The National and Global Policy Agenda: Priorities for Canadian Business Leadership

January 14, 2003

Thank you and good morning. I would like to begin my report with an assessment of the domestic and international context that will drive our work programme in the year ahead. Then I will outline what I see as our immediate priorities for action and what we will be doing to lay the foundation for significant longer term initiatives moving forward.

For Canadians, it is tempting to be optimistic. The fiscal discipline and tax cuts of previous years continue to pay real dividends in terms of economic growth. Even as the American economy has sputtered, Canada has kept churning out new jobs, more than half a million of them in 2002. And in December, Statistics Canada reported that real per capita incomes rose by 2.8 percent a year in the latter half of the 1990s. This is a pace that, if sustained, would double our standard of living within the next generation.

Despite all the good economic news Canadians received during 2002, I have to say that the near-term outlook is more ominous. The prospect of a war in Iraq looms larger by the day. North Korea is once again engaged in nuclear brinksmanship. Terrorist bombings and the inevitable retaliatory strikes continue in the Middle East, and the risk of further terrorist actions continue to be a significant concern to people around the world.

Nor is the news very encouraging on the economic front. Japan seems unable to break out of its deflationary spiral. Germany, France and other European economies remain mired in sluggish growth. And Latin America is awash with uncertainty: the financial crisis continues in Argentina; a new government is feeling its way forward in Brazil; and the dramatic confrontation unfolding in Venezuela has led to major fluctuations in the supply and price of oil.
At home, Canadians face other risks. New security measures have added to the cost and inconvenience of travel. Our heavy dependence on exports to what has been a shaky United States market clearly leaves our economy vulnerable. And the chaotic process leading to the pre-Christmas ratification of the Kyoto Protocol has left many sectors of the economy operating under a pall of uncertainty.

Meanwhile, the prolonged process of leadership transition at the federal level has effectively put most major policy development on hold and left short-term decision-making hostage to the vagaries of internal Liberal Party politics. In particular, this has created a host of competing demands for additional public spending and sidelined the sound policy fundamentals that have driven Canada’s growth in recent years: budget surpluses, debt reduction and increasingly competitive tax rates.

Under these circumstances, the Council is effectively pursuing a two-track strategy. In the short term, we have limited our advocacy to a relatively select group of issues — in particular those related to economic and trade issues and corporate governance. But on most issues, especially where we think major policy initiatives are desirable, the best we can do is to lay the groundwork for possible action by the next federal leader and his government.

Let me illustrate what this means in practical terms. Fiscally, for instance, we have been strongly supportive of Finance Minister John Manley’s decision to restore a full $3 billion annual contingency fund in the federal budget and to continue the use of significant prudence factors in budget planning.

The $670 billion tax cut plan unveiled last week by United States President George W. Bush has provided a powerful reminder that maintaining and enhancing Canada’s competitiveness will require continued vigilance and further effective action on the tax front. But with most of the major tax cuts of the October 2000 budget now in place and with Canada’s corporate income tax rate projected to fall below that in the United States, the current government has little appetite for further tax reductions.

In our presentation to the Finance Committee of the House of Commons in November, therefore, we continued to argue the merits of further tax cuts, but kept a narrow focus on the immediate priority of eliminating federal capital taxes. We suggested that this would be affordable even within the limited surpluses projected by Mr. Manley. And we suggested that the government should proceed with elimination of capital taxes even if it were necessary to fund this initiative through elimination of equivalent spending on business subsidies such as regional development programs.

Last week, the Conference Board of Canada raised its forecast for the federal surplus to $8.7 billion this year and $11.2 billion next year. A surplus this large, given the strong consensus across the country that elimination of capital taxes is the single most important measure the government could take to stimulate innovation and productivity, would leave no logical excuse for not taking action in the next budget.

At the same time, we recognize the intensity of the demands for increased public spending. The recommendations of the report of the Commission on the Future of Health Care in Canada headed by Roy Romanow by themselves would consume the entire surplus forecast by Mr. Manley in October over the next five years. Yet the Throne Speech in September called for new spending in a wide variety of other areas as well.

We ourselves have suggested that there are areas of federal activity that require increased funding. In particular, we have said that Canada’s military must have the capability to safeguard Canadians and to enable our country to do its part in ensuring the security of others within North America and around the world.

We therefore have strongly supported Mr. Manley’s stated desire to carry out a rigorous review of all existing spending, comparable to the program review carried out in the deficit-cutting days of the mid-1990s. As the Finance Minister himself remarked as he presented his fiscal update in October, when you are spending $170 billion a year, there must be some programs that have become less relevant or proven to be less effective.

In the short term, therefore, our fiscal priorities are fairly straightforward: to ensure that the government maintains sufficient prudence in its budget to avoid any significant risk of a return to deficits; to hammer home the national consensus on the need to eliminate capital taxes; and to prevent an unsustainable surge in new federal spending. We need to be especially wary of any multi-year commitments that might be included in the next budget because of the risk they would pose both of future deficits and to future efforts to bring down tax rates.

The final priority for the Council in the short term, I would suggest, is the regulatory environment. Especially when fiscal resources are constrained, action on the regulatory front can be a powerful tool for encouraging investment and growth. We have strongly supported the decision by Industry Minister Allan Rock to accelerate the regulatory review process within the federal Innovation Strategy and to complete the key elements of this review by 2005 rather than 2010.

As we said to the Finance Committee, our most urgent concern is not with respect to regulatory standards. Indeed, a reputation for maintaining the highest standards in areas such as the environment and health and safety can and should be part of Canada’s global brand. We are, however, deeply concerned by the persistent lack of transparency and predictability in regulatory processes.

Put simply, for regulation to work well and to contribute to a positive environment for investment and growth, the rules of the game must be clear and respected. Banks should not have to guess whether a lengthy regulatory review of a potential merger will be cast aside at the end of the day on a political whim. Clarity and consistency are also essential on issues like intellectual property protection and the regulation of foreign share ownership in sectors such as transportation, telecommunications and media, two other priorities for review identified by Mr. Rock.

But I think no issue illustrates the need for greater clarity and predictability in the regulatory process than the badly botched process leading to ratification of the Kyoto Protocol on global climate change.

I already have offered my analysis of what went wrong in this process in a memorandum circulated to all of you recently, so I will not rehash this morning what I see as the reasons for this lamentable failure in the policy development process.

But now that the Prime Minister has forced through ratification of the Protocol, the weaknesses of the government’s implementation plan will only become more apparent. In the days immediately after the ratification vote, the government offered some important concessions that reduce to some extent the risks to our businesses. While this is good news, two points are important here. One, these promises would not have been made were it not for the vigorous efforts by Canadian business, including many of you in this room, and the reality that the Kyoto juggernaut was indeed having a real impact on some important investments and potential investments in Canada. Second, to the extent that the obligations on large industrial emitters have been capped, the liability for making up the excess falls to the federal government and, of course, ultimately to all of us as taxpayers.

The reality is that Canada’s commitment to the Kyoto Protocol remains a potentially significant drain on our economy if the government were to ever try to achieve its totally unrealistic target. That the current implementation plan is a house of cards — a fact that will only become more apparent as our emissions grow and the gap becomes wider with each passing year — should not lull us into a false sense of security. Although many in the federal government are content to downplay the consequences of Canada missing the target, the legal enforceability of the Protocol is very much an issue, and one that should concern us. Our trading partners, particularly in Europe, may resort to trade remedies if they feel that Canadian firms have received an unfair advantage, and Kyoto proponents are likely to use the courts and various regulatory bodies to try to impose more stringent obligations on companies with growing greenhouse gas emissions.

Having said this, it is important that we move ahead to solidify the promises that have been made by the federal government and to ensure that the emissions intensity targets which are to be established for key industry sectors reflect economic realities and technological opportunities. These negotiations will primarily be carried out on a sectoral basis but we at the Council will remain intensely engaged and will do our best to ensure that what emerges is, as we have recommended for months, a plan based on what is realistic and achievable for Canada, one that both makes a real contribution to the environment and enhances Canadian competitiveness.

In the short term, the politics of federal leadership suggest that we will be primarily on the defensive, doing our best to prevent further bad policy decisions rather than acting with any great hope of seeing ambitious new ideas enacted. But precisely because of the transitions in leadership taking place within the Liberal, Progressive Conservative and New Democratic parties, this year will be an excellent time to plant the seeds of tomorrow’s big ideas.

That is why one of our tasks in the months ahead will be to develop a detailed policy platform, a compendium of our ideas that we can offer to the current and potential leaders of all political parties, at the provincial as well as federal levels. In the course of the Canada Global Leadership Initiative that we launched in 1999, we proposed the bold goal of making Canada "the best place in the world in which to live, to work, to invest and to grow." We put forward a wide range of ideas for enhancing Canada’s ability to attract and to foster investment, talented people and innovative ideas, many of which have since been reflected both in federal budgets and the government’s Innovation Strategy.

While Canada has made great progress and has begun to outperform the United States, much more remains to be done: to create a winning business environment, to foster innovation, to maximize Canada’s human potential and to manage the process of continental and global integration.

We cannot hope to build sustainable competitive advantage on the basis of either low-cost labour or of a steadily declining currency. As demonstrated by the latest study on productivity from the Centre for the Study of Living Standards, productivity growth in Canada has continued to lag that in the United States despite our strong economic showing of recent years.

Some of the causes of this gap are structural: sectors such as electronic equipment that have experienced the greatest productivity growth simply account for a bigger share of the economy in the United States and skew the overall numbers accordingly. But the fact remains that Canadian business managers are faced with significant incentives not to make risky investments in leading-edge technologies, the very strategies that are most important in improving productivity and creating a higher-skill and higher-wage economy.

I have already mentioned capital taxes, which make Canada the only country in the industrialized world to directly penalize through taxation the very investment in capital assets like new machinery and equipment that we know is essential to boosting productivity and incomes. Our country persists in maintaining an array of business subsidies whose impact has been to reinforce traditional patterns of sectoral activity and employment. Our Employment Insurance system continues to discourage people from upgrading their skills and exiting seasonal and low-skill work. And despite the fine intentions of the Agreement on Internal Trade, both provincial governments and self-regulating professions continue to maintain significant barriers to the mobility of labour within Canada.

Eliminating capital taxes is not the only step Canada could take to improve its ability to attract investment and to help Canadian enterprises to grow and to create jobs. Earlier this year, the Council suggested that Canada could create a meaningful advantage in attracting investment within North America by aiming for an average corporate income tax rate of at least 10 percentage points less than in the United States. This year, we will explore how such a goal could be achieved and funded, and address related tax issues including capital cost allowance rates, equity in taxation between industrial sectors and tax incentives for venture capital and research and development.

The Council has long argued that it is counterproductive for an economy as small as Canada’s to fragment its internal market and regulatory regimes. Today, the most obvious example of this folly is in the arena of securities regulation, where Canada’s efforts to develop a credible response to the frenzy of new regulatory initiatives in the United States are clearly hampered by the fragmentation of regulatory authority within our country. We intend to help in any way we can to advance the discussion on how to manage securities regulation consistently from coast to coast.

The final domestic issue I want to highlight is one championed by our outgoing chairman, Charlie Baillie, and that is the vital role of Canada’s urban centres to the country’s future prosperity. The very success of many of our cities has exacerbated a wide range of problems, from deteriorating environmental conditions and inadequate infrastructure to a shortage of affordable housing. Yet these issues challenge the traditional role of the federal government, which has been to redistribute resources within the federation from richer regions (predominantly urban) to poorer ones. For Canada as a whole to move forward, the federal government may have to rethink its fundamental priorities, and the Council is planning to make a constructive contribution to this evolving national discussion.

Before opening the floor for your comments and questions, I want to talk briefly about our activities on the international front. We have set aside the second half of this morning for a detailed presentation of a proposal for advancing the Canada – United States relationship, and I will save my comments on this subject for that time.

But more broadly, as a relatively small economy, we also have a vital interest in strengthening the international rule of law and multilateral institutions such as the World Trade Organization. The Council has and will continue to offer strong support to multilateral and regional discussions aimed at continued trade liberalization. We also, as we have done in recent years with other business organizations and with governments in countries such as Mexico, Japan, China and India, will seize opportunities to help Canada enhance its bilateral relationships with trading partners around the world.

Canada’s most immediate global challenge, however, flows from the war on terrorism. This is an unprecedented conflict that puts all Canadians at risk, wherever they live, work and travel. Our country always has been committed to the defence of democracy and to peacekeeping within zones of conflict. But as I suggested earlier in my comments on fiscal priorities, the scale and nature of today’s threats to Canadian and global security have strained our military forces to the breaking point.

The time is long overdue for a major strategic review of foreign and defence policy, in part to define and narrow the roles that we expect our armed forces to play. And the bottom line, I would suggest, is that whatever Canada asks of the men and women who put their lives on the line for our country, it must ensure that they are trained and equipped to do it well.

Let me close by returning to the theme introduced by our new chairman this morning, that of restoring public trust. We cannot escape the fact that the corporate scandals of recent years have had an enduring impact on the reputation and credibility of the business community in general and of business leaders in particular. And the brutal fact is that when business leaders suffer a loss of public trust, we also diminish our ability to influence public policy. If we are not trusted, neither will be our ideas.

As a Council, we already have taken action to show leadership in the challenge of improving corporate governance. In our major statement in the autumn, Governance, Values and Competitiveness: A Commitment to Leadership, we promised not only to uphold the highest standards of governance within our enterprises, but also to encourage the spread of better practices across the economy and our society.

The Council will remain actively engaged on the corporate governance issue in the year ahead as regulators and other market participants work out how best to restore confidence in Canadian enterprises and markets. But as our chairman suggested earlier, I think we need to look beyond corporate governance and renew our engagement in issues of public governance.

Perhaps the most urgent issue here, in both symbolic and practical terms, is Parliamentary reform. Canadians need to see enhancements to the roles of committees and of individual members of Parliament and greater transparency and accountability on the part of elected and appointed officials alike.

I want to suggest this morning that we as a Council also should encourage a review of the policies governing political donations by corporations and unions. While I believe that corporations and their employees have a right and a responsibility to participate in the democratic process, I think you would agree that any perception that donations buy access or influence undermines public trust in both business and government.

At the same time, I worry that funding political parties through general tax revenues instead of voluntary donations by Canadians would remove an important element of accountability from the democratic process. And I therefore would welcome your comments on how the Council should respond to any proposal for the reform of party financing that may emerge in the weeks ahead.

This specific issue aside, I think that our democratic institutions, like our capital markets, have suffered a grievous loss of public trust. The quality of public governance in turn has profound implications for the competitiveness of the Canadian business environment. And I therefore would suggest that we as business leaders can and should play a visible role in improving the quality of governance in both the public and private sectors.

To summarize my report this morning, I believe that policy-making in Canada stands at an interesting but perilous juncture. At home and abroad, there are significant risks to both the physical and economic security of Canadians. The lengthy process of leadership transition at the federal level is frustrating innovative policy-making in the short term, but it also provides fertile ground for bold ideas in the longer term. While focusing our short-term efforts on reinforcing fiscal discipline and prudence, we at Council headquarters therefore will be devoting much of our time in the year ahead to developing ambitious proposals that could be adopted by the next federal leader and his government.