MANAGING UNCERTAINTY GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT

MANAGING UNCERTAINTY, GOVERNING FOR GROWTH: PRIORITIES FOR THE NEXT FEDERAL BUDGET Notes for remarks by Thomas d’Aquino President and Chief Executive Canadian Council of Chief Executives to The Standing Committee on Finance House of Commons Montreal, November 7, 2002 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 Thank you, Madame Chair. It gives me great pleasure to appear before the members of this Committee once again. And I am especially glad that I am able to do so here in Montreal, home to many of the members of the Canadian Council of Chief Executives and an international hub that exemplifies our country’s cultural and economic dynamism. When my colleagues and I last appeared before the Committee in April, we discussed the federal Innovation Strategy, the regulatory environment, tax policy and the high degree of risk in the economic outlook. In the months since, the economic news for Canada has continued to be excellent. As the Minister of Finance pointed out last week, Canada’s economy grew at a rate of 5 percent annually in the first six months of 2002, and the country’s employers created 427,000 new jobs between January and September. While the Governor of the Bank of Canada has noted that our country’s economy is now operating close to capacity, it also is inextricably linked with the economy of the United States. There, the outlook remains shaky. Business pessimism is reflected in the continuing volatility of financial markets, and there are growing signs that consumers are running out of steam. Other major economies, including Japan and most of the European Union, continue to experience stagnant growth, and seem unlikely to be able to pick up the slack if the American economy falters. Canadian Council of Chief Executives 1 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 In addition to this pervasive economic uncertainty, the risk remains high of continuing terrorist attacks and indeed of broader conflicts. We simply cannot ignore the possibility of major disruptions to the lives of Canadians and to the flows of trade and investment that are the sinews of our economy. As my first comment on the federal government’s fiscal priorities, I want to commend the Minister of Finance for restoring a full $3-billion annual contingency fund and for factoring in a significant degree of prudence in fiscal planning. In his appearance before this Committee last week, the Minister noted another benefit that flows from prudence. Over the past five years, prudent fiscal management has led to repayment of $46.7 billion in principal -- and savings of almost $3 billion a year in interest payments on the public debt. Maintaining significant contingency funds and prudence factors not only reduces the risk of an unintended return to deficits. When unused contingency funds go to paying down the debt, they also buy greater assurance that the government will be able to sustain and enhance the quality of life of Canadians in the years ahead. Money saved is never money wasted. Once contingency funds and prudence factors are included, the government’s projections show relatively small surpluses in the near term. We therefore agree wholeheartedly with the Minister of Finance that just as individual families must make tough choices in managing their household budgets, the government must address urgent new Canadian Council of Chief Executives 2 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 priorities through the reallocation of money from other activities that have become relatively less important or have proven to be less effective. As he put it, when you are spending $170 billion a year, there have to be some expenditures that have outlived their usefulness. Indeed, the Fiscal Update noted that a major reason for the unexpectedly high surplus in the last fiscal year was that more than $3 billion in budgeted program expenditures went unused. While the Council has argued consistently for a return to rigorous program review as a regular and continuing feature of fiscal management, and we are pleased that the Minister is moving in this direction, we have to keep in mind that budget-making over time is not a zero sum game. As the economy grows, people pay more taxes and governments have more to spend. The Fiscal Update notes that over the next five years, total federal tax revenue is expected to rise by five percent a year. By 2007/8, revenue from the goods and services tax, personal income tax and corporate income tax is projected to rise by 34 percent, 32 percent and 25 percent respectively -- despite the tax cuts launched in the October 2000 budget. This growing revenue stream, coupled with regular rigorous reviews of existing spending, should be sufficient to enable the government to meet new and growi ng priorities. Some of the areas that will require increased expenditure are significant. One in particular that has received insufficient attention is military spending. The state of Canada’s military affects more than Canadian Council of Chief Executives 3 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 Canada’s international stature as a peacekeeper. As the experience of the past year demonstrates, a well-funded and well-trained military is vital to ensuring the security of Canadians. And given the realities of continental integration, our willingness to maintain a credible military capability affects not only our sovereignty over our coasts and airspace but also the nature of our relationship with the United States and our ability to ensure a continued free flow of goods and people across our common border. Health care costs also seem certain to keep rising in real terms, but the amount of money Canada spends on public health care is not unusual in comparison with other industrialized countries. There is simply no reason to believe that increasing health care expenditures in Canada should require an increase in overall taxation. Just like any family planning its budget, the more we choose to set aside for one purpose, the less we will have to spend in other areas. The Minister of Finance has made it clear that he is not prepared to reverse any portion of the $100 billion tax cut package announced in the October 2000 budget. In the Council’s view, any move to introduce a new tax -- even if dedicated to health care or any other purpose -would be a violation of this promise. In particular, the variable health care premium proposed by the Senate Committee on Social Affairs is simply an income surtax under another name, one that would both complicate the tax structure and reverse much of the personal income tax relief that Canadians have received over the past two years. This would be unacceptable on two counts. First, in practice, dedicated taxes aren’t. Unless the health care system were to be Canadian Council of Chief Executives 4 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 funded entirely by a single dedicated tax source, there is simply no way to ensure that the dedicated tax would in fact result in an equivalent net increase in health care spending. Those dollars might flow into the health care system, but others could just as easily flow out. Second, raising tax rates is simply the wrong way to ensure that Canada can sustain and enhance public health care. The combination of fiscal discipline and tax cuts that this government has introduced has played a very important role in making Canada the fastest growing economy in the G-7. It is this growth that has boosted real disposable income per person by 3 percent a year over the past five years, and that is projected to boost annual federal tax revenue by $46 billion within the next five years. Even with all the tax cuts federal and provincial governments have introduced in recent years, total tax revenue for all levels remains at about 43 percent of the economy, near its all-time high. If the federal government wants to reinforce Canada’s economic growth and drive tax revenue even higher over time, it should be giving far greater consideration to further tax cuts, not tax increases. As the Council indicated to this Committee in April, the single most effective change in tax policy at the federal level would be a commitment to eliminating capital taxes. T his generates a relatively small amount of revenue, about $1.5 billion a year. But this tax directly penalizes companies that invest in fixed assets, in the very new plants, machinery and equipment that are critical in boosting productivity and enabling Canadian workers to earn higher incomes. A commitment to eliminating the federal capital tax on a phased basis over the next Canadian Council of Chief Executives 5 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 three years would be not only affordable within the current fiscal context but also the single most powerful move this government could make in driving innovation, productivity and economic growth. The Council believes that Canadian competitiveness also would be enhanced by further cuts to corporate income tax rates. In a memorandum addressed to the Minister in July, we suggested that Canada should adopt a target of keeping its average corporate income tax rate at least 10 percentage points below that in the United States. This may sound self-serving, but the fact is that Canada is competing directly with the United States to attract investments in operations serving all of North America. The Fiscal Update noted that including capital taxes, companies in Canada will enjoy a 4.3 percentage point advantage over those in the United States by 2005. We believe that widening this advantage to 10 percentage points or more through a combination of cuts in corporate income and capital taxes would create a compelling case for investment in Canada at a relatively modest fiscal cost even in the short term. Such a strategy is worth exploring even if fiscal circumstances preclude a net cut in tax revenue. For instance, as at least one member of this Committee has suggested, you might wish to consider offsetting the short-term revenue losses from further corporate income tax cuts through corresponding cuts in spending programs involving business subsidies. Without getting into arguments over the relative merits of specific programs, tax measures are generally more efficient at stimulating business activity than program spending. Canadian Council of Chief Executives 6 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 As the Council has noted in the past, changes to the tax mix also could improve competitiveness with no reduction in overall revenue. Here, the evidence suggests that Canada would benefit in particular from a shift in the tax base toward greater taxation of consumption instead of income. The other way to stimulate innovation, productivity and economic growth without affecting government revenue or spending is through the regulatory regime. High standards can in fact be an advantage in creating an attractive environment for investment and recruiting talent. And in our view, the most urgent priority is to reduce the costs, complexity and unpredictability of the regulatory process. We have seen another example of the damage done by regulatory uncertainty in the past week, when a long and complex process of negotiating and seeking approval for a merger between two major banks was summarily terminated, even before a formal application for review had been made. Such arbitrary actions send a disturbing message to financi al markets, a message that Canada’s regulatory processes cannot be trusted and that major business initiatives will be subject not to a transparent examination of their merits but rather to what is seen as a capricious exercise of political power. A similar message is being sent to Canadian and international investors by Canada’s process of deciding whether to ratify the Kyoto Protocol on global climate change. In 1997, the federal government overrode a prior agreement with the provinces and unilaterally picked a number out of the air in Kyoto as its agreed target for reducing greenhouse gas emissions. Five years later, it still has no credible Canadian Council of Chief Executives 7 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 plan that could show Canadians what it would take to achieve this arbitrary and in our view unrealistic target. Yet the government is insisting that the Protocol be put to Parliament for ratification before the end of the year -- without regard to the consequences for all Canadians, without clear rules that will define the impact on investment and job creation, without consideration of the impact on Canada’s competitiveness within a hemisphere in which it would be the only signatory, and without any willingness to consider any alternative approaches to addressing climate change outside the confines of the Kyoto Protocol. The danger to the economic outlook lies not just in the actions that would be needed to meet the Kyoto target, but in the pervasive uncertainty that will envelop business investment in this country until the rules are clarified. If the Protocol is ratified without a credible and detailed implementation plan, the projected fiscal surpluses presented by the Minister of Finance last week will certainly be smaller -- and perhaps much smaller. As a result, I would like to conclude my remarks with a few comments on the subject of governance. The topic of corporate governance has been front and centre ever since the collapse of Enron and WorldCom in the United States. Canada’s chief executive officers recognize that public trust in markets has been deeply wounded, and that is why the members of the Council worked so intensively over the summer to develop a strong collective statement on corporate governance. In this statement, entitled Governance, Values and Competitiveness: A Commitment to Leadershi p , we recognize that trust we need to attract Canadian Council of Chief Executives 8 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 investors and grow our enterprises cannot be legislated or regulated. Business leaders must earn this trust through our own actions. I would suggest, though, that Canada’s democratic institutions are also suffering from a trust deficit these days, one that I know is deeply troubling to members of Parliament. As in the corporate sector, significant actions are being taken to restore public trust, and the creation of an independent Ethics Commissioner reporting directly to Parliament is certainly an important step forward. In my view, however, institutional reform also is necessary, and that each of you have an important role to play. Even in the absence of formal changes in the rules, members of Parliament do have significant power when they choose to exercise it. This was one of the Parliamentary Democracy: Issues for conclusions of a paper entitled Reform that I co-authored for our organization nearly twenty years ago. The Standing Committee on Finance always has had an important impact in shaping fiscal strategy, and I would suggest to you that your influence is needed more than ever. In today’s environment, the fiscal choices you recommend will be important in their own right, precisely because some of the choices to be made will be so difficult. But I want to suggest to you that how you make these and other choices in the months ahead will be important too, important in rebuilding public trust in the central institution of our democracy. I think Canadians need to see their members of Parliament, of every party, playing a more extensive role in shaping this country’s future. Canadian Council of Chief Executives 9 MANAGING UNCERTAINTY, GOVERNING FOR GROWTH PRIORITIES FOR THE NEXT FEDERAL BUDGET NOTES FOR REMARKS BY THOMAS D'AQUINO PRESIDENT AND CHIEF EXECUTIVE TO THE STANDING COMMITTEE ON FINANCE HOUSE OF COMMONS MONTREAL, NOVEMBER 7, 2002 The regulatory and tax environment has a huge impact on the competitiveness and growth of Canadian businesses and therefore to the prosperity of Canadians. But the democratic environment matters to economic growth as well. For business to succeed, governments have to work well and be seen as working well. On that note, I want to thank all of you, not just for considering our advice on fiscal matters, but also for your dedication to making the right choices for Canadians. Madame Chair, thank you. I stand ready to answer whatever questions the Committee may have. Canadian Council of Chief Executives 10