Beyond September 11: Assessing the Damage, Planning for Recovery

November 1, 2001

Madame Chair, let me begin by thanking the Committee for this opportunity to help assess the economic effects of the terrorist attacks of September 11 and how Canada can move forward from here.

I will leave it to individual company representatives who are appearing before you to offer detailed assessments of the challenges being faced by their specific enterprises. I would suggest, however, that Canadian enterprises have been affected on three distinct levels, each of which demands different business and public policy responses.

First, there are the one-time shock effects of the terrorist attacks, economic losses that can be directly attributed to the terrorist attacks themselves and to their aftermath. Second, there are temporary cyclical effects of the economic downturn that was already underway at the time of the attacks. Third, there are persistent structural issues of Canadian competitiveness, problems that could be glossed over in better times but are now being brought to a head.

Travel-related industries were the hardest hit by the shock effects, and governments moved quickly to offer airlines compensation for direct event-related losses and to provide temporary back-up insurance for airports. The cyclical downturn, however, was well underway before September 11. It began with the high-technology sector, and had already triggered tens of thousands of layoffs and reductions in corporate expenditures such as business travel.

The shock of September 11 accelerated the downward cycle, hitting an increasingly wide number of companies and workers, but central banks worldwide had already taken action to counter its effects. They have responded to the terrorist attacks by cutting rates further, the Bank of Canada by an additional one and a quarter percentage points. The impact of lower interest rates is not immediate, but it is pervasive and powerful. Monetary policy remains the best way of easing the cyclical problems facing Canadian companies and consumers alike.

In recent weeks, we have heard a few scattered calls for massive fiscal stimulus as well. At best, we believe this would be counterproductive. At worst, it would be disastrous. First, consumers are benefiting already from the major tax cuts announced by Finance Minister Paul Martin last year. Second, the American experience with tax rebates suggests that in the current environment, most would be saved rather than spent. Third, the new security-related expenditures the government must make will in themselves be stimulative.

Above all, we expect that these essential spending measures will eat up most if not all of the current year surplus. In the absence of offsetting cuts in less essential spending, these needs may well push the government into deficit in the next fiscal year. The government may not be able to avoid a deficit for a year or two no matter what it does, but it must at all costs resist spending its way into deficit. We can think of no policy that would do more damage to consumer and business confidence than a return to the scale of deficits that drove taxes up year after year for more than two decades.

Fiscal policy is not the best means of combating the temporary effects of the economic cycle, but it will have a profound impact on Canada’s ability to deal with the structural challenges facing Canadian companies in a wide range of industries. The business environment that governments create through their choices on taxation, spending and regulation will determine how successful Canadian companies are in evolving and growing in the years ahead.

In our recently published book, Northern Edge: How Canadians Can Triumph in the Global Economy, my colleague David Stewart-Patterson and I argue that Canada’s goal can and should be ambitious: to make Canada the home of choice for global enterprises and global citizens, the best place in the world in which to live, to work, to invest and to grow. To succeed, however, we must be relentless in our efforts to improve the economic environment, to seek advantage through more competitive taxation, more transparent regulation, more effective public investment in research, in education and skills, in infrastructure and in other drivers of future growth.

As Industry Minister Brian Tobin said to this Committee on Tuesday, we must not let the short-term crisis lead us to neglect the essential building blocks of long-term growth in jobs and incomes. The government has already made important progress, for example through significant reduction of personal and corporate tax rates and increased investment in research. But much more can and must be done, and I would strongly encourage the government to proceed with a forward-looking strategic agenda that continues to be centred on innovation and skills.

The priorities and timing of this agenda, however, must be shaped to the times. This is not a time for massive new spending programs. It is a time to reflect on how we can spend existing resources more effectively. It is a time to look for ways to reshape Canada’s tax structure, to make our tax burden more competitive without reducing revenue. And it is a time to focus on regulatory issues that can have a powerful impact on growth without the need for new spending.

In the longer term, Canada needs to go much further in reducing taxes to give the country a compelling edge in attracting investment, but for now, there is much that can be done to make our tax structure more competitive without any loss of revenue. Likewise, over time, we will need to increase investment in research and to improve access to lifelong learning. But in the meantime, there is much that can be done to make existing support for individuals, for communities and for regions more effective.

Given today’s fiscal constraints, an effective innovation agenda also must address key regulatory issues. Governments could improve the efficiency of the Canadian economy by fully implementing and extending the Agreement on Internal Trade. Renewing efforts to reform Employment Insurance could have a powerful impact on labour mobility. Reviewing competition policy and restrictions on foreign ownership could provide a spur to increased business investment.

Innovation is not about preserving the status quo. It is about doing things better. The government should continue its vigorous efforts to encourage innovation in the public and private sectors alike, but I would suggest that a credible blueprint for moving forward must at the very least demonstrate that the lead government departments are committed to making more effective use of the resources they already have.

I would like to conclude my opening remarks by discussing the most urgent structural concern Canada faces today, our continued access to the United States market. The immediate effect of September 11 was to create long line-ups at the border. The line-ups have shrunk for the moment because governments have assigned more inspectors and fewer people and goods are trying to cross the border. The critical need now is to ensure that the temporary impact of measures to ensure border security do not cause persistent structural damage to Canada’s economy.

Many measures can be taken quickly to improve both security and efficiency at the border. These are discussed in a paper released this morning by a coalition of business groups that includes the Business Council on National Issues. Such efforts, however useful, will in our view be insufficient.

The health of Canada’s economy — and therefore the key to its sovereignty — lies in its ability to compete for investment in businesses that serve the continental and global markets. In particular, access to the American market is crucial. Given the evolution of worldwide events, Canada must make some fundamental decisions about how to manage its overall relationship with the United States. In dealing with this issue, time is short.

The BCNI has therefore begun to assemble a committee of Canadian chief executive officers who will work closely with their peers in the American business community. Our goal is to ensure that governments at all levels and in both countries are fully aware of our shared interest in ensuring an open border and that misperceptions do not lead to ill-conceived actions that might inhibit future trade or investment flows.

In times of crisis and confusion, unity of purpose and clarity of message are essential. Canada’s efforts must proceed vigorously and visibly, because even the perception that the border might become a more serious barrier will begin influencing business decisions now — decisions about which plants to close; decisions about where new plants will be built. Whatever else we do to improve the business environment in Canada will be undone if we ever allow the 49th parallel to be seen as a serious impediment to trade and investment.

To conclude, Madame Chair, Canadian companies are suffering on many fronts and for a variety of reasons. Some of the impacts of September 11 were one-time and now past. The most serious short-term problems are primarily cyclical in nature, but also have exposed serious structural weaknesses that must be addressed. Now more than ever, Canadians must work together both to ensure our collective security in the short term and to lay the foundation for competitive advantage in the future.