 per cent to 3 per cent.

• For the second quarter, our economy grew at an annualized rate of 4.3 per cent—much faster than the private sector had predicted in the spring and well above the 2.8 per cent growth rate in the U.S.

• Export growth was very strong, propelling Canada’s current account surplus to $42 billion in the second quarter.

• Corporate profits, wages and salaries are all up significantly.

• Overall, nominal gross domestic product (GDP) growth, which effectively determines the tax base, was over 10 per cent in the second quarter of this year.

The Canadian economy has thus shown remarkable resiliency despite more than 20 per cent appreciation in the dollar, the impact of both SARS and BSE, a big power blackout in Ontario, a hurricane in Atlantic Canada and massive forest fires in B.C. All of these factors were flagged just a few months ago by private sector economists as significant downside risks.

But all these worries notwithstanding, the data now suggest that our national economy is poised to do better than expected in 2004. And that will mean greater-than-expected revenues this calendar year for both the federal government and the provinces.

Furthermore, as I noted earlier this month, we also expect the final results for the last fiscal year, 2003–04, to show higher-than-expected revenues, and hence a better fiscal outcome, due at least in part to significantly higher-than-expected nominal income in early 2004.

Two key points are worth noting about these developments.

First, they are genuinely unexpected, not only by the Government but also by all the other political parties, all the well-known private sector modellers and forecasters, all the economists and commentators. We were all agreed in the spring about the likely size of the Government’s revenues.

For example, in the official revenue projections that were published by us and by the Conservative opposition in June:

• For 2004–05, we said $187.3 billion. They said $187.2 billion.

• For 2005–06, we said $196 billion. They said $195.8 billion.

• For 2006–07, we said $205 billion. They said $204.9 billion.

And so on and so on. There were no appreciable differences. So better revenues will be a surprise on all sides.

But secondly, and even more importantly, these better results (for last year and this year and to some extent going forward) are a pleasant and positive turn of events. I look forward to their formal confirmation in October and November, because I will not risk the nation’s balanced budget on the basis of revenues I only hope to have (as opposed to what I know we will have).

There are too many countries around the world in deficit today because they forgot that basic distinction.

This all underscores the importance and common sense in our prudent approach to fiscal planning—especially the practice of setting up reserves to protect against unpredictable contingencies, and then adding an extra margin of prudence to make certain we will always stay in the black.

To that same end, to bolster the quality of our available data, I have launched a comprehensive review of how we do our economic and fiscal forecasting. Ten years on from the last such review, I want to test our assumptions and make sure we are continuing to use best practices, as benchmarked against the very best in the world.

I also think it’s important to press forward with our government-wide expenditure review process under the leadership of Minister John McCallum.

Expenditure review is first and foremost an attribute of good governance. Testing what we do and how we do it for relevance and excellence. Shifting expenditures from lower to higher priorities—building fiscal room from within, to tackle new and more crucial issues. Over five years, we expect to reallocate $12 billion in this manner.

Hand-in-hand with expenditure review goes fostering and rewarding strong and prudent government management.

It’s probably fair to say that for most of the past 10 or 15 years, the sharpest focus within government has been on policy development—on those who generate bright new ideas. But basic good management may not have been given the attention—or the pizzazz—it deserves.

Sadly, the very best of ideas will founder in the absence of strong management and solid on-the-ground delivery, demonstrating efficiency, transparency, accountability and value-for-money.

So we have re-established the Office of Comptroller General, and we’ve recruited a highly qualified professional to fill that role. The corresponding expenditure oversight officers are being established in all departments. Internal audit functions are being enhanced government-wide. Real-time information systems are being put in place, including automatic disclosure of government contracting. And the governance of Crown corporations is being strengthened. All to bolster the quality of our management.

Finally, I want to stress the importance of a sensible, sustained public debt repayment plan. As with balanced budgets, debt reduction is a fiscal principle that a large majority of Canadians just instinctively believe in—for many good reasons.

They know that every dollar we can save from debt-servicing charges is a dollar that can go instead into health care or post-secondary education or tax reductions. To date, by paying down some $52 billion in debt since 1997, we have freed up at least $3 billion every year for better and higher purposes than just debt charges.

Secondly, simple fairness demands that future generations not be saddled with a huge debt they did not incur. Right now, even after all the progress we have made in eliminating the deficit and reducing federal debt, annual servicing costs are still the biggest single expense item for the Government of Canada: about $35 billion every year—20 cents out of every federal dollar.

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

Thirdly, a huge demographic change lies just around the corner, as the baby boomers begin to retire in about 2010—just six years from now.

As the largest generation in history 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.

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

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

Steady, practical, ongoing debt reduction.

A solid Contingency Reserve and some reasonable extra prudence built into our planning process.

A sustainable, affordable response to pressures to ease the tax burden.

Major health and equalization transfers to help provinces and territories.

Ongoing shared responsibilities for things like post-secondary education, social services, agriculture, immigration, the environment, regional development, science and innovation.

New commitments to early childhood development, cities and communities, seniors, the disabled, caregivers, Aboriginals and the strengthening of Canada’s global reputation.

Discharging our federal obligations with respect to pensions, employment insurance, defence, diplomacy, foreign aid, world trade and national security.

And making sure that no sudden and unforeseeable surprise along the way can push us off our fiscal track and back into red ink once again.

These are all among the pieces that I have to fit into Canada’s fiscal framework. And I know the challenge is not easy.

It’s a good thing that we left ourselves some extra fiscal room in our election platform.

It’s a good thing we’re pursuing ongoing expenditure review.

It’s a good thing the economy is performing better than expected with higher than projected revenues, both federally and provincially.

It’s a good thing our forecasting never errs on the deficit side of the equation.

This country has made huge progress since 1997. We absolutely must not fall back. As we savour Canada’s fiscal and economic accomplishments and face tomorrow’s demands and expectations, we need to remind ourselves of the crucial principles that got us to where we are today. And we have to stick to them!