Seizing the Future, Sharing Success: Fiscal Priorities for Accelerating Growth

April 23, 2002

Thank you, Madame Chair. Let me begin by offering my best wishes to you as you take up the challenge of guiding the important work of this Committee. I also should note that while the faces appearing before you may be familiar, the name of our organization has changed. When the Canadian Council of Chief Executives last appeared before the Committee, we were still the Business Council on National Issues.

At that time, smoke was still billowing from the rubble of the World Trade Center, and it was clear that Canada faced urgent new priorities and tough fiscal choices. There were real fears both for the security of Canadians and for the country’s economic prospects. We suggested that to recover from the crisis and forge ahead as rapidly as possible, Canadians would have to work together with prudence, creativity and determination.

Today, the shadow of the terrible events of September 11 still hangs over us, but a great deal has changed and for the better. The federal budget of last December managed to address the need for more effective security measures without either plunging into deficit or giving up any of the hard-won improvements to Canada’s tax structure. The rapid reduction of interest rates by central banks kept consumer confidence high and the economic downturn remarkably short. The governments of Canada and the United States moved with remarkable speed to ensure that our mutual border, to quote the Minister of Finance, "is open for business but closed to terror." The result is that this Committee can now contemplate a much broader range of measures to enhance the prosperity and quality of life of Canadians than was possible just seven months ago.

The degree of economic uncertainty, however, remains high. The business sector in both Canada and the United States has begun to recover from a sharp slump in profits. But I have to say that business leaders on the whole remain much less optimistic about the near-term prospects than many economists or than the Bank of Canada, which already has moved to raise interest rates.

Our views are closer to those of United States Federal Reserve Chairman Alan Greenspan, who said last week that while the odds are strongly in favour of continued economic growth, there is still a danger of what he called "a real slip back". Continued weakness in business investment, heavily indebted consumers pinched by rising fuel prices and interest rates, and recent developments in the war on terrorism and in the Middle East all pose significant risks to growth in the near term.

That said, federal finances are in better shape than predicted as recently as the December budget. According to the 11-month fiscal report issued last week, both personal and corporate income tax revenues have been significantly stronger than projected, and the result is likely to be another healthy surplus for 2001/02.

We continue to believe strongly, however, in prudent fiscal planning. After all, setting aside significant contingency funds serves two goals. First, it prevents a return to the deadly cycle of deficits. Second, by accelerating the reduction of public debt, it gives future governments more room to meet growing demand for services such as health care.

A second principle we emphasized last autumn remains equally important today: the need for a tight rein on public spending. While much of the additional spending in the December budget was for essential measures to protect the security of Canadians, we clearly cannot sustain spending growth at last year’s 9.4 percent pace. And while projected spending for this year is somewhat more modest, it is still expected to grow more than twice as fast as either inflation or budgetary revenues.

Canada’s foundation for growth remains far stronger today than it was a decade ago. But it is important to build on our progress, not fritter away what Canadians have worked so hard to earn. For this, we need a tightly focused national effort. The recently unveiled Innovation Strategy lays out some laudable and ambitious goals — goals that would have a real impact in meeting this Committee’s desire to raise the standard of living and improve the quality of life of all Canadians.

A timid or incremental approach simply will not deliver the results Canadians want. As the government acknowledged in its Innovation Strategy, if we fail to improve both the substance and global perceptions of Canada’s innovation performance, "we risk being bypassed in the intense international competition for investment and talent." The brain drain, a head office exodus, the "hollowing out" of corporate Canada: call it what you will. The reality is that either we set out boldly to make Canada a compelling place to do business in the global marketplace or we undermine the growth and prosperity that is essential to delivering a high quality of life. To share success, we must seize the future.

We are convinced that there is much that the government can and should do in the near term. We see room for ambitious initiatives that could make a real difference without the need for substantial new resources. The essence of innovation, after all, is doing better with what we have.

Canada has done a great deal to improve the macroeconomic environment over the past decade. The fact remains that too many Canadian businesses still lag their competitors across a wide range of indicators of innovative behaviour, from productivity and investment in training to the adoption of new technologies and the development of new products for global markets. This leads to the obvious question: Given the pressures of global competition, why are Canadian businesses not investing more aggressively?

The regrettable fact is that Canadians trying to build globally competitive enterprises still face a daunting range of impediments that flow from public policy. For their part, Canada’s largest companies tend to be relatively small players on the global stage, and yet can find their ability to grow hampered by competition policy and other regulatory limits that focus on Canada’s modest market. Across a wide range of issues from environmental approvals to corporate mergers, Canadian enterprises are subject to staggering uncertainty and costs through complex and lengthy regulatory processes that cry out for greater transparency and predictability.

Canada’s regulatory framework also remains highly fragmented. This is especially damaging in capital markets, imposing unacceptable costs not only on the financial services sector, but on companies in all industries as they grow and seek access to capital. More broadly, much can and must be done to build on the principles embodied in the Agreement on Internal Trade and to ensure that Canadian enterprises are able to function efficiently from coast to coast.

We see a thorough and critical review of Canada’s business and regulatory regimes as the single most important element in the federal Innovation Strategy. We would suggest, however, that the 2010 deadline for completing this process is far too modest. In a recent memorandum for Industry Minister Allan Rock, which I would be happy to share with members of the Committee, the Council said that the regulations, policies and programs that are the key federal drivers of innovative behaviour should be reviewed and changed where appropriate no later than 2005. We suggested four areas in particular that will be examined in more detail by the Council’s National Policy Committee in preparation for the government’s National Summit on innovation this autumn:

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  Adopting a national framework for the commercialization of intellectual property created with federal support;

  
  
  
  
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  Improving access to venture capital through pension funds and carrying out a critical review of the effectiveness of Labour Sponsored Venture Capital Corporations;

  
  
  
  
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  Reviewing all business subsidies and maintaining only those that have a transparent and demonstrable impact in encouraging innovative behaviour and increasing productivity; and

  
  
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  Reforming the Employment Insurance system to remove incentives for both employers and governments to maintain existing patterns of low-skill or seasonal work at the expense of investments in new technologies that create more highly skilled and better-paid jobs.

Even ambitious initiatives to encourage innovation need not and should not involve net new expenditures. Indeed, one of the conclusions that is likely to flow from an effective review of federal programs is that the innovation agenda would be served better through changes to the tax system and regulatory regime than through program spending.

This brings me to the Council’s priorities in tax policy. Last September, we suggested that the need to put the security of Canadians first meant deferring any major new tax cuts or non-essential new spending. Today, there is clearly room once more to consider ways of using tax policy to improve Canada’s competitiveness and add to its future prosperity.

The economic evidence is quite clear on what forms of taxation do the most damage both to innovative behaviour and to economic growth. Quite aside from the impact of the overall tax burden, Canada’s existing tax structure discourages innovation by leaning more heavily on business capital and income than on payrolls and more heavily on personal savings and income than on consumption.

No form of taxation is more damaging to innovation than capital taxes, because they penalize directly business investment in assets such as new machinery and equipment. As its top fiscal priority, the federal government should announce in the next budget that its capital tax will be eliminated by 2005 and should encourage provincial governments to follow suit. Even if slower growth persists, elimination of capital taxes should proceed as part of a broader review of the tax structure at both the federal and provincial levels.

There may be room for additional targeted tax cuts in the next budget. However, the Council would prefer not to make specific recommendations until we see more evidence of sustained economic recovery. We would hope to have the opportunity, therefore, to return before this committee later in the year.

In the meantime, the goal of tax policy should be clear. Competitiveness in taxation is not just a matter of playing catch-up with the neighbors. Rather, Canada should be trying to create a meaningful advantage over its major competitors. Canada may not be able to match the United States on personal income tax rates, but it already offers lower payroll taxes and is, at least in some provinces, becoming quite competitive in corporate income tax rates. The focus of tax policy should be on consciously shaping Canada’s tax structure to create a real incentive for Canadian and foreign businesses alike to choose this country as their base for serving the North American market.

This leads to my final observation this morning. To attract investment in innovative businesses and well-paid jobs, Canada needs to offer more than just a welcoming and competitive business environment. It also needs unimpeded access to the North American market. The aftermath of September 11 has driven home the fact that despite the Canada – United States and North American Free Trade Agreements, such access is not guaranteed. To maintain and enhance the free flow of goods across our mutual border, we also must ensure that our citizens enjoy the same degree of physical security as our American friends. Improving security goes hand in hand with enhancing economic growth.

In addition to setting ambitious goals for Canadian achievement, therefore, we need an overarching vision of how we want to flourish within a highly integrated continental economy. Only by considering Canada’s strategies within this larger context can we hope to achieve the degree of prosperity that is necessary for Canadians to remain relevant as a sovereign nation, to continue making our own choices for own reasons.

Let me conclude by thanking the Committee for launching its pre-budget consultations earlier than usual. The degree of uncertainty means that we will not be able to offer definitive suggestions on fiscal measures until later in the year, but it is important to lay out the framework first. This Committee has always played an important role in shaping the budgetary framework, and I hope that my comments this morning have been helpful to you as you begin this formidable task.