Memorandum for The Honourable John Manley, P.C., M.P.

July 2, 2002

Dear Minister,

As the co-chairmen of the National Policy Committee of the Canadian Council of Chief Executives (CCCE), we wish to welcome you to your newest Cabinet responsibilities and to congratulate you on the tone and content of your initial presentation on June 19 to the Standing Committee on Finance of the House of Commons.

We were especially encouraged by your determination to pursue the policies that will be necessary to turn Canada into a "Northern Tiger", a country that will be a global magnet both for business investment and for highly skilled people. As you pointed out, it is only through an aggressive focus on ways to give Canadians a real edge in the global competition for money and talent that we can ensure that our economy will grow and that our society will be strengthened.

This was precisely the message issued by what was then the Business Council on National Issues when we launched the Canada Global Leadership Initiative in 1999 with the ambitious goal of making Canada "the best place in the world in which to live, to work, to invest and to grow".

In the Council’s statement at the resulting CEO Summit in Toronto in April 2000, at which you were in attendance, we suggested that to foster the pace of economic growth needed to achieve our aspirations as a society, we would have to reverse the record of most of the 1990s. During this period, Canada’s productivity and real income growth lagged that of the United States by an average of one percentage point a year, widening the gap in real per capita incomes to roughly $9,000 a year.

The Council suggested that Canada should aim not merely to catch up with the American pace of income growth, but to exceed it by the same margin in this decade as we fell behind in the past — a full percentage point a year.
We therefore were delighted to see from your presentation on June 19 that Canada’s growth in real per capita income is now exceeding that of the United States, and by half a percentage point a year, half way to the goal we recommended just two years ago. The sweeping fiscal measures that the federal government has taken, most notably the tax cuts introduced in October 2000, are clearly having an impact.

Now it is essential to build on this momentum and finish the job. To achieve success in the second half of Canada’s quest for super performance will require measures just as far-reaching as the federal government has undertaken to date. In particular, as you told the Finance Committee, it is essential not just to keep reducing the overall burden of taxation, but also to create "tax advantages in areas where Canada can take on the world and win."

Finance Canada has noted that by 2005, Canadian companies will on average enjoy a modestly lower corporate income tax rate than their American peers. In our view, however, this projected 4.4 percentage point edge will be insufficient to offset the competitive disadvantages of Canada’s much higher overall tax burden, our northern geography and the continuing effects of the Canada-United States border. Even assuming that American corporate tax rates remain unchanged in the years ahead, further cuts to corporate tax rates are essential. In addition, the exclusion of Canada’s crucial resource sector from the corporate tax cuts already announced must be rectified.

To become the location of choice within North America for investment in global enterprises, Canada must be able to offer a truly compelling business case. While Canada cannot realistically hope to match American rates of personal taxation, we can at modest cost create a significant advantage on the corporate tax front. To this end, we would suggest that Canada set a goal of undercutting United States corporate income tax rates by a margin of at least 10 percentage points.

The tax cuts already announced will get the country almost half way to this goal. As the Council said in its submission to the Finance Committee in April, the next step should be the elimination of federal and provincial capital taxes. In addition to its impact on tax competitiveness, elimination of capital taxes also would be the single most effective measure governments could take to stimulate private sector innovation and investment in productivity-enhancing technologies. Furthermore, the cost of this measure at the federal level is eminently affordable within the current fiscal projections.

Lower corporate tax rates will, however, be insufficient to address our shared concern about the "hollowing out" of corporate Canada. As the Council said in its statement at the CEO Summit two years ago, "the question is not whether Canadians and their enterprises can succeed globally, but to what extent they will continue to do so from a Canadian base."

As Canadian chief executives, we see inflows of foreign capital as votes of confidence in our collective creativity and management skills, and in our economy. But within foreign-owned and Canadian-controlled companies alike, there is real concern over Canada’s ability to attract and retain the talented people who drive the growth of our enterprises.

To build Canada’s reputation as the home of choice for global leaders and head office jobs, our country must offer both competitive tax rates and a high quality of life. In order to improve public services and infrastructure over time, we must provide a tax and business environment conducive to investment, productivity and growth. But to meet today’s urgent demands for greater spending in areas such as education and health care, we also must be rigorous in re-examining all uses of public money on a continuing basis and reallocating resources as necessary to meet the evolving needs of Canadians.

A renewed focus on getting better value for our tax dollars must be combined with continued prudence in fiscal planning. While Canada’s growth record in recent months has been impressive, the degree of risk remains high. There appears to be a real danger of a renewed economic slowdown in the United States that would not leave Canada unscathed. We therefore continue to support fiscal planning that is built on conservative assumptions and significant contingency reserves. This in turn will lead to steady reduction of the public debt and increasing fiscal flexibility that governments will need to cope with the rising real costs of essential services like health care.

We would add that prudence also is required in the management of the business and regulatory environment. We have emphasized to Industry Minister Allan Rock that improvements in the regulatory environment could be a highly effective and low-cost means of stimulating innovation. Ill-considered regulatory measures, on the other hand, can do great damage.

In particular, as the Council has made clear to you and your Cabinet colleagues in recent months, a decision to proceed with ratification of the Kyoto Protocol on global climate change in its present form could do great damage both to existing businesses and to investment in new ventures from coast to coast. As described in the Council’s recently released paper, The Kyoto Protocol Revisited: A responsible and dynamic alternative for Canada, we see the need for an innovative and ambitious made-in-Canada strategy that delivers demonstrable improvements in the environment and enhances Canada’s prosperity.

The Council also hopes to continue working closely with you with respect to another of your responsibilities, management of the Canada-United States border. We are delighted with the rapid progress that has been made since the Smart Border Declaration that was signed by you and Governor Tom Ridge last December. But we see this as just the first step in a much more ambitious process for managing Canada’s future within North America, and the Council is proceeding with plans for a major initiative in the near future.

In closing, we have to note that leaders in both business and government are facing a high degree of public skepticism. While each sector must address its own areas of weakness in rebuilding public trust, it also is vital for the public and private sectors to reinforce each other’s strengths. Together, we must prove that Canada can be the best in the world in combining a rising standard of living with a superb quality of life.

We agree that what is required here involves more than just rules and regulations, policies and programs. Rather, what we must instill in Canadians is a global mindset. And as you said to the Finance Committee: "Our challenge is to take this new mindset and apply it to all areas of our national life. We cannot win in today’s global economy by settling for second best or what was best a decade ago – or in some cases, even what was best last year. We must focus on areas that will give an edge in the global economy. This, in turn, means we must be ready to challenge traditional assumptions, reconsider old ideas and, above all, make the changes necessary to succeed."

This was precisely the sentiment expressed by the Council two years ago when we said that "if we wish to set ambitious goals for a better tomorrow, we must be quick and bold in our actions today." We were delighted to sense both your determination and your sense of urgency, and we stand ready to help in any way that may be useful.

Thank you for your stupendous work on so many of the files that are critical to building a better future for Canadians. We look forward to continuing to work with you in the months ahead.

Sincerely,