Jim Flaherty VERBATIM Canada: “Punching Above Our Weight”

Jim Flaherty VERBATIM Canada: “Punching above our weight”

At the 79th annual Couchiching Conference, Finance Minister Jim Flaherty delivered a remarkable keynote address in which he shared anecdotal and analytical details of how Canada has come out of the deepest downturn since the Great Depression in better shape than any other G7 country. “By any economic indicator,” he said, “Canada is punching above its worldwide economic weight class.”

Le ministre canadien des Finances Jim Flaherty a prononcé un remarquable discours à l’occasion de la 79e Conférence annuelle de Couchiching. À l’aide de données et d’anecdotes, il y décrit comment le Canada est sorti de la pire récession depuis la Grande Dépression en meilleur état que tout autre pays du G7. « Selon tous les indicateurs économiques, a-t-il expliqué, le Canada est maître du ring dans sa catégorie de poids. »

here is the story of the old col- ing above its worldwide economic subprime mortgage crisis in the United lege graduate in economics who weight class. States. By the middle of the next year, T went back to his alma mater to It brings me particular pleasure to certainly by October 2008, the crisis visit his son, who was following in his say this so soon after, to paraphrase the had grown exponentially and reached footsteps. The son was showing his theme of this conference, a watershed into the real economies. The world examination paper and the father was event for this country — that is, the eco- faced potentially the most serious eco- astounded to find that it was exactly nomic summits in Canada that brought nomic crisis since the Great Depression. the same paper he had sat for 30 years world leaders together to set a course for By later that fall of 2008, the full effects before. So he went to the head of the strong and sustainable economic of the crisis were being felt outside of economics department and confronted growth. Canada played a pivotal role in the credit markets as the recession hit him with the discovery he had just drawing out this road map to recovery, the real economies. made. “What kind of a department,” both in what we did to prepare for a Thankfully, in Canada we had pre- the man asked, “is this that sits the global crisis and the way we responded pared. We had run balanced budgets. We same papers, asks the same questions of when it arrived. It only makes sense then had paid off a massive amount of debt — students year after year?” “Well,” said for me to recount the extraordinary some $40 billion during our govern- the professor, “the questions don’t events of recent years at this forum that ment’s time in office since January 2006. change but the answers do.” was around during the last great global As the crisis intensified, we were on So if there’s one thing that crisis of this magnitude in the 1930s. the campaign trail for the federal elec- Couchiching has provided over the tion that was held on October 14, 2008. past 78 years or so, it’s just that: ver the past couple of years, we The election was ongoing. The econom- answers. And in doing so, your 2010 O have witnessed and, I believe, ic news was getting worse. Frequent dis- organizers, panellists and presenters, made history of our own. Just as this cussions were being held internationally. those here to observe, are acting in the institution has done, our nation has I was speaking often with my counter- best traditions of Couchiching — you once again answered the call in global parts, particularly in Europe and the are punching above your weight. efforts to make the world a more stable United States, with the G7, regarding Canadians, when they consider place for all. And if that isn’t a nation what should be done about a looming our nation’s economic performance, of 33 million punching above its serious recession, one that was not fore- both leading up to the crisis of 2008 weight, I don’t know what it is. seen by the economists. and after, have also been punching Now it is important to put the eco- In Canada, we took some immedi- above our weight as a nation. We just nomic crisis that the world has faced in ate decisions to help alleviate the trou- don’t like talking about it. I’ll break context, and I’ll try to do that fairly bles in credit markets. First, we decided with that very Canadian mould briefly. If we go back to August 2007, it that we would purchase CMHC- today. I will actually say it: by any was a time when the threatening credit insured mortgages to provide more liq- economic indicator, Canada is punch- crisis...manifested itself in the form of a uidity in the system. Second, we

POLICY OPTIONS 7 SEPTEMBER 2010 Jim Flaherty VERBATIM decided we would guarantee the uments prepared by public servants in rized the Toronto accomplishments after wholesale debt of our banks to enable advance of meetings, and they’re rarely the summit. First of all — and this was them to have certainty as they lent to read — frequently published. In this not easy to obtain — firm targets for one another again, and to maintain a meeting, we actually tore it up, and that advanced economies on deficit reduction level playing field because other coun- was one of the most important things and reduced debt burdens. We agreed on tries were guaranteeing the indebted- we did. Leading up into that, we created specific targets: that is, countries would ness of their banks. a five-point plan. The five-point plan cut deficits in half by 2013 and stabilize I made that first announcement fundamentally was based on our agree- or reduce debt-to-GDP ratios by 2016. We on Friday, October 10, 2008, in the ment that we would not allow, as gov- reached an agreement to move forward morning in Ottawa. By that afternoon, ernments, any more banks to fail. on the second stage of mutual assess- I was in the Cash Room of the Treasury The next morning we met with ments each country will undertake to Building in Washington with the other President Bush at 7 a.m. in the achieve strong, sustainable and balanced G7 finance ministers and central bank Roosevelt Room of the White House. growth. We agreed on higher and better- quality capital standards Our nation has once again answered the call in global efforts throughout the global finan- to make the world a more stable place for all. And if that isn’t cial system and an extension a nation of 33 million punching above its weight, I don’t of our shared pledge not to know what it is. introduce new barriers to trade over the course of the governors. And let me say I’ve been to He agreed to the plan on behalf of the next three years. lots of these meetings over the course United States. He went out to the Rose This continued collaborative, of four and a half years now. But this Garden and gave a press conference long-term approach coming out of the was a different kind of meeting. endorsing the plan. And on the Toronto summit makes for a future far Saturday we had meetings with the more hopeful than the treacherous he financial markets were teetering International Monetary Fund. Later in past we have just lived through. T with uncertainty. Hank Paulson, the afternoon, the Council of the who was the secretary of the treasury Finance Ministers of the Americas — ow of all the G20 countries, then, opened the meeting by saying, South America, Central America and N Canada has a particular reason for basically, We’re in a lot of trouble. Some North America — we met and we all post-summit optimism in my view. Our of the European ministers spent some endorsed the plan. And then that country has weathered the deepest, most time expressing some pointed opinions evening, on the Saturday evening in synchronized global downturn since the about the US financial system and its Washington, the G20. And President 1930s in far better shape than other contribution to the crisis, passing Bush attended for part of that meeting major industrialized countries. The around a graph, a one-page graph, that as well, and the G20 ministers endorsed decline in our economic output was the showed what had happened: the widen- the plan as well. So that by Saturday smallest of our G7 counterparts. Now, in ing of credit spreads dramatically since evening we had global economic agree- August 2010, Canada has virtually the failure of Lehman Brothers the ment on the five-point plan. recouped a recession’s worth of econom- month before. We then started the sequence of ic decline. With more than 400,000 jobs As a group, we realized the reality G20 summit meetings in Washington created since July 2009, we have also that some heavily leveraged European in November 2008, then in London in recouped all of the jobs lost during the banks were carrying toxic assets. Some April 2009, in Pittsburgh in September downturn. The IMF expects that Canada British banks had failed. Some US of last year and, as you know, in will be the fastest-growing economy banks had failed. Some German Toronto in June and in Seoul, Korea, among the G7 economies during 2010. regional banks had failed. It was later this year in November. At a time when other countries, includ- unclear in fact whether the markets In Pittsburgh, the leaders agreed ing the United States, still struggle to get would even open on the following that the G20 would serve as the pre- their economies back on track, this suc- Monday. So this was the dire situation mier forum for international econom- cess cannot be put down to mere luck. on a Friday afternoon in October 2008. ic cooperation, with a clear mandate to It is the so-called ordinary But the story that weekend had a continue its prominent role well Canadians who deserve the most cred- promising ending as it became really beyond the economic crisis. it. Consumer confidence in Canada quite a glowing example of what can be has remained relatively strong and accomplished with global cooperation. n Toronto, we set our sights equally picked up quickly as we came out of After the recriminations and the striden- I high: on ensuring the world’s econo- the three quarters of recession. One of cy, we tore up the communiqué. These my would never come so close to crisis my heroes, Robert Kennedy, once said, communiqués, they’re rather dense doc- again. Prime Minister Harper summa- “Most of our fellow citizens do their

8 OPTIONS POLITIQUES SEPTEMBRE 2010 Canada: “Punching above our weight” VERBATIM best and do it the modest, unspectacu- lar, decent, natural way which is the highest form of public service.”

e also owe our enviable posi- W tion to how we prepared for the unexpected and how we coped for it when it arrived. Canada had the low- est total government net burden in the G7 at the outset of the crisis. In 2007, before the crisis, Canada’s net debt stood at 23 percent of GDP, which was less than half the G7 average at that point. This prudence means the G20 commitment to cut our deficit in half and reduce our debt-to-GDP ratio by 2016 is not only possible; we’ve already set the course to achieve it in our most recent budget. Canada took other steps before the global downturn that continue to serve us well. Long before world leaders met to confront the global emer- gency, our government put in place permanent, broad-based tax reduc- tions that helped position Canada to withstand a global downturn. Actions taken by the government since 2006, including those in the Economic Action Plan, provided $220 billion in tax relief over 2008-09 when the crisis was at its worst, and the following five fiscal years. That means that as other nations — and this was the competitive aspect of this — that as other nations faced the prospect of tax increases due to unsus- tainable budget deficits, Canadians can benefit from tax relief that is both permanent and affordable. We also made innovation a gov- Photo: Couchiching Institute on Public Affairs ernment priority virtually from the Finance Minister Jim Flaherty at the Couchiching Conference in August. Canada, he said, is day we took office. This year in my punching above its economic weight in the world. budget we provided $1.4 billion in new science and technology funding, and when you go with the previous This preparation put us in a good est budget date in Canadian history — budgets, which are another $2.2 bil- position but the magnitude of the cri- January 27, 2009. We did the pre- lion, we have another $4.9 billion in sis required an extraordinary response. budget consultations on an urgent additional funding overall provided in As the economy began to slow in basis. It became quite apparent to me Canada’s Economic Action Plan for December 2008 — and you’ll recall we quite quickly, listening to small-busi- innovation. This helps explain why had just had an election in Canada in ness people, medium-sized business, Canada’s investments in higher educa- the middle of October — we were re- larger-business people, people in the tion, research and development as a elected once again as a minority gov- financial sector, people all across the proportion of the economy are now ernment and back to Ottawa and back country — certainly by the middle of the highest in the G7. at it. We decided to schedule the earli- December 2008, that we were in a deep

POLICY OPTIONS 9 SEPTEMBER 2010 Jim Flaherty VERBATIM recession. One can look back now at recession at that time. Our view at the end to the stimulus measures at the the statistics and see that the Canadian time was that we needed to act boldly end of the two-year period, which we economy basically fell off a cliff in the and quickly and that if we did not, said right at the beginning to every- last quarter of 2008, and worsened in there were two great risks. One was we body: that the spending will end on the first quarter of 2009, which was would have a longer, deeper recession the infrastructure projects at the end of the worst part of the recession. in Canada. And the other was that we the fiscal year March 2011. We have So what of all of that and what would have very substantial unemploy- targeted measures to limit growth in does government do when faced with ment, double-digit unemployment in direct program spending and a compre- that reality? Well, we could have tried our country, which has been seen else- hensive review of our overhead costs in to muddle through, I suppose. We did- where. As it is now, our unemployment government. So we have a three-point n’t. We chose to act boldly and to act rate is about 8 percent. The American plan that will place our net debt ratio quickly and to develop the Economic unemployment rate is about 9.5 per- on a clear downward track when the Action Plan. We also took a lot of cent. This reflects well on our country, debt burdens of other nations are advice. I appointed an Economic and about our fiscal fundamentals, expected to escalate even higher. So the competitive This made-in-Canada resilience in weathering the global advantage to Canada: we recession is also a testament to the stability of Canada’s financial can afford to reduce taxa- sector, not to mention the prudence of Canadians themselves. tion. We’re stimulating our Canada’s banks [and] our other major financial institutions were economy. Our competitors are going to have to raise better capitalized, less leveraged than their international peers taxes going forward, a clear going into the global recession, in part reflecting a strong economic advantage for financial regulatory and supervisory framework. Canada. Our debt-to-GDP ratio is much better than Advisory Council, chaired by former BC because that gap has not existed since our competitors in the Western indus- Finance Minister Carole Taylor, to give 1975, which is an important difference trialized economies. us urgent advice on steps we ought to reflecting, I think, economic differ- So we have a good brand. Canada take, and I can tell you that when I met ences, fundamental differences today is in a position other nations can with them for the first time in between our government’s fiscal situa- only envy and I have to say that I’ve December 2008, they encouraged me to tion and that in the United States. observed that first-hand. act boldly and quickly because of what In any event, we went ahead with they were seeing in the Canadian econ- the Economic Action Plan. It is a two- do want to leave you with a sense of omy and the global economy as well. year plan. It fit well with the G20 con- I how others see us. In recent months, We also had the auto issue at that text because we had agreed with the preparing for the G7, G8 and G20 meet- time in December 2008 — very impor- G20, all of the leaders had, that we ings, I travelled a lot to China and tant to people here in Ontario and for would all seek to have stimulus put into India, of course the United States, the Ontario economy, of some impor- our economies of about 4 percent of Korea, South America. And I can tell tance in the riding I represent of Whitby- GDP over the course of two years. Now you that Canada is viewed in a way that Oshawa. And we certainly dealt with in Canada, in the federation of course, can only be described as admiration. that. And that was a difficult policy deci- we needed the cooperation of the When I went to New York a few days sion for government too. You know, provinces and territories to do that. And before the Canadian summits, the same how much does one want to get during all of this time about which I day we did the most recent update on involved in the private sector? And I’d be have been speaking, I was on the phone the Economic Action Plan, I was able to happy to talk more about that later on. conferencing regularly with my provin- highlight that Canada was not only As you know, General Motors is making cial and territorial colleagues. And I must hosting the world, it was leading it. By a significant comeback. If this continues, say the cooperation was very substantial. several key measures — job creation, it’s going to look like we made the right Almost all the provinces and territories economic growth, the stability of our policy decision. So I’m happy to see in Canada went ahead and participated financial sector, relatively low public General Motors and I hope Chrysler is in the infrastructure plan so that we did debt — Canada is performing markedly coming back as well. As you know, fulfill, Canada fulfilled its G20 commit- better than most advanced economies General Motors has begun to repay the ment of more than 4 percent of GDP and all G7 nations. debt to the Canadian people. over the four years. And there’s much talk now about n the fiscal side, the IMF expects e can see the data in retrospect exit strategies. We built in an exit strat- O Canada will be the only G7 coun- W now about the depth of the egy in the Economic Action Plan, an try to return to balance in the next five

10 OPTIONS POLITIQUES SEPTEMBRE 2010 Canada: “Punching above our weight” VERBATIM years. I’ll just give you a couple of investors and entrepreneurs — the best who I was privileged to hear a long numbers here to give some sense of place to do business in the next five years time ago when I was an undergraduate where we are. The IMF projects our net in fact, according to the Economist at Princeton, he reminds us, “History debt ratio in Canada will stand at 31 Intelligence Unit. And, as I say, Canada’s is a relentless master. It has no present, percent of GDP in 2015. By way of con- tax advantage will only grow as our tax only the past rushing to the future. To trast, the US debt-to-GDP ratio is about rates continue to fall through 2012 — a try to hold fast is to be swept aside.” 67 percent. The United Kingdom’s is major competitive advantage. In terms of financial sector reform, about 75 percent. Japan’s is about 115 And it is a federal advantage Canada will keep working to build on percent. All of these are likely to wors- because we challenged the provinces the momentum that occurred in en — except ours — over the course of and territories several years ago to join Toronto. That means keeping the glob- the next several years, another impor- us in making Canada a more attractive al focus on what matters: quality and tant advantage for Canada. place to invest by reducing the business quantity of capital; the definition of So this made-in-Canada resilience tax burden, to try to get to 25 percent capital; leverage ratios. These are issues in weathering the global recession is overall. When we started in 2006, the that are being discussed intently now also a testament to the stability of federal business tax rate was a little bit and we hope to have a solution, solu- Canada’s financial sector, not to men- over 22 percent. It is down to about 18, tions on both issues ready for the lead- tion the prudence of Canadians them- a little bit more than 18 percent now. ers when they meet in Seoul in selves. Canada’s banks [and] our other It’ll be down to 15 percent by 2012-13. November of this year. major financial institutions were better Most of the provinces are moving in We will continue on our efforts on capitalized, less leveraged than their the direction of getting their business the quality issue and on the leverage international peers going into the glob- tax rate at the provincial level to 10 issue with our colleagues. We will do so al recession, in part reflecting a strong percent — 15 percent federally, 10 per- with the same tenacity that Canada financial regulatory and supervisory cent provincially. A brand for Canada: demonstrated in dousing the attempts to framework. And attitudes changed 25 percent business tax rate overall. introduce what we viewed as a misguid- because of data like that and a strong And, as I say, there’s been terrific coop- ed and punitive global tax on the finan- regulatory system and the global crisis. eration by the provinces and territories cial sector. And, as you know, we were The first time I went to China as to get to that place. successful in having the majority of the Canada’s minister of finance was in G20 agree with Canada on that issue. January 2007. And several times in e also in the budget this year For Canada and all nations, our meetings with my counterparts there, W not only promoted free trade, work is far from finished. Much more they alluded to the fact that the we eliminated tariffs on imported effort and determination is required if Canadian banks were risk averse, too machinery and manufacturing inputs, we are to make the Canadian summits risk averse, not willing to take on in the process becoming the first G20 the economic legacy they deserve to be. enough challenges. “Boring” was used. nation to become a tariff-free zone for We have a Canadian advantage. “Timid” was another word that I manufacturers. So [we] don’t just say We have come too far and achieved too heard, at least in translation. that we believe in free trade; we take much to fall back into the complacency I was back in China in In 2007, before the crisis, Canada’s net debt stood at 23 August of 2009 and then about six weeks or so ago. percent of GDP, which was less than half the G7 average at And now when the same that point. This prudence means the G20 commitment to cut counterparts were talking to our deficit in half and reduce our debt-to-GDP ratio by 2016 me about the Canadian is not only possible; we’ve already set the course to achieve it banks and financial institutions, they were using in our most recent budget. words like “wise,” “prudent,” “stable,” actions that are consistent with the that allowed the global economy to be “solid.” And, as you know, there are policy perspective. thrown into turmoil. Canadians should substantial investments being made by That is why it is becoming increas- be proud that our country played such certain Asian countries in our country. ingly clear to the international observers a pivotal role in overcoming a global The World Economic Forum has that the initiatives put in place since downturn, yet we cannot let up now ranked Canada’s banking system as the 2006 are making Canada much more when our nation is increasingly being soundest in the world for two consecutive competitive internationally. called upon to show global leadership. years. Combined with that stability is a So it adds up to a future that looks highly competitive business tax system far more promising than what could be Excerpted from a keynote address to the and our commitment to free trade. This is talked about only a couple of years ago. Couchiching Conference in Orillia, making Canada increasingly attractive to To turn to Robert Kennedy again, Ontario, August 6, 2010.

POLICY OPTIONS 11 SEPTEMBER 2010