I wanted to start by getting your take on the health of the economy. You saw the disappointing GDP numbers for July. What conclusion do you take from those numbers?
Well, I look at those numbers along with many other numbers. My view has been that what we’ve been seeing as the year’s developed is stabilization in the economy. There are some signs of positive developments, like consumer confidence, the job [loss] numbers have moderated, and business confidence increasing. So we’re seeing some good signs. The real estate market — certainly the residential real estate market — in most parts of Canada is good. Interest rates are low, as you know. So I think the word I would use is stabilization. Some people have been more bullish about economic growth. I think we have to be careful. We will see some growth, but it’s going to be a relatively slow recovery; 2010 will be a relatively good year. And in terms of where we are internationally, we’re better positioned than most countries in the world. And the most recent IMF report confirms that we went into the recession in better shape than most countries and will come out of it more strongly than most countries.
Obviously a lot of economists, because of those GDP numbers, are now talking about the possibility of another leg down in the recession. Do you consider that a real risk?
It’s a risk if we don’t stay the course, and that’s why we’ve been absolutely clear that we will continue with the economic action plan. It’s a two-year plan. The budget was Jan. 27. We will continue for two years with the very substantial stimulus spending. The G20 leaders and finance ministers last week in Pittsburgh were clear that we are all going to continue to do that, that this is not the time to relax and stop creating public demand, because the evidence of private demand growing is minimal.
That brings us to the other problem, of course, which is the deficit. There was a recent projection that suggested it’s going to take up to a decade to balance the books again. What’s your best guess on how long it’ll take to bring the budget back into balance?
Well, when I look at the private-sector forecasters, that word “guess” comes to mind, because we have not seen the tremendous variation in numbers from the private-sector forecasters in many years. There is no consensus among the private-sector forecasters, which is why when I did the fiscal update and delivered it in Victoria a few weeks ago, what we said is that we will be able to move to surplus in the medium term, and the medium term is something like five or six years. But it depends on the rate of growth in the economy in years three, four and five. We’re going to run deficits — large deficits in Canadian terms, not large in international terms but in Canadian terms — this fiscal year and next. That’s because we have the large stimulus spending happening. That’s entirely rational and necessary, and the right thing to do for the Canadian economy, and we’re going to stay the course and do that. We also had the auto spending this year, which is one-time spending, very substantial. Once we move into years three, four and five, we will have stopped stimulus spending. So that’s the first item of discipline we have to do. We said these are temporary spending programs: they have to end. And I know we’re going to get municipalities and provinces and others telling us, you know, “Please let us go on for another year.” We’re going to say no. It’s been use-it-or-lose-it from the beginning, and we’re going to be strict about it. We have to if we’re going to move back to surplus. That’s the first thing. The second thing is, as we go through the years three, four and five, we’ll have to watch the rate of growth of the economy. If it’s growing as we expect it will, then we will move toward surplus in the medium term. If there’s less growth than anticipated, then we may have to restrain the rate of growth of general program spending. We’re not going to reduce the spending transfers to the provinces and territories. We’re not going to reduce transfers to the elderly and for children. But we have about $100 billion of spending in the Government of Canada that is program spending, about 2,500 programs. That’s growing at about 3.3% per year. We could restrain the rate of growth.
What would be a reasonable spending-increase cap, do you think?
Well, we’ll see. You know, I hope it will not be necessary to do that. We have a systemic review of government programs that we continue to do called strategic review — that’s done by the Treasury Board — and we’re continuing to do that. That’s designed to deal with the issue of whether programs continue to serve the purpose for which they were created, and accomplish the goals for which they were created, because there’s a tendency with government programs, once they’re created, to go on forever, with no one to examine, like, “Why are we still doing this?” So that process will continue. But we’ll just have to see what the rate of growth in the economy is in the future years. I mean, I’m hoping we’ll have strong growth. I expect that we will have relatively modest growth, but it will be growth.
Some have suggested that temporary tax hikes might be necessary to close the gap. Is that something you’d consider?
No. You know, I’m a fiscal conservative about running deficits. It’s necessary to do the deficits now because of the very serious situation that we’ve faced the last 11 months globally, but tax reductions actually are a stimulus for the economy, and tax increases are not.
OK, you say you’re a fiscal conservative, but I know you’ve heard a lot of criticism from the conservative base. People are starting to say that when the country is running $55-billion deficits, that term “fiscal conservative” has lost its meaning. Does it have any meaning anymore?
It does. I think the key is to have a commitment to a balanced budget and to always be moving in that direction, to have a plan to be there, and to have the discipline to do it. And we will show that discipline. I’ve certainly exercised that kind of discipline before at the provincial level in order to balance budgets, and we’ll do it again federally. But in the past year, we’ve faced the most serious economic crisis globally since the Second World War. The meetings we had in the middle of October last year in Washington were in a time of deep crisis. We weren’t even sure that the markets were going to open on Monday morning. I think there’s a tendency for people to forget very quickly, because we’re out of the time of crisis right now, how deep and dangerous this crisis was for the world economy. And when we made the decision to run large deficits in Canada, we made the decision to save General Motors and Chrysler in Canada at large expense. These decisions were made because of the seriousness of the crisis. That, to me, is being a good conservative economic manager.
What’s your reaction to Michael Ignatieff’s economic plan, which he sketched out here in Toronto last week. What do you think when he says things like the government’s role is to grow the economy?
Well, that’s not my view of the role of government. You know, the role of government is to support economic growth, not to lead economic growth. We believe in free enterprise and the entrepreneurial spirit in this country. That’s what’s made Canada successful. We believe in free trade. We believe in expanding trade. The leadership there is in the private sector. We can help and we can support, like when I was in China in August and I brought executives with me, and that’s helped Manulife,it’s helped the Bank of Montreal get some more business opportunities from the Government of China. I think that’s a good role for government to play, as a facilitator, but the dynamism comes from the private sector, not government.
Based on what you’ve heard from Michael Ignatieff on economic and financial issues, how would you characterize his approach to the country’s finances?
Well, he kind of reminds me of the 1970s, where there was a time of big government spending, and the beginning of the creation of year-after-year deficits and a very large public debt for Canada, which we’re still struggling with. I mean, we paid off $50 billion of public debt in the first three years of our government, which put us in good stead to handle the recession and deficits now when we need to. But I think he is back in that time frame when he left Canada, actually, and that was the way the thinking was in the 1970s. I remember it well, because it was a prime motivator for me getting involved in politics, because I was so upset when I was in law school back then. But the spending, I just thought, “How can our government do this?” And then I saw it again in the Rae government in 1990–1995 in Ontario, and that’s when I got myself elected.
On the issue of a national securities regulator, obviously the provinces of Quebec and Alberta have both come out very, very strongly against this plan. Do you need their support in order to make a national regulator a reality?
We don’t need their support. I’d like to have their support, and I’ve had continuing discussions with the finance ministers in both provinces on this subject. I’m hopeful that at some stage they will join in a Canadian securities regulator, and we’re certainly keeping the door open. I’m very encouraged by the co-operation and willingness to participate in the development of the securities regulator nationally out of various other provinces and territories. It’s a growing movement. There’s certainly strong support in the private sector for doing this across the entire country, including Quebec and Alberta. This crisis we’ve gone through in the markets, the asset-backed commercial paper crisis that we had in Canada, the Ponzi schemes that we’ve seen revealed in various parts of Canada, all of these things make it all the more important that we get our act together in this country. It’s the only aspect of our financial system that is an embarrassment for me when I travel outside Canada. Other than that, people look at Canada as a veryreliable, stable country with strong financial institutions and regulation.
There has been some concern voiced about the fact that the national regulator seems to be moving toward a principles-based rather than a rules-based approach.
Well, I don’t think it’s an either/or. I think we’re benefiting from the fact that we’ve seen some of these shortcomings that were evident in the U.K. when they created what they called a principle-based regulatory system. We’ve also had the benefit of seeing the shortcomings of a highly regulated system like the Americans created. So I expect that we will have a system that will incorporate the best of both worlds. I’m not going to prejudge it, but I expect that it will incorporate elements of both principle-based and rules-based regulation.
There’s been talk of G20 nations adopting guidelines on executive pay. Are you in favour of international rules on how private companies can pay executives?
I’m in favour of following the principles set out by the Financial Stability Board, which now reports to the G20. They deal primarily with bonuses, executive compensation bearing a direct relationship to risk and the duration of risk, so that we avoid the evil, quite frankly, which was some institutions — not so much in Canada but elsewhere — paying short-term bonuses for high-risk transactions which later on turned out not to be in the best interests of the institutions or the shareholders of the institutions. So I’m in favour of following those rules. In fact, I’ve asked all of our federal Crown corporations to follow those rules.