Managing the Border, Managing the Budget

November 19, 2001

Dear Mr. Martin,

The consequences of the terrorist attacks of September 11 on an already weakening economy make the choices involved in your upcoming budget perhaps the most difficult since you began the arduous task of bringing down the sky-high deficits of the early 1990s. On behalf of all of the member chief executive officers of the Business Council on National Issues (BCNI), we wish you well as you craft its final details.

The BCNI has made a number of detailed recommendations on fiscal policy in recent weeks, most notably in a memorandum for the Prime Minister on September 7, a presentation to the Standing Committee on Finance on September 25 and a presentation to the Standing Committee on Industry, Science and Technology on November 1. We also had the privilege of a frank and extensive exchange with you over dinner at the BCNI’s Autumn Members’ Meeting in Toronto on October 18.

At that time, we made it clear that we see the need to manage Canada’s borders as the country’s most urgent challenge. First and foremost, of course, is the need to protect Canadians, in terms of both physical and economic security. While physical security requires more effective and innovative border management, Canada’s economic future depends on the continued free flow of goods and services. In particular, our country’s ability to attract investment and foster globally competitive enterprises depends on confidence that the Canada-United States border will never again become a significant barrier to trade.

We are pleased that the governments of Canada and the United States are engaged in constructive collaboration in response to the immediate impacts of the attacks of September 11. Neither country wishes to take any measure that might worsen the downturn in the North American economy. The real challenge, though, is to build and maintain a high level of mutual confidence in the integrity of our common economic space. The BCNI has pledged to reinforce government-to-government efforts by working with private sector leaders in the United States, and to this end, already has begun to assemble an action committee of leading chief executives. We are prepared to commit whatever time and resources are necessary to ensure that fear of terrorism does not disrupt the economic relationships that have fuelled Canada’s impressive growth in recent years and that remain vital to our prosperity as well as our future sovereignty.

In the meantime, we know that you face difficult choices in managing the country’s finances. Fiscally, we believe prudence must come first in times like these. The economic news since September 11 has been grim: business profits have plunged; unemployment is on the rise; consumer confidence has been eroded. For its part, the federal government faces the need for major new expenditures to ensure the security of Canadians even as all of its major sources of tax revenue come under pressure.

The scope of the economic damage Canada has suffered is becoming clearer, but the outlook remains murky. Even with prudent planning and significant contingency reserves, a deficit may be unavoidable in the next fiscal year. We therefore continue to urge the federal government to do its utmost to avoid spending its way deliberately into deficit. To do otherwise risks seeing a modest planned deficit turn into a huge unplanned shortfall. As you have rightly emphasized, nothing could do more damage to business and consumer confidence than the prospect of reigniting the deadly spiral of rising debt and taxes from which Canadians struggled for a decade to emerge.

At the same time, it is important to stay the course in long-term strategy. The events of September 11 were a short-term shock that accelerated a cyclical decline that was already underway. But both fiscal and monetary policy reflected a determination to counter those cyclical effects even before the terrorist attacks.

The Bank of Canada began cutting rates long before September 11 and in concert with central banks around the world continues to pursue a course of monetary easing that will have pervasive and powerful effects over time. Indeed, the interest rate savings on federal government debt are offsetting some of the damage being done by falling tax revenues. Similarly, the bulk of the planned cuts in personal and corporate income taxes and in Employment Insurance premiums announced in October 2000 kicked in at the beginning of this year.

We see no reason to back away from any of the remaining elements of these previously announced plans. In fact, following through on these promises will play an important role in restoring confidence in Canada’s long-term prospects. Consistency in pursuing sound fiscal and monetary policy also will be important in restoring confidence in Canada’s currency as the terrorist crisis abates and the economy turns up again. We remain convinced that an independent currency remains Canada’s best option, but only if we continue to pursue fiscal as well as monetary policies that are likely to reverse the effective pay cut that Canadians have endured over the past quarter century.

We therefore see no room at this time for major new fiscal initiatives, either sweeping new tax cuts or new spending commitments beyond those essential for maintaining and enhancing the security of Canadians. We recognize that the government may find it possible to fund a few modest, one-time initiatives to support other urgent priorities without running the risk of a deficit in the current fiscal year. However, given the high risk of falling into deficit in 2002/03, we would be uncomfortable with any non-essential commitment that would extend into the next fiscal year.

We see many ways for the government to demonstrate its commitment to the longer-term agenda that do not involve net new expenditures. We can do better with what we have. This is particularly true within the innovation and skills agenda, where there are plenty of opportunities to reinvent, redesign and redirect existing programs in ways that will produce better outcomes. One of our earlier recommendations was a revival on a continuing basis of rigorous program review, and certainly a commitment to an agenda centred on innovation should highlight the government’s determination to innovate within its own operations.

Similarly, we have raised options for structural reform in taxation, changes that would improve the competitiveness of Canada’s tax burden without any net loss of revenue. We have strongly suggested a review of the regulatory environment, where for example changes to competition policy and ownership restrictions in many key sectors could spur investment and growth without new federal spending. We have recommended that the federal and provincial governments move much more vigorously to implement and enhance the Agreement on Internal Trade. And we have suggested that the flexibility of labour markets could be enhanced significantly by returning to effective reform of the Employment Insurance system. In short, we do not see the constraint on revenue as an excuse for inaction in pursuing progress in Canada’s competitiveness and growth.

We recognize that this kind of structural reform is neither easy nor quick, and that your forthcoming budget will focus on the country’s immediate needs and prospects. However, we hope that the budget does encourage Canadians to look forward and to think about what all of us can do even in difficult economic times to build a better country.

In the meantime, it remains equally important for governments not to take non-budgetary actions that could exacerbate the economic downturn. Take for example the environment. While Canadian companies are committed to leadership in environmental innovation, the economic consequences of proceeding with Canadian ratification of the Kyoto Protocol in the absence of an equivalent step on the part of the United States could seriously damage the competitiveness of Canadian enterprises in many sectors of the economy and have far-reaching consequences for growth and employment. We therefore would urge the government not to move toward ratification at this time. At the very least, any eventual decision must be preceded by a thorough, comprehensive and public review of the precise costs that would be incurred not only by Canadian companies but by individual employees and consumers.

This leads back to the broader issue of Canada’s economic performance and its relationship to the value of our currency. Despite all of the progress Canada has made over the past decade, the Canadian dollar has continued to decline in value relative to its American counterpart, leading some commentators to suggest that the time has come to abandon our independent currency. Such a step may prove to be inevitable in the decades ahead, but it offers no solution to the structural challenges Canada faces today. Canada’s economy has done well in recent years, but that of the United States has done better, and the value of our dollar reflects the disparity. If we want a stronger dollar, then as you yourself have suggested and the members of the BCNI supported in the course of our Canada Global Leadership Initiative, our goal must be to outperform the American economy.

In today’s challenging times, important long-term initiatives to this end may have to be set aside. We should not lose sight of what must be done to improve the lives of Canadians and of all citizens of the world over time. But we must for the moment focus on ensuring security today rather than improving quality of life in the years ahead.

That said, it is incumbent on all Canadians to stand shoulder to shoulder, to work together unstintingly in ensuring that we make the most of our country’s impressive human and financial resources. Canada’s business leaders played important roles in helping to marshal the country’s resources during the great crises of the last century. We continue to offer our help in any way that may be useful as Canada confronts the latest challenge to its values and way of life.