THE CANADIAN ECONOMY: SUCCESSES AND CHALLENGES
Chairman: John A. Campion
Past President, The Empire Club of Canada
Head Table Guests
George L. Cooke, President and CEO, The Dominion of Canada General Insurance Company and Past President, The Empire Club of Canada; Rahim Madhavji, OAC Student, Marc Garneau Collegiate Institute and Volunteer, East York General Hospital; Wendy Kelley, Vice-President and Associate General Counsel, BMO Nesbitt Burns; Bluma Appel, C.M., O.Ont., Chair, Canadian Foundation for AIDS Research (CANFAR); Stephen LeDrew, President, Liberal Party of Canada and Senior Partner, LeDrew Laishley and Reed; Gregory P. King, Senior Partner, Gowling LaFleur Henderson; George D. Anderson, President and CEO, Insurance Council of Canada and Director, The Empire Club of Canada; Reverend Prue Chambers, Rector, Church of St. Nicholas, Birchcliffe; Clare Cowan, Chair and CEO, Goldcare Industries Inc.; David Crane, Economics Editor, The Toronto Star; and Martha Durdin, Managing Director, Marketing Communications and Planning, BMO Nesbitt Burns.
Introduction by John Campion
John McCallum
When I was first asked to address this audience today, my designated topic was ""The Canadian Economy–Successes and Challenges."" Although my personal situation is now dramatically different from what it was when the invitation was tendered, I nevertheless warm to the original assignment. It provides an excellent opportunity to explain to my many friends and colleagues in the business community why I have determined to abandon my office on Bay Street and throw all my energy into seeking the confidence of the people of Markham as a candidate for the Liberal party of Canada in this critically important general election campaign. I am especially pleased to be running in Markham-Canada’s high-tech capital and the epicentre of our new economy.
At the outset, let me assure you that I not only believe profoundly in what I am doing, I am also having the time of my life.
For the many of you who spend your days in the rarified atmosphere of our downtown office towers, let me give you a little flavour of what life is really like out ‘on the hustings.’
The thing about campaigning is that you have to look the part–and the part is not always the same from one hour to the next. That means you sometimes have to change clothes quite a few times in a single day. The problem is that you don’t always have a suitable place to change. On day one of my campaign I had to transform my appearance from casual to formal, and the only place to do it was in the car in the privacy of a parking lot. I got into the front seat to begin the operation but, unfortunately, there was another man sitting in the driver’s seat of the car right beside me. I kind of smiled at him, hoping he would be backing his car out quickly, and he kind of looked at me. And he kept looking. He probably thought I was a bit weird. But he eventually left and I made it in sartorially appropriate fashion and on time to my next campaign event.
By day three, I was feeling quite experienced and confident that I could handle anything. Then, in the middle of Loblaw’s parking lot, I had one of the truly unforgettable encounters of the campaign to date. One of the good citizens of Markham began to harangue me in some of the most colourful and unrepeatable language that one could imagine. The gist of the fellow’s comments was that he didn’t much like Liberals and that he liked this bank-economist-turned-Liberal candidate even less. With a Toronto Star reporter and photographer in tow, I marked the voter down as `undecided’ and continued on my way. I think the media presence during this scene was a plus, if only to engender public sympathy for a neophyte politician.
As you can appreciate, this sort of life is a radical departure for me. For what is now 50 years, I had always refused to align myself with any of our political parties. Like most of you, I have enjoyed a perspective that is somewhat removed from the real arena.
While retaining my political virginity, I had nevertheless developed a more or less settled view over the years on where I stand in political terms and on the sort of Canada I believe in. Like many of you, I suspect, I am a moderate conservative on fiscal matters, a liberal on social matters and a federalist on constitutional matters. I believe our ability to sustain and enhance our social safety net is, and must be, pre-conditioned by the strength of our economy and our ability to pay for it. I also believe we need a national government with the fiscal and constitutional muscle to implement national economic and social policy geared to benefiting all Canadians.
I am confident that the marketplace is the best arbiter of economic value in our society. But I also believe that there are important Canadian values, essentially human values, which the marketplace will not and cannot satisfy for all Canadians. I am thinking of our broader community concerns for quality health care and education from cradle to grave. These are the cornerstones of hope and humanity for our community. Today, a healthy, highly educated populace is increasingly an essential element of a competitive economy. I believe that government must step into the picture to ensure equal protection and opportunity for all. I am also thinking of our underlying environmental assets-our precious air, water, forests and wildlife. If we are to preserve them, the powerful natural drives of capitalism and private interest must be constrained for the general welfare.
While I do believe that our very best instrument of social policy is a paying job, we also share a responsibility in our Canadian community to lend a helping hand to the least fortunate of our fellow citizens. Their citizenship should entitle them to the basic necessities of a decent human life-food, shelter and clothing. Our history and our vision call us to provide for those who are unable to provide for themselves. It is not just a matter of personal charity. It is a matter of the collective duty of any society that seeks to offer itself as a model for the world.
So these are the biases I bring from my private life into my public life. Certainly, I believe in fiscal responsibility. We must strive to keep our public finances in order as the over-arching framework of our national economic policy. We must put policies in place that will encourage individuals and corporations to work their wealth-creating magic in the marketplace. Finally, we must balance the creative drivers of our economy with measures that promote the general welfare and advancement of all our fellow citizens. Call it finding the balance. Call it managing the productive tension between private interests and the public interest. Call it what you will. That is the Canadian way.
My remarks today will be focused on three broad themes:
Let’s start by taking a close and hard look at the liberal economic record.
John Chretien was first elected Prime Minister and Paul Martin was first appointed Finance Minister in 1993. From where we sit today, it is sometimes easy to forget the fiscal mess that they inherited. But let me take a moment to remind you. The federal deficit that the Liberals inherited from the Conservatives was running at about $42 billion annually. The accumulated total federal debt was over $500 billion, giving Canada the ignoble distinction of having a higher total debt-to-GDP ratio than any other G7 country except Italy. At the time, almost 33 per cent of every federal tax dollar was going to service the interest payments on the debt. The possibility of tax reductions, much less new programme spending, was simply not on. From a fiscal perspective, Canada had already mortgaged the farm and everything else including the kitchen sink just to pay its bills. To make matters worse, unemployment was 11.4 per cent, with over 1.6 million Canadians out of work.
And this tough situation was reflected in how global economic markets viewed us at the time. In 1993, Canada was suffering from real long-term interest rates (the differential between absolute interest rates and inflation) of about 5 per cent, almost 2.5 per cent higher than those of our neighbour to the south. The Wall Street Journal, as you will no doubt recall, had begun describing Canada as being ""on its way to third-world status.""
How then should we measure the economic policy that the Liberals have pursued since 1993? What sort of report card should we issue? Objectivity and fairness demand that we apply the same tests that we have always used to measure the economic performance of our governments.
Since 1993, the Canadian unemployment rate has fallen from 11.4 per cent to 6.9 per cent, with the number of unemployed falling by more than 500,000. The economy has created a total of over 2,000,000 net new jobs since 1993, resulting in an increase in total employment since 1993 of 16.5 per cent.
Since 1993, the federal deficit of $42 billion annually has been converted into a projected surplus of more than $12 billion annually for the fiscal year 2000/2001 or a total improvement in the nation’s annual bottom line of about $54 billion annually. These resources can now be allocated to tax reduction, debt reduction and critical new programme spending.
Since 1993, the Canadian economy has grown by almost 30 per cent. Over the period, our rate of GDP growth has exceeded that of every other G7 country except the United States. We were a very close second. Note too that this expansion has been achieved against a backdrop where Canadian government spending has represented a steadily shrinking proportion of our total economy. As a percentage of GDP, federal government spending in Canada has fallen from 21.8 per cent in
1993/94 to 15.6 per cent in the current fiscal year. Programme spending was 16.6 per cent of GDP in 1993-94 and is 11.7 per cent of GDP this year.
And we have achieved this level of growth without spurring another round of growth-eroding high inflation. Inflation has been well within the target band of 1 per cent to 3 per cent annually.
Total public debt in Canada has also fallen from 70.1 per cent of GDP in 1993/94 to less than 54 per cent of GDP over the same period. We should be able to achieve a debt to-GDP ratio of less than 50 per cent within the next two years just by balancing the books.
Our international balance of payments has improved dramatically too. Thanks to our booming performance as a trading nation, our annualised merchandise trade surplus has risen from $14 billion in 1993 to almost $50 billion. Over the same period, we have moved from a current account deficit of $24 billion in 1993 to a surplus of about $14 billion. The improvement in the situation of our international accounts is almost as remarkable as our fiscal reversal.
All of this enables us to respond to The Wall Street Journal today with a clear answer: ""Some third-world country!""
By any measure, the economic report card for this government can only be fairly described as excellent. I would ask you to judge it for yourself.
But, you might say, what about the Canadian dollar, which now stands at around 65 U.S. cents? You may be surprised to hear that the Canadian dollar is now the second-strongest currency in the world. Year to date we have lost 6 per cent against the U.S. dollar, but the Japanese yen has lost 7 per cent, the Swiss franc and the pound have lost 10 per cent, the euro has lost 14 per cent, and Australia and New Zealand have lost respectively 20 per cent and 23 per cent. To any objective observer, the story is overwhelmingly one of U.S.-dollar strength rather than Canadian dollar weakness.
As we enter the 21st century, Canada has finally got its fundamentals right. We have put in place the over-arching framework that, with proper continuing stewardship, will permit us not only to meet the challenges of an increasingly competitive and globalised marketplace but also to resume our agenda of building a more civilised and compassionate society.
This state of affairs has not been accomplished without pain. In addressing first things first, the Government of Canada has had to ask Canadians to bear a higher interim tax burden and reduced support for our social safety net. You cannot bring a nation back from the brink of bankruptcy without tough restructuring medicine. Canadians have understood that and supported that by electing and re-electing a fiscally responsible government.
I hope you can now understand why Stockwell Day is reaching back 20 years to attack the Liberal economic record. The fact is that the record that Canadians have to scrutinise in this election is the record over the past seven years. From any objective or fair-minded perspective, the performance simply does not support the case that Mr. Day has to make. The so-called `Agenda of Respect’ clearly does not respect the facts of the economic record.
I have watched Canadian finance ministers closely for more than 20 years. I have no hesitation in saying that Paul Martin has surely to be regarded as the best finance minister this country has seen over that period. He took the tough decisions, rallied the consensus required to support them, and accomplished in seven short years what has to be regarded as nothing less than a full-blown fiscal revolution-a revolution that has recovered the economic integrity of the nation.
But he also accomplished that revolution because he had the unflagging support of his boss. There is a long list of former Canadian finance ministers who have had the intelligence, integrity and determination to set this country on a sound financial footing. What they lacked was a prime minister who would back them. I credit the Chretien-Martin team immensely for doing what was right for Canada, whether or not it was universally popular.
And I extend that credit to the choices they have made in recent weeks in the allocation of our fiscal surplus, where the focus has been balanced: significant but fair tax cuts for employees, corporations and investors to drive our competitiveness, meaningful debt reduction to strengthen our fiscal capacity, shoring up our health-care system with a much-expanded long-term funding commitment and, lastly, educating our work force for the challenges of the new economy.
Against this background of remarkable economic success, I believe there are now two principal challenges that confront Canadians in their pursuit of an even brighter economic future. The first challenge is one of profound change in the very structure of our economy–the so-called `new economy.’
The second challenge is a threat to the very core of our national ethics and our national vision-a threat to the very existence of the Canada that we and our ancestors have built up over the years. I refer, of course, to the Canadian Alliance.
In my view, everything we have accomplished over the past seven years can be quickly forfeited if we respond inappropriately to these challenges.
The first `challenge’ to our continued economic success is the very item which the Prime Minister and Mr. Martin have now moved to the forefront of our political agenda-exploiting the opportunities of the new economy for the benefit of Canada and Canadians.
It is clear the new economy will be the principal driver of Canadian productivity, competitiveness and growth over the next several years. If we are to meet the challenge in this area, then it is equally clear that we need policies in Canada that will stimulate the sort of investment and human resources development that will provide the underlying infrastructure for entrepreneur-led growth.
For the new economy, the mini-budget and the Liberal platform were right on the money: reduced capital gains and corporate income taxes to encourage capital formation, plus income tax reductions and the elimination of the income tax surtax to encourage our best and brightest to stay in Canada; new money for basic research and a set of targeted policies geared to promoting computer literacy; training and private-sector investment in research and development. With these policies in place there is no reason why Canada cannot capture a disproportionate share of the global explosion in e-commerce and e-business generally.
And these framework or infrastructure policies for the new economy have to be supplemented by specific incentives to stimulate specific investments by our business community. Creative and innovative Canadian entrepreneurs ought not to be compromised in creating wealth because our capital markets happen to be smaller and less mature than those which have fuelled the technological explosion in Silicon Valley and Silicon Alley to the south.
It is easy for Mr. Day to say that he is going to stop so-called ""handouts"" to business. But it is also incredibly naive. If it had not been for the assistance from the federal government’s technology partnerships programme, IBM would probably not have been persuaded to locate its global lab facilities in Markham rather than in Ireland. Would the Canadian Alliance have kissed goodbye to the hundreds of highly skilled, highly paid jobs and hundreds of millions of spin-off benefits that the IBM investment will bring to Canada and, more specifically, to the riding I hope to represent? Are they so removed from the competitive realities that drive global investment decisions that they would deprive Canadian communities of at least an approximately level playing field? You cannot compete in the global battle for leadership in innovation with baseball caps and brochures. We will need the muscle of all levels of government working together to secure our place in the new economy.
Mr. Day can talk about the brain drain all he likes. All I can say is that something must be draining from his brain if he thinks that investing in small but successful Canadian entrepreneurs and working to attract investment from the global technology gorillas is anti-business. Liberal policy in this area is not about picking winners from losers as the instrument of some corollary social policy. It is about backing and attracting companies, both large and small, which have already proved that their products and services are winners in the marketplace.
And the Liberal approach is not geared to specific companies or regions. There are a series of new initiatives that will benefit Canadian business broadly–policies of general application that our new economy entrepreneurs will be able to take advantage of. I am thinking of the capital gains rollovers for investments in small businesses with up to $50 million in assets, the reduction of capital gains inclusion rate to 50 per cent and the more favourable treatment of stock options. These are concrete measures that will make a vital difference in encouraging investment in new and growing businesses across Canada.
Ladies and gentlemen, the Canadian Alliance does not understand what it is going to take for Canada to win in the new economy. Mr. Day’s free market ideological dogma on issues like strategic support for our high tech poses a huge challenge to communities all across Canada, like Markham, where the attitude is one of winning not whining.
Now let me turn to the broader threat posed by the Canadian Alliance. As an economist, what worries me most, and what I want to demonstrate clearly today, is the absolute lack of any semblance of responsibility in Mr. Day’s fiscal plan.
I start here because, even if one is an ideological soul mate of Steve Forbes and Stockwell Day, one has to be concerned about an economic agenda that would quickly sacrifice all of the fiscal progress we have made. My objective is to demonstrate that the programme of the Canadian Alliance will either throw this country’s books back into the realm of red ink from which we have been so recently rescued or force us to endure so much pain as a nation that the Liberal spending constraints on our social infrastructure over the past seven years will look like child’s play.
The devil is in the details but, in broad outline, the story is quite simple. I begin with the projected fiscal surpluses as estimated by a panel of private-sector economists. These surpluses represent the funds available after implementation of the measures in the 2000 Budget as well as the expenditures related to both the recent health-care accord and the unemployment insurance initiative. They do not take into account the tax reduction measures announced in the October mini-budget or the spending commitments detailed in the Liberal platform document.
What the forecasts show is that the planning surplus for 2004-2005, when the tax reduction measures announced in the mini-budget and the spending plans outlined in the Liberal platform will have been fully implemented, is estimated at $7.0 billion. In the succeeding fiscal year (2005-2006), the planning surplus grows to $10.7 billion. The total of the planning surplus over the next four years is $40.7 billion.
Now, let’s compare the cost of the measures in the mini-budget and the Liberal platform with the cost of Mr. Day’s proposals.
Over the next four years, the tax reduction measures announced in the mini budget will cost $31.9 billion. The total cost of new tax relief and spending measures proposed by the Liberals in the mini-budget and the platform document over the next four years is $39.1 billion. That means that what the Liberals have promised is totally deliverable within the $40.7 billion forecast fiscal capacity of the government without having to eat into the reserves for contingency or economic prudence. Under the Liberals, the remaining forecast planning surplus would be $1.6 billion.
Let’s take a detailed look at the annualised cost of the Alliance platform. Here is a summary:
According to the Department of Finance, the fully implemented cost of the Alliance proposals in 2004-2005 is $28.9 billion. But we are not quite done yet. The Alliance has also committed itself to legislated debt reduction of no less than $6 billion annually for a total cost to its programme of $34.9 billion annually. Since the Liberals are targeting to reduce the debt by at least $3 billion, this represents an incremental cost to the treasury under the Alliance of $3 billion. So the total incremental cost of the Alliance programme when fully implemented will be almost $32 billion annually. In round numbers, these spending commitments are more than four times the available planning surplus in 2004-2005 and more than three times the planning surplus in 2005-2006. Looked at another way, the cost of the Alliance platform commitments in one year is roughly equal to the cost of the measures announced in our mini-budget over four years. What a remarkable but telling coincidence.
Put simply, my friends, Mr. Day faces a fiscal shortfall of almost $25 billion in 2004/2005. No matter how you look at it, the Alliance platform threatens a whopping big deficit for Canada.
The only way that Mr. Day can get out of this hole and restore any semblance of fiscal balance to the equation is truly massive cuts in the expenditures of the federal government-cuts of a magnitude, I note, that he has not yet dared to talk about in this election.
We learned yesterday that the Alliance intends to release an explanation of the funding of the costs for its platform next Sunday. Is it not convenient that its explanation will not appear until after the leaders’ debate?
In eager anticipation of its explanation, let me walk you through the numbers as I, and many other economists who are not politically affiliated, see them.
We start with the required cuts of $25.0 billion annually by 2004-2005. Where will the required cuts come from? The Alliance election platform document identifies certain categories of federal expenditure as ""wasteful spending areas."" The list of wasteful areas is incomplete, but it includes such items as Heritage (including the CBC), foreign aid, Public Works and the entire
Department of Indian Affairs and Northern Development. This is where the Alliance proposes to target its spending cutbacks. Well do you know what? It won’t work.
The projected total cost of all the so-called ""wasteful spending areas"" in 2004-5 is around $17.4 billion. In fact, the Alliance has stated that the projected cuts from these ""wasteful spending areas"" will actually be $7.0 billion–a very large cut of some 40 per cent, the implications of which I hasten to add they have not come even close to explaining to Canadians. But even after that, they would still be about $18 billion in the red for 2004/2005.
Even if they reduced spending in these ""wasteful areas"" to zero, a feat which would be totally impossible given such considerations as the constitutional responsibility to maintain health care on Indian reserves, they would still have a shortfall of almost $8 billion.
With shortfalls of this magnitude, one can only conclude that the Alliance would have to cut deeply into core federal programmes, renege on their tax commitments, put the federal government back into deficit, or some combination of the three.
Mr. Day has sworn to protect programmes for the elderly, transfers to provinces for higher education and health care, statutory equalisation payments, defence and, more recently, unemployment insurance. Ladies and gentlemen, the Canadian Alliance simply cannot find $25 billion in savings from that portion of federal spending that Mr. Day has left ""unprotected.""
Either the tax- and debt-reduction policies that the Alliance has trumpeted as the cornerstones of its fiscal policy are totally empty promises or Canadians are in for the biggest bait and switch manoeuvre of our political history. Bait them with promises of tax cuts and switch them back to the harsh reality later. Either way, the fiscal programme of Mr. Day is totally lacking in credibility. Does he reject the private-sector economists’ forecast? We do not know. Does he quarrel with the estimates of the
Department of Finance? We do not know. Do his plans make appropriate reserves for contingency and economic prudence? We do not know. What we do know is that he is not telling us until Sunday after the debate.
What we also know is that Mr. Day apparently intends to justify his plan by using fiscal 2005/2006 as the comparison year, even though it will be the year following what would be the next government’s usual mandate. I have no problem with that and I am even prepared to concede that under the forecast he will have another $3.7 billion to play with in that year. But if that is his strategy, I hope he also remembers that he has already promised Canadians that he will introduce further tax cuts for the wealthy in year five-the full-blown flat tax that will cost the federal treasury another $4.8 billion. All together that makes the hole he has to fill another billion or so larger in 2005/2006.
To paraphrase another politician speaking in a different context, I would like to say this about the economic platform of the Canadian Alliance: ""It’s about the numbers, stupid."" And Mr. Day’s numbers simply do not add up.
I would now like to ask you to feast your eyes on one last chart. It shows federal government spending relative to the total size of the economy, commencing in 1947-48 and projected forward to 2005/2006 according to the private-sector economists. This chart will no doubt stun those of you who may have been poisoned by the propaganda of the right wing press. The size of the federal government today, as a proportion of the total economy, is less today than it has been at any time since 1949-50. Not only that, but the shrinkage from the most recent peak has all occurred since the Liberals took power again in 1993. Not only that, but the private-sector economists project continuing modest shrinkage over the next five years.
Yes, the Liberals are proposing strategic investments in key economic areas like basic research and key social areas like homelessness. I make no apology for that whatsoever. More importantly, the broad picture shows a relative size of government smaller than at any time in the lifetime of most of the people in this room including myself and it is not getting any bigger.
These facts are not celebrated by all Canadians, certainly not by all Liberals. But they are the facts nevertheless. The show how the current government got us out of the fiscal crisis it inherited from the Mulroney Tories. They also put the lie to the Alliance charge that the Liberals are guilty of profligate and wasteful stewardship of our national treasury.
Have the Liberals made mistakes? Sure they have. The HRDC mismanagement is the most obvious example and this is in the process of being rectified. The Prime Minister has admitted these mistakes and there are, no doubt, other areas where the record is less than perfect. But if you focus on the big picture, the conclusion that the Liberals can claim a stellar economic record is, I believe, compelling.
Why should you believe me on these numbers? Am I not tainted because I am running for the Liberals? A legitimate question. Let me give you three answers.
First, whether I am running for office or not, I value my reputation as an economist. The numbers I have given you are fully documented in the handout. I am staking my credibility on the numbers at least being in the right ballpark.
Second, the other day I was honoured and delighted to be the target of a custom-made attack from the Canadian Alliance which, of course, was out to destroy my credibility. My firs
