'We will come out of this'
Finance Minister Jim Flaherty talks with L. Ian MacDonald about the effects of the economic crisis on Canada
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National Post, Tuesday, March 3, 2009
L. Ian Mac Donald In the November economic statement, you projected balanced budgets through 2012 and said that there was really no need for much further stimulus. Sixty days later in the budget, you forecast a $64-billion deficit over two years, $85-billion through 2014. And you have a $40-billion stimulus package that's in the budget. So what happened in those two months?
Jim Flaherty Well, the economic statement was just that: an economic statement. It was not a budget. It was not an economic plan. It was a snapshot of where the private-sector forecasters and the Finance Department had us then.
And in fact, at that time, everyone was still predicting positive economic growth for Canada in 2009. The situation was deteriorating dramatically, although that was not visible at that point. But it became clear that the global situation was deteriorating rapidly and that it was affecting Canada and that we had to have a major stimulus budget.
This has been a remarkable change. And the signs of difficulties, for example, in our banking system did not emerge until during the election campaign, actually. That was the first sign in Canada that we might have to help with the liquidity of our banks, the capital availability of our banks.
L. I. M. It's been said that the job of monetary policy is to pump liquidity into the system, the job of fiscal policy is to pump stimulus into the system and the job of leadership, political leadership, is to pump confidence into the system. How important is confidence here?
J. F. It's essential. And we talk a lot about trust and confidence at G7, G20 meetings. We talked about it most recently at Davos where we had 60 people in the room, including various prime ministers and ministers of finance and ministers of trade from around the world. And we talked a lot about trust. And fundamentally what needs to happen is what has been apparent for too long now, and it's not yet happened, and that is that we need to be sure that banks are clear of what are called toxic assets, or bad debt, and they own up to it.
And that can be done in various ways. And the United States is trying to go one route. The UK has tried a couple of approaches. But it has to happen so that there is trust and confidence in interbank lending --lending between financial institutions. So there has to be that cleansing that takes place, and it has not occurred yet.
L. I. M. But in terms of the political leadership, are we in what Franklin Roosevelt famously called a "we have nothing to fear but fear itself " moment? Is this 1933?
J. F. We're not in anything like that. But this is very serious because we have a crisis in the financial system that has travelled through to the real economy and the crisis in the financial system has not been fixed. L. I. M. You have talked about us being in a synchronized global recession.
What do you mean by that, and can these kinds of co-ordinated efforts lead to a synchronized global recovery?
J. F. I think so, and Prime Minister Harper was a leader when the G20 ministers met in Washington in November. He spoke very clearly about what needed to be done. How we had to get our own financial systems in our home countries in order, clean up our own houses and then we'd need to have some sort of international policing or monitoring so that there's an assurance between systems in various countries that it's safe to lend. And we're still not there. That has to happen.
L. I. M. How much of this is the bully pulpit, or if I can put it another way, kicking ass with the banks on your part?
J. F. I've been pretty mild actually with respect to the banks. I've had some moments with some of the banks' CEOs where they've been less than enthusiastic about my comments. On the one hand, we have the soundest financial system in the world. On the other hand, we have to make sure that in a time of crisis, their lending policies reflect the need. They have a relatively protected position in Canada. And that to me means that they have some public obligations that they need to recognize.
L. I. M. I wonder if we could compare for a moment the stimulus package and the tax cuts of your budget and the Obama package. Can you compare the two?
J. F. Well, first of all, you can take about one-third of his so-called stimulus package and discount it because it's not really stimulus. It's transfers for health and education to the states because most of the states aren't allowed to run deficits. A good part of the rest of it is stimulus spending and his margin is more than we would do here, relatively speaking. But their economy is in much worse shape than our economy. And their system is in crisis. Our housing sector never had the big bubble that the American housing sector did.
L. I. M. Switching topics, Danny Williams and Jean Charest have recently expressed their displeasure over equalization payments. Your thoughts?
J. F. We're seeing equalization growing at, in recent years, about 15% per year. We're in a serious recession. We can't have governments spending in one area, growing at 15%. It'll continue to grow but it'll grow at the rate of growth of the economy. I have a pretty good relation with most of the finance ministers.
We were actually doing the provincial ministers a favour because we were telling them at the beginning of November exactly what they were going to receive in equalization in 2009-10 to help with their budget preparations. Because they're all facing challenges as we are in the federal government. Most provincial governments are going to run deficits this coming fiscal year.
L. I. M. I wonder, when you're talking to the Governor of the Bank of Canada about the economy overall, whether you think we're living through a moment not only of a cyclical downturn that's very severe, but a secular change in our economy and the world economy.
J. F. Well, that's why in the budget I included the chapter about Advantage Canada, which is our long-term economic plan for the country, just to show how the steps we're taking in the budget tie into the longer-term plan. That's why we continue to fund universities and colleges. That's why we continue to fund the Canada Innovation Fund and the other longer-term investments in research and technology. Those kinds of investments don't fit in a stimulus budget, unless you take the longer-term view and say we're going to come out of this.
I think what's important is that we came out of the recession in the early '80s and the early '90s. We will come out of this. But we have to make sure that we come out of it strongly and moving.
The fiscal stimulus that we have created will take traction. They will gain traction at some point, probably later this year, and our economy will start to really come out quite quickly.
L. I. M. Is this a good time to be in public life, paradoxically?
J. F. Yes, I think it is. These are difficult issues, but it's challenging. I mean, the discussions we have in Cabinet, and among ministers and the Prime Minister and so on, are very important and serious discussions. They make a big difference in people's lives. If you're going to be involved in public life, you might as well be involved at a time when it matters a lot.