Building Economic & Financial Strength

April-21-05

Building Economic and Fiscal Strength
Remarks by John McKay, MP
Parliamentary Secretary to the Minister of Finance to the
Financial Management Institute

Ottawa , April 21, 2005

Thank you for that kind introduction.  And let me first respond by extending greetings and good wishes to everyone here on behalf of the Government of Canada, and especially my colleague, Ralph Goodale, the Minister of Finance.

I have been asked to speak with you about Canada ’s current economic and fiscal health and, more importantly, how our recent federal budget acts to enhance our strength in these vital areas.

For public sector financial professionals, I don’t believe I have to spell out the difficulties that governments -- at all levels -- face in putting together budgets at a time when people are demanding more and better levels of service for their hard-earned tax dollars.

But the February budget, even more than usual, presented special challenges at almost every level.  Our government had to contend with pressures on the right, pressures on the left, and high expectations all around.  This is a fact that was made eminently clear to me when I took part in our usual pre-budget roundtable meetings with Canadians across the country.

Some participants made the case for tax relief:  Others for greater debt reduction.  And there were passionate advocates for huge investments in everything from the environment to our armed forces, infrastructure in our cities, child care, innovation, seniors and caregivers, the disabled … and the list goes on and on.

Reconciling competing demands like these is never easy, especially in a minority government situation.  If any of you think that being the Finance Minister in post-deficit Canada means never having to say “no,” my colleague, Ralph Goodale, would gladly disabuse you of that notion! 

Clearly we cannot address all of the challenges facing our country in a single year.  Nonetheless, Canadians have a right to expect that their governments will take major steps forward to address these challenges as circumstances and resources permit.

Our 2005 federal budget did exactly that.  It provided increased support in areas identified by Canadians as their major priorities – areas such as health care, childcare, and the environment.

We also provided tax relief for income earners at all levels, while continuing to set aside funds to deal with unforeseen economic and fiscal shocks that could push us back into deficit.

The theme of our budget was “delivering on commitments” -- and I have no hesitation in saying that it lived up to its billing.

To give you a clear picture of what was involved in developing the main elements of Budget 2005, I’d like to begin by explaining how we see our current economic and fiscal situation.

The fact is, Canada has enjoyed a remarkable fiscal and economic turnaround in recent years.

Slide 2 – Canada ’s economic record

Since balancing the federal budget in 1997, we have led the Group of Seven industrial nations with the best job creation record – 255,000 full-time jobs in 2004 alone -- and the fastest growth in per-capita living standards.

Slide 3 – Canada ’s economic outlook

However, in the second half of last year, our economy showed the effects of the rapid increase in the value of our dollar – up more than 25 per cent against the U.S. dollar since 2002.

Looking ahead, based on the average of forecasts by economists from the private sector, the 2005 Budget anticipated real growth in 2005 of 2.9 per cent – rising to 3.1 per cent in 2006.

And more recently, the private-sector forecasters have further lowered their expectations a bit – to 2.6 per cent for this year, and 3.0 per cent next year – reflecting national account statistics on the economy released after the budget was tabled.

However, I should note that, while the economists saw lower real GDP, after taking inflation into account, their view on nominal GDP (the basis for our revenue outlook) was basically unchanged.  And it’s also interesting that the range of forecasts – low to high – was much wider than usual.

This underscores the fact that forecasts are subject to risks, including the evolving impact of the rise in our dollar, and factors such as oil prices.

But the principal risk lies with the ‘twin’ U.S. budget and current account deficits.  These could cause higher interest rates, slower U.S. growth, and further depreciation of the American dollar – all leading to slower Canadian growth.

Slide 4 – sound financial management

It is the possibility of future shocks that motivates our permanent commitment to sound financial management – with balanced budgets or better, based on prudent fiscal planning.

Slide 5 – budgetary balance

Even after dramatic investments in funding for provinces and territories, and further new measures, Budget 2005 projects a surplus for the current fiscal year – which ended March 31 st  -- for the eighth year in a row.  That’s the longest string of surpluses since Confederation (in 1867)!

And the Budget projects continuing balanced budgets or better over the following five-year period.  This five-year fiscal projection in Budget 2005 reflects the fact that the vast majority of commitments it makes extend beyond the traditional two-year planning horizon. 

Slide 6 – International financial balances

This has further positioned Canada as a world leader – the only G-7 country to post total-government surpluses in each of the past three years.  And the only nation expected to be in surplus again in 2005 and in 2006.

Slide 7 – Debt-to-GDP ratio

Our strong performance has fuelled a $60-billion reduction in Canada’s public debt – bringing it down to 38 per cent as a share of our economy, and saving more than $3 billion a year, every year, in debt servicing costs.

This turnaround has also helped restore the government’s Triple-A credit rating, producing lower interest rates for provinces and cities, for businesses, and for families.

And the combination of lower debt and lower interest rates means that the share of government revenues going to pay debt-interest has been cut from almost 38 cents of each revenue dollar in the mid-1990s to just 19 cents last year.

To sustain these benefits – and position Canada to meet future pressures, such as an aging population – the government aims to bring the debt down to 25 per cent of GDP within 10 years.  

Slide 8 – Contingency Reserve

Balancing budgets and bringing down debt do not happen by accident.  They require prudent fiscal planning.

For this reason, Budget 2005 again sets aside $3 billion in an annual Contingency Reserve.  If not needed to keep our books in balance, these funds go directly to help reduce the debt.

We have also continued to build economic prudence into our budget plan – starting at $1 billion.  If not needed, this will be used to invest in the priorities of Canadians.


Slide 9 – Expenditure Review

Fiscal discipline also demands a rigorous approach to delivering value for the taxpayer’s dollar.  That is why the government established an Expenditure Review Committee of Cabinet, to scrutinize every line of government spending.

This committee identified nearly $11 billion in cumulative savings over the next five years.  Almost 90 per cent come from greater efficiency in procurement, property management, service delivery and program administration.

Slide 10 – Productive economy

Canada ’s current economic progress shows we are on the right path.  But increased prosperity and growth needs constant improvements in productivity and our ability to compete in a fast-changing global environment.

In particular, we face the challenge of the soon-to-retire Baby Boom generation, followed by a much smaller generation of workers.  This means we will no longer be able to rely on automatic labour force growth to boost the economy.

So, to mitigate the impact of demographic change, we need to focus on a workforce that’s as inclusive as possible.  And we need to encourage that workforce to be as skilled and productive as possible to beat its international competition.

Budget 2005 takes action to meet such challenges, including further action to reduce taxes.

Slide 11 – Child-care initiative

This action starts with the understanding that quality childcare and early learning is much more than good social policy.  The demographic challenge makes it an essential investment for better productivity and economic success in the years ahead.

That is why Budget 2005 provides $5 billion over five years to develop a shared early learning and child care initiative, in collaboration with the provinces and territories.

Slide 12 – Workplace initiatives

Next, to boost workforce participation, the budget provides $398 million over five years to make services more responsive to the needs of immigrants, and enhance settlement and integration programs to help them become fully contributing members of the workforce more quickly.

And it provides $125 million over the next three years to move forward on a Workplace Skills Strategy to help workers keep pace with changing job requirements.

Slide 13 – Investing in R&D

Changing job needs also highlight the fact that new ideas and technology are the foundations of 21st Century economic growth.  So this Budget provided over $1 billion over five years for R&D and innovation – helping maintain Canada as the leader among all –7 countries in publicly funded research.

Slide 14 – Financial sector regulation

The Budget also re-affirmed the important role the financial sector plays in economic capability and growth, proposing measures to streamline the regulatory environment facing business.

For example, the government will continue to work with the provinces and private sector to develop a new, less fragmented system of securities regulation.

We will also reduce areas of overlap between OSFI (Office of the Superintendent of Financial Institutions) and the CDIC (Canada Deposit Insurance Corporation).  And the Budget also launched a review of all current financial sector regulation, to ensure it meets the needs of business and consumers now, and in the future.

Slide 15 – Competitive tax system

A competitive tax system contributes to improved personal prosperity and is an incentive for enhanced productivity.  That is why the federal government has cut taxes every year since the budget was first balanced in 1997 – including the record five-year, $100-billion tax cut plan introduced in 2000.

The budget builds on these reductions by committing to increase the basic personal amount of income that all Canadians can earn tax-free to $10,000 by 2009.  This will benefit all taxpayers, and remove 860,000 low-income earners from the tax rolls (including almost a quarter of a million seniors).

Slide 16 – Retirement savings

Next, to help Canadians save for retirement, Budget 2005 boosts the overall contribution limit for Registered Retirement Savings Plans (RRSPs) and Registered Pension Plans (RPPs) to $22,000 by 2010.  This will especially benefit entrepreneurs, the self-employed, and small business owners.

As well, to expand the investment opportunities for Canadians, the government will remove the 30-per-cent limit on foreign property – such as shares – for RRSPs and pension plans.

Slide 17 – Corporate taxation

Budget 2005 also takes action to maintain a competitive corporate tax system to stimulate growth and jobs.

It proposes to eliminate the corporate surtax – originally a deficit-fighting measure -- in 2008.  This benefits all businesses – especially small- and medium-sized firms.

And by 2010, the government proposes to reduce the general corporate income tax rate by 2 points – to 19 per cent.

These measures will maintain a tax-rate advantage for Canadian business – 4.5 percentage points in the case of manufacturing -- even in the face of corporate tax reductions in the U.S.

Slide 18 – Capital cost allowance

Also, Budget 2005 introduced further adjustments to the capital cost allowance – the tax write-off rate – for certain assets.  This appropriate depreciation will encourage companies to invest more, helping boost our productivity and competitiveness.

Slide 19 – Sustainable environment

Next, the ‘meeting point’ of a prosperous economy and society is a safe and healthy environment.  Promoting economic policy should go hand-in-hand with fostering a more sustainable environment and a better quality of life.

Slide 20 - $5 billion investment

Budget 2005 introduced a $5-billion package of measures over five years to support a sustainable environment.

These include a new Clean Fund and a Partnership Fund to reduce greenhouse gas emissions.  And, of course, funding to support the action plan on climate change – under the Kyoto agreement – unveiled last week.

I want to make clear that we have done our homework on this issue.  Our climate change plan has been designed to promote sustainable economic growth and competitiveness in the long term by applying a market-based approach, by encouraging new investment in energy efficient technologies, and using a gradual, step-by-step format.

And the Plan will not jeopardize our commitment to sound fiscal management.  New investments to fulfil Canada ’s Kyoto commitments and other key priorities will only be made as the fiscal situation permits. 

Slide 21 – Energy equipment write-off

The budget further enhances ‘green’ tax incentives by boosting the capital cost allowance from 30 to 50 per cent for efficient and renewable energy generation.  This represents an important environmental exception to the standard ‘useful life’ test used to determine depreciation rates.

Slide 22 – Sustainable communities

Of course, a key element of the environment for Canadians is our cities and communities.  Budget 2005 builds on the New Deal for Communities launched last year by providing municipalities with a growing share of the federal excise tax on gasoline.  Within five years, this will provide $2 billion a year in additional revenues.

Slide 23 – Social foundations

But a productive, environmentally sustainable economy is only part of Canadian well-being.  Budget 2005 also delivers further investments to ensure that all individuals have the chance to participate fully and achieve their potential in our society.

Slide 24 – Funding for health care

These investments build upon the long-term, $41-billion agreement on health care with Canada ’s premiers last fall.

Under this agreement, federal cash transfers to provinces and territories will rise from $16.3 billion this year to $30.5 billion in 2013-14.

Slide 25 – Equalization funding

As well, the government also introduced a new framework for provincial Equalization and territorial financing – providing $33 billion in additional funding over the next decade.

Slide 26 – Transfer to grow $75 billion

Taken together, the new funding for health care and Equalization will mean $75 billion more in federal transfers to provinces and territories over the next 10 years.

Slide 27 – Further social investments

With these investments in place, Budget 2005 does even more, starting with an additional $805 million in new, direct federal health funding. This includes:

§ $75 million to expand the integration of internationally educated professionals into the Canadian health system;

§ $300 million for a healthy-living and chronic-disease strategy; and

§ $170 million to improve the safety of drugs and other therapeutic products.

Slide 28 – Support for seniors

Budget 2005 not only recognizes the importance of investing in young Canadians – through the early learning and child care initiative -- but also our debt to seniors.  It will increase Guaranteed Income Supplement payments by $2.7 billion, with improvements in place in less than two years, not the five originally promised.

This will benefit 1.6 million seniors – the majority of them women.  The maximum GIS will go up by more than $400 per year for a single senior, and almost $700 for a couple.

Slide 29 – Global responsibilities

As you can see, Budget 2005 delivered on a whole range of commitments we made across the country.  But it also delivered on the obligations – for peacekeeping, security, and international aid -- we have beyond our borders.

Slide 30 – Boost for defence

The budget introduced the largest increase in defence spending in two decades, worth almost $13 billion on a cash basis over five years.  These resources will deliver on our commitment to enlarge the regular forces and reserves.  And they also mean new funding for operations, and major investments in equipment and materiel.

Slide 31 – Growing foreign aid

For international assistance, the budget provides an extra $3.4 billion over the next five years.  This sets Canada on track to meet its commitment to double foreign aid by 2010-11.  Actions include increased support for Africa , for debt relief, and funding to address diseases such as AIDS, malaria, tuberculosis and polio.

Slide 32 – National security

Another aspect of meeting our global responsibilities is security.  That is why Budget 2005 provides an additional $1 billion for national security, including for more secure and efficient borders, as well as emergency response and preparedness.

Slide 33 – Title slide

That, ladies and gentlemen, is a brief summary of some of the key elements in our recent budget.

It is a budget that reflects, in a balanced way, the priorities of Canadians with investments in key sectors and a strong focus on maintaining the fiscal discipline that has allowed us to eliminate our deficit and reduce our federal debt by more than $60 billion.

But our job as stewards of the nation’s economy is far from over. As a government, we will maintain our focus on providing programs and services that meet the needs of our citizens in all parts of the country and from all walks of life.  At the same time, we will continue our efforts to ensure that Canadians get value for their money from the services they receive from the federal government.

It will not be an easy task, but it is achievable. And, let me assure you, it will be done.

Thank you.