18-K/A

FORM 18-K/A

AMENDMENT NO. 4
For Foreign Governments and Political Subdivisions Thereof

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ANNUAL REPORT
of
CANADA
(Name of Registrant)

Date of end of last fiscal year: March 31, 2005

SECURITIES REGISTERED *
(As of the close of the fiscal year)

	Amounts as to		Name of
	Which registration		exchanges on
Time of Issue	Is effective		which registered
N/A		N/A		N/A

Name and address of person authorized to receive notices
and communications from the Securities and Exchange Commission:

HIS EXCELLENCY THE HONOURABLE MICHAEL H. WILSON
Canadian Ambassador to the United States of America
Canadian Embassy
501 Pennsylvania Avenue, N.W.
Washington, D.C. 20001

Copies to:

ROB STEWART	DAVID MURCHISON	ROBERT W. MULLEN, Jr.
Director	Consul	Milbank, Tweed, Hadley & McCloy LLP
Financial Markets Division	Consulate General of Canada	1 Chase Manhattan Plaza
Department of Finance, Canada	1251 Avenue of the Americas	New York, N.Y. 10005
20th Floor, East Tower	New York, N.Y. 10020
L’Esplanade Laurier 140 O’Connor Street Ottawa, Ontario K1A 0G5

* The Registrant is filing this amendment to its annual report on a voluntary basis.

Cautionary statement for purposes of the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995.

     This amendment, including the exhibit hereto, contains various forward-looking statements and information that are based on Canada’s belief as well as assumptions made by and information currently available to Canada. When used in this document, the words “anticipate”, “estimate”, “project”, “expect”, “should” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Among the key factors that have or will have a direct bearing on Canada are the world-wide economy in general and the actual economic, social and political conditions in or affecting Canada.

     This amendment to Canada’s Annual Report on Form 18-K for the year ending March 31, 2005 is being filed to include Exhibits C-9,
C-10 and C-11.

     This amendment to Canada’s annual report comprises:

(a)	Pages numbered 1 to 4 consecutively.
(b)	The following exhibits:

Exhibit C-9:	Copy of The Economic and Fiscal Update, November 23, 2006, Department of Finance, Canada
Exhibit C-10:	Copy of Advantage Canada: Building a Strong Economy for Canadians, November 23, 2006, Department of Finance, Canada
Exhibit C-11:	Copy of Joint Statement of the Government of Canada and the Bank of Canada on the Renewal of the Inflation Control Target dated November 23, 2006

- 2 -

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 4 to its annual report to be signed on its behalf by the undersigned, thereunto duly authorized, at Ottawa, Canada, on the 28^th day of November, 2006.

CANADA
By:	/s/ Rob Stewart
	Rob Stewart
	Director Financial Markets Division Financial Sector Policy Branch Department of Finance, Canada

- 3 -

EXHIBIT INDEX

Exhibit No.
C-9:	Copy of The Economic and Fiscal Update, November 23, 2006, Department of Finance, Canada.
C-10:	Copy of Advantage Canada: Building a Strong Economy for Canadians, November 23, 2006, Department of Finance, Canada
C-11:	Copy of Joint Statement of the Government of Canada and the Bank of Canada on the Renewal of the Inflation Control Target dated November 23, 2006

- 

EX-99.C-9

 
 
 
 
 
 
 
 
 
 
 

EXHIBIT C-9

 
 
 
 
 
 
 
 
 
 

The Economic
and
Fiscal Update

CANADA’S NEW GOVERNMENT

Department of Finance
Canada Ministère des Finances
Canada

© Her Majesty the Queen in Right of Canada (2006)
All rights reserved

All requests for permission to reproduce this document
or any part thereof shall be addressed to Public Works
and Government Services Canada.

Available from the

Distribution Centre
Department of Finance Canada
Room P-135, West Tower
300 Laurier Avenue West
Ottawa, Ontario K1A 0G5
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Also on the Internet at www.fin.gc.ca

Cette publication est aussi disponible en français.

Cat. No.: F2-105/2006-1E
ISBN 0-662-44504-X

Table of Contents

Chapters
1 Economic Developments and Prospects	5
2 Five-Year Fiscal Projections	29
Annex
Canada’s Financial Performance in an International Context	63

1

Economic Developments
and Prospects

Highlights

ü	Private sector forecasters expect Canadian real gross domestic product (GDP) to grow around 2 3/4 per cent in both 2006 and 2007. They expect nominal GDP in 2006 to be somewhat lower than they expected at the time of the May 2006 budget, primarily because of a lower forecast for GDP inflation.
ü	Real GDP growth moderated in the second quarter of 2006 after strong growth in the first quarter. Net exports have continued to be a drag on growth, but domestic demand growth has remained strong, supported by a healthy labour market.
ü	In the United States economic growth has slowed, primarily due to a sharp decline in housing activity and slower consumer spending.
ü	Despite slower growth in the U.S., the global expansion is projected to remain broadly on track, supported by strengthening activity in Europe, the ongoing recovery in Japan and continuing strong growth in emerging markets such as China.
ü	The risks to the Canadian economic outlook remain largely external.

– The correction to the U.S. housing market and its impact could be more severe than expected, resulting in a more pronounced slowdown of the U.S. economy.

– The prices of many commodities are well above historical norms, leading to the possibility of a significant correction. This poses a significant downside risk to Canadian nominal GDP growth. As well, a sharper than expected U.S. slowdown or a deceleration of growth in China from its current rapid pace would also pose a downside risk to commodity prices.

– There is also a risk that the U.S. dollar could depreciate further against floating currencies such as the Canadian dollar in response to global current account imbalances. This would pose additional challenges to Canada’s export sector.

Note: This chapter incorporates data available up to November 3, 2006.

6

Introduction

This chapter reviews recent economic developments and prospects. It first discusses recent developments and the outlook for the U.S. and overseas economies, followed by a review of recent developments in the Canadian economy. It then describes the economic-planning assumptions that underlie the Government’s budget plan and notes a number of risks and uncertainties associated with the private sector economic outlook.

U.S. and Overseas Economic Developments and Outlook

Recent U.S. Economic Developments

In 2005, U.S. real GDP grew 3.2 per cent. Real GDP growth slowed to 2.6 per cent in the second quarter of 2006, following strong growth of 5.6 per cent in the first quarter (Chart 1.1). The slowdown primarily reflected weaker growth in consumer spending as well as a large decline in residential investment. Advance National Accounts estimates show that third-quarter growth moderated to just 1.6 per cent due largely to a further contraction in residential investment, weaker net exports and a slower pace of inventory accumulation.

     Recent data reveal a growing dichotomy within fixed investment. Non-residential investment remained healthy in the second quarter, growing 4.4 per cent. However, residential investment dropped over 10 per cent in the second quarter. According to advance estimates of the National Accounts, non-residential investment grew 8.6 per cent in the third quarter, while residential investment contracted by 17.4 per cent.

7

     The correction in residential investment follows several years of rapid growth. Low interest rates and the development of attractive unconventional mortgage products, such as interest-only mortgages and non-prime lending, made housing more affordable, boosting housing demand and construction activity.

8

     These factors led to a significant appreciation of house prices in the U.S. over the past few years (Chart 1.2). House prices grew rapidly and likely exceeded values warranted by fundamentals in many markets. Strong growth in house prices also fuelled expectations of continued rapid price gains, which in turn added a speculative component to housing demand. Soaring house prices boosted household wealth, allowing households to increase spending from current income as well as withdraw equity from their houses. This has translated into higher consumer spending and a lower personal savings rate.

9

     The removal of monetary stimulus by the Federal Reserve since mid-2004 has led to a tightening of credit conditions and lowered the attractiveness of purchasing houses, thereby reducing demand and slowing house price appreciation. This in turn has reined in expectations of future house price inflation. A high past level of construction also led to an inventory overhang, putting additional downward pressure on housing prices and leading to an abrupt correction in housing starts.

     The realignment of house prices to their fundamental values is negatively affecting wealth and likely played a role in the weakening in consumer expenditure growth in the second quarter. Partly offsetting this, however, has been a recent decline in gasoline prices, which frees up household income for other purchases.

U.S. Economic Outlook

Moderating domestic demand, driven by a cooling housing market, is expected to lower economic growth to below potential in the second half of 2006 and into 2007. However, solid wage growth and lower energy prices should support household expenditures. Strong business investment, reflecting an ongoing catch-up in non-residential structures spending from the protracted weakness that followed September 11th, should also help prevent a sharper slowdown of the U.S. economy. As well, strengthening growth abroad and the past depreciation of the U.S. dollar should support export growth.

     For 2006 as a whole, private sector forecasters expect U.S. real GDP to increase 3.4 per cent, up from 3.2 per cent expected in March 2006 and unchanged from the April 2006 Blue Chip Economic Indicators forecast presented in the May 2006 budget (Chart 1.3). Private sector forecasters expect 2007 growth of 2.5 per cent, down from 2.8 per cent expected in March 2006. They expect 2008 growth to strengthen to 3.1 per cent.

10

Overseas Economies

Despite the expected slowdown in U.S. economic growth next year, the global expansion is projected to remain broadly on track, supported by solid economic activity in Europe, the ongoing recovery in Japan and continuing strong growth in emerging markets such as China. Overall, the International Monetary Fund (IMF) expects world real GDP growth (calculated at market exchange rates) to pick up from 3.4 per cent in 2005 to 3.8 per cent in 2006, before moderating to 3.5 per cent in 2007 (Chart1.4).

11

     In Japan, the recovery is now well established, with the economy growing in each of the past six quarters, supported by a solid expansion of domestic demand. The IMF expects the expansion to remain firmly on track, as strong profits and a rebound in bank credit bolster private investment, while consumer spending remains steady. Real GDP growth is expected to edge up to 2.7 per cent in 2006 before moderating to 2.1 per cent in 2007.

     Economic activity remains strong in China, spurred on by a renewed pickup in investment and surging exports. Despite a series of measures to cool down the economy, the pace of expansion is expected to remain rapid at 10 per cent in both 2006 and 2007. There is potential for the economy to overheat, raising the risk of an investment boom-bust cycle. A sharper than expected U.S. slowdown would likely put downward pressure on exports and investment.

12

     In the euro area, economic growth is strengthening, with growth increasingly driven by domestic demand, in particular business investment. The IMF expects business investment to continue to support economic activity in the second half of this year, with economic growth for 2006 projected to be 2.4 per cent, up from 1.3 per cent in 2005. Growth is expected to moderate to 2.0 per cent in 2007, largely reflecting a slower pace of consumer spending in Germany due to planned tax increases.

     Growth has been solid in the United Kingdom over the first half of the year, as healthy employment gains have supported consumer spending, and investment has remained strong. Economic activity is expected to remain solid in the near term, with real GDP growth of 2.7 per cent in both 2006 and 2007.

Commodity Prices

Prices for key Canadian commodities have remained volatile in recent months. Crude oil and industrial metals prices remain at historically elevated levels despite recent declines, reflecting ongoing strong global demand growth and tight supply conditions. At the same time, higher inventory levels have resulted in sharply lower prices for natural gas, while lumber prices have dropped significantly in response to slowing U.S. housing demand.

     Crude oil prices rose from US$72 per barrel at the time of the May 2006 budget to daily highs of close to US$77 in mid-summer, before dropping to under US$60 in recent weeks. The recent decline reflects easing geopolitical tensions, higher inventory levels and expectations of increased production capacity. However, despite a slowing U.S. economy, global oil demand is expected to remain strong, led by continued solid growth in China. Moreover, the risk of further geopolitical disruptions remains. As a result, private sector forecasters expect only a modest decline in oil prices from 2005 levels over the medium term.

     After adjusting for inflation, this would leave crude oil prices close to record highs reached in the late 1970s over the near term, and well above their average over the last 35 years (Chart 1.5). However, industrialized economies are far less exposed to the negative impacts of higher oil prices than in the 1970s, using only approximately half as much oil, relative to GDP, as they did then.

13

     Natural gas prices fell sharply over the past year, as a warmer than normal winter and the absence of hurricane-related disruptions pushed inventory levels well above recent historical averages. Private sector forecasters expect prices to rebound moderately over the near term, however, reflecting growing substitution away from relatively more expensive oil for home heating and electricity generation. While forecasters expect prices to remain below the record levels seen in 2005, they expect prices to remain significantly above their historical average.

     Lumber prices, which have fallen by more than one-third since early 2005, are expected to remain at or below current levels over the near term, reflecting ongoing weakness in U.S. housing demand (Chart 1.6). Industrial metals prices are expected to moderate from current record highs but remain above historical trend levels, fuelled by continued strong demand from China.

14

Canadian Economic Developments

Canadian real GDP growth softened to 2.0 per cent in the second quarter of 2006 from 3.6 per cent in the first quarter and 2.9 per cent in 2005, as net exports weakened significantly. Growth in final domestic demand also moderated but remained solid in the second quarter (Chart 1.7).

     Net exports have been a drag on growth in every quarter over the past year. The strength of the Canadian dollar and a slowing U.S. economy in the second quarter led to a decline in exports in the first half of 2006. The strong dollar has also contributed to strong import growth by reducing the prices of foreign goods and services.

15

     Solid growth in final domestic demand has been supported by a healthy labour market. In the first five months of 2006, employment rose at a solid pace, pushing the employment rate to a record high of 63.2 per cent in May and the unemployment rate to 6.1 per cent, the lowest level since December 1974. Employment then fell between June and August, before increasing at a healthy pace in September and October. The unemployment rate remained close to its over 31-year low at 6.2 per cent in October.

16

     So far in 2006, the Canadian economy has created over 260,000 new jobs, almost all of which are full-time. All regions of the country have benefited from the gain, with western Canada experiencing the strongest growth. In Ontario and Quebec, losses in manufacturing employment that are in part due to the stronger Canadian dollar have been more than offset by widespread gains in the services sector (Chart 1.8).

     The high rate of job creation, combined with recent tax cuts, has contributed to strong income growth, which in turn has supported consumer spending. Consumer spending rose a solid 4.2 per cent in the second quarter of 2006 following growth of 5.1 per cent in the first quarter (Chart 1.9). In particular, spending on durable and semi-durable goods continued to grow strongly in the second quarter after surging in the first.

17

     Growth in business non-residential investment has also remained solid, despite some moderation from the double-digit increases seen during most of 2005. Real investment in machinery and equipment (M&E) rose 8.8 per cent in both the first and second quarters of 2006, while real investment in non-residential structures increased 5.5 per cent in the second quarter following growth of 8.2 per cent in the first (Chart 1.10). The continuing strength in investment partly reflects the appreciation of the Canadian dollar, which has lowered the costs of imported M&E. As well, strong profit growth has boosted investment, particularly in the oil and gas sector, which accounts for about a quarter of total non-residential investment in Canada. In the second quarter of 2006, corporate profits stood at 13.7 per cent of GDP, near the record high of 14.3 per cent reached in the fourth quarter of 2005 (Chart 1.10).

18

     Strong corporate profits have been supported by significant improvements in Canada’s export prices. Continued increases in world demand have driven up the prices of Canadian-produced commodities, which, combined with ongoing adjustments to global current account imbalances, has led the Canadian dollar to appreciate since the beginning of 2003 (Chart 1.11).

     Rising prices of commodity exports, particularly oil, have led to strong growth in commodity-producing provinces, especially Alberta. Wages in Alberta have jumped in response to a tight labour market in the province, with average hourly wages of employees in October 5.6 per cent higher than a year earlier, compared with growth of 3.1 per cent for all of Canada over the same period.

19

     An influx of workers from other parts of the country has resulted in strong demand for housing in Alberta, causing house prices to soar. Prices of resale housing in Alberta were 39 per cent higher in September than a year earlier—more than four times the increase for Canada as a whole. While the housing market remains very active in British Columbia and Alberta, growth in house prices has moderated in most other regions of the country.

     As a result of strong increases in house prices as well as in the prices of many services, Alberta accounted for more than one-quarter of core Consumer Price Index (CPI) inflation in Canada in September. Core CPI inflation in Canada had remained at or below 2 per cent since the beginning of 2004 before rising to 2.3 per cent in September. However, core CPI inflation excluding Alberta has continued to be below 2 per cent (Chart 1.12).

20

     In September, total CPI inflation eased to 0.7 per cent, the slowest rate since March 2004. Lower inflation in September mainly reflected a fall in gasoline prices. The 1-percentage-point reduction in the goods and services tax rate has also helped to reduce total CPI inflation since July.

     The Bank of Canada left its key policy rate unchanged in its July, September and October fixed action dates after seven consecutive 25-basis-point increases over nine months. The Bank expects that the small amount of excess demand currently in the economy will unwind over the coming months, with core CPI inflation returning to 2 per cent by the middle of 2007.

21

Private Sector Economic Forecasts

The Department of Finance surveys private sector economic forecasters on a quarterly basis regarding their outlook for the Canadian economy. The economic forecasts reported here reflect the survey conducted by the Department following the release of the second-quarter National Income and Expenditure Accounts by Statistics Canada on August 31. A total of 15 forecasters responded to the latest survey. Their responses form the basis for economic assumptions that underlie the five-year status quo fiscal projections reported in the next chapter.

Short-Term Outlook

Chart 1.13 provides a summary of the forecasts of real and nominal GDP growth for the period 2006 to 2008. The key change to the outlook since the May 2006 budget is that private sector forecasters expect nominal GDP growth to be weaker in 2006, primarily as a result of weaker GDP inflation.

     Private sector forecasters expect real GDP to grow by 2.8 per cent in 2006, down slightly from 3.0 per cent anticipated at the time of the 2006 budget (Chart 1.13). Growth is expected to slow modestly to 2.7 per cent in 2007, identical to the budget forecast. The forecasts of real GDP growth in 2007 range from 2.3 per cent to 3.1 per cent, reflecting differing views regarding the U.S. outlook. In 2008, growth is expected to pick up to 3.0 per cent, slightly stronger than the 2.9 per cent anticipated at the time of the budget. According to the IMF, Canada is expected to have the second fastest growth rate in 2006 among Group of Seven (G7) countries, second only to the United States. For 2007, the IMF expects Canada to be the fastest-growing economy among the G7.

     Private sector forecasters have lowered their forecast for GDP inflation in 2006 from 2.9 per cent to 2.1 per cent, reflecting lower than expected energy prices in the first half of the year (Table 1.1). For 2007, forecasters expect GDP inflation of 1.9 per cent, slightly higher than anticipated at the time of the budget. Private sector forecasts for GDP inflation in 2007 range from 0.9 per cent to 2.8 per cent. Forecasters expect GDP inflation of 1.9 per cent in 2008.

22

     As a result, nominal GDP is projected to grow 5.0 per cent this year and 4.6 per cent in 2007, compared to 6.0 per cent and 4.6 per cent, respectively, in the budget forecast (Chart 1.13). Private sector forecasts of nominal GDP growth range from 3.2 per cent to 5.9 per cent in 2007. For 2008, nominal GDP growth of 4.9 per cent is projected, higher than the 4.6 per cent anticipated at the time of the budget.

     Based on private sector forecasts, the level of nominal GDP in 2006 is projected to be about $13.5 billion lower than expected at the time of the 2006 budget, after adjusting for historical revisions. The level of nominal GDP is projected to be approximately $14.2 billion lower in 2007 and $10.2 billion lower in 2008 than expected at the time of the budget.

23

     Short-term interest rates are projected to average 4.1 per cent in 2006, slightly higher than the 4.0 per cent in the budget forecast. Forecasters expect that short-term rates will average 3.9 per cent in 2007 and 4.2 per cent in 2008, both slightly lower than expected at the time of the 2006 budget.

     Private sector forecasters expect Canadian long-term interest rates to average 4.3 per cent in 2006 and 2007—about 15 basis points lower, on average, over this period than forecast in the budget. For 2008, private sector forecasters expect long-term interest rates to average 4.6 per cent, 50 basis points lower than expected at the time of the budget.

     Private sector forecasters expect the Canadian labour market to remain healthy. The unemployment rate is forecast to average 6.4 per cent in 2006 and 6.5 per cent in both 2007 and 2008, slightly lower than anticipated at the time of the budget. Forecasters have raised their outlook for employment growth in 2006 from 1.5 per cent in the budget to 1.8 per cent. Employment growth is expected to slow somewhat from this strong pace to 1.2 per cent in 2007 and 2008.

Medium-Term Outlook

Private sector forecasters have not significantly revised their medium-term economic outlook for 2009 to 2011 since the budget survey. Real GDP growth is expected to average 3.0 per cent over 2009 to 2011. Forecasters expect GDP inflation to average 1.7 per cent over the period, leaving average annual growth in nominal GDP unchanged at 4.7 per cent. Short-term and long-term interest rates are expected to rise very gradually from their 2006 levels to 4.4 per cent and 5.1 per cent, respectively, by 2011. The unemployment rate is expected to average 6.4 per cent over 2009 to 2011 and employment growth is forecast to average 1.2 per cent over the period.

24

Table 1.1

Private Sector Forecasts for 2006–2011

							Average
	2006		2007		2008		2009–2011
	(per cent, unless otherwise indicated)
Real GDP growth
May 2006 budget		3.0		2.7		2.9		2.9
November 2006 Economic and Fiscal Update		2.8		2.7		3.0		3.0
GDP inflation
May 2006 budget		2.9		1.8		1.6		1.8
November 2006 Economic and Fiscal Update		2.1		1.9		1.9		1.7
Nominal GDP growth
May 2006 budget		6.0		4.6		4.6		4.7
November 2006 Economic and Fiscal Update		5.0		4.6		4.9		4.7
Nominal GDP level (billions of dollars)
May 2006 budget1		1,454		1,520		1,590		n/a
November 2006 Economic and Fiscal Update		1,440		1,506		1,580		n/a
3-month treasury bill rate
May 2006 budget		4.0		4.1		4.3		4.4
November 2006 Economic and Fiscal Update		4.1		3.9		4.2		4.3
10-year government bond rate
May 2006 budget		4.4		4.5		5.1		5.2
November 2006 Economic and Fiscal Update		4.3		4.3		4.6		5.0
Unemployment rate
May 2006 budget		6.6		6.6		6.7		6.5
November 2006 Economic and Fiscal Update		6.4		6.5		6.5		6.4
Employment growth
May 2006 budget		1.5		1.2		1.4		1.2
November 2006 Economic and Fiscal Update		1.8		1.2		1.2		1.2
U.S. real GDP growth
March 2006 survey of private sector forecasters		3.2		2.8		3.1		3.1
November 2006 Economic and Fiscal Update		3.4		2.5		3.1		3.1
Addendum
U.S. real GDP growth
May 2006 budget (April 2006 Blue Chip Economic Indicators)		3.4		3.0		n/a		n/a
October 2006 Blue Chip Economic Indicators		3.4		2.6		3.1		3.0

¹ Nominal GDP levels have been adjusted to reflect May 2006 revisions to Canada’s National Income and Expenditure Accounts.

Sources: March 2006 and September 2006 Department of Finance surveys of private sector forecasters; April 2006 and October 2006 Blue Chip Economic Indicators.

25

Risks and Uncertainties

The main risks to the Canadian economic outlook continue to be external. Recent developments suggest that the correction in the U.S. housing market could be sharper than previously expected. There is also a risk of a significant drop in the prices of certain commodities, which are well above historical norms. As well, global imbalances remain large and continue to pose a medium-term risk to the outlook.

U.S. Housing Market

The private sector forecast for the U.S. economy is consistent with a significant further correction in the U.S. housing market. However, there is a risk that this correction could be greater than expected. A larger than expected house price correction would negatively affect consumer wealth and have negative implications for consumer demand. There is also a risk of a sharper than expected contraction in residential investment. Weaker than expected U.S. consumer spending and residential investment would have negative implications for Canadian growth.

Commodity Prices

Uncertainty over the future path of commodity prices remains a key risk to the outlook. Although the possibility of further price increases remains, the risk of greater than expected declines has risen recently. Indeed, the unexpected recent sharp decline in crude oil prices, the bulk of which occurred since the September Department of Finance survey of private sector forecasters, means that there is a risk that GDP inflation in the second half of 2006 could be below expectations. This would have negative implications for the level of nominal GDP for both 2006 and 2007.

     Prices for several key commodities remain well above historical levels, in real terms, leading to the possibility of a significant correction in the near term. Real industrial metals prices are currently approximately 75 per cent above their average levels since the early 1970s, almost entirely due to strong demand from China. Similarly, real crude oil prices remain close to twice their average level over the same period, despite recent declines, in large measure due to strong growth in demand from China and the United States. Natural gas prices are also close to double their average over the period as a result of strong U.S. demand and higher oil prices.

     A sharper than expected slowdown in U.S. growth, as well as a deceleration of growth in China from its current rapid pace, could cause commodity prices to fall more than anticipated, translating into lower than expected Canadian nominal GDP over the medium term.

26

Resolution of Global Imbalances

Global current account imbalances remain large (Chart 1.14). In 2005, the U.S. current account deficit grew to 6.4 per cent of U.S. GDP (almost 2 per cent of world GDP) and was matched by growing surpluses in China, oil-exporting countries and Germany. Current account surpluses remained large in Japan and the rest of emerging Asia as well.

     Although the U.S. has thus far been able to finance its current account deficit, it is unlikely that deficits of this magnitude can be maintained indefinitely. Sustained large U.S. current account deficits have meant that U.S. net foreign indebtedness has steadily risen, reaching 21 per cent of GDP in 2005. The U.S. current account deficit must fall from its current high level if further substantial increases in net foreign debt are to be avoided.

     Slowing growth in the U.S., strengthening growth in the euro area and solid growth in Japan will help to reduce imbalances, though the impact is likely to be small. Greater currency flexibility in emerging Asia and a reduction in the U.S. fiscal deficit would also help to correct global imbalances. However, there is a risk that the main channel of adjustment could be a further depreciation of the U.S. dollar against floating currencies such as the Canadian dollar, and this would pose additional challenges to Canada’s export sector.

27

2

Five-Year Fiscal

Projections

Highlights

ü	The fiscal outlook has improved since the May 2006 budget, largely due to lower than expected program expenses and stronger than expected personal income tax revenues. After accounting for the cost of measures announced since the budget and the Government’s minimum tax and debt reduction commitments, the Government projects a planning surplus of $4.2 billion for 2006-07, $3.5 billion for 2007-08, $2.4 billion for 2008-09, $2.0 billion for 2009-10, $3.6 billion for 2010-11 and $2.9 billion for 2011-12. These surpluses are available for new spending and debt and tax reduction initiatives.
ü	The Government believes that we should aim as a country to eliminate Canada’s total government net debt in less than a generation. The federal government will do its part by continuing to plan for annual debt reduction of $3 billion. Further, it is advancing its commitment to reduce the federal debt-to-GDP (gross domestic product) ratio to 25 per cent by one year, to 2012-13, from 35 per cent today.
ü	Lower debt will mean lower taxes. To ensure that Canadians benefit directly from reductions in Canada’s debt, the Government will dedicate the effective interest savings from federal debt reduction each year to personal income tax reductions. To the extent that the Government realizes unanticipated surpluses, it will accelerate debt and personal income tax reductions.
ü	The Government is committed to keeping the growth of program expenses below the growth of the economy over the medium term. The Government took an important step in meeting this objective in 2005-06, when program expenses fell for the first time in nine years. For 2006-07 and 2007-08, program expenses are projected to be lower than estimated in the May 2006 budget. Keeping the growth of spending below the rate of growth of the economy will contribute to further reductions in public debt and in taxes.

30

ü	Revenues as a share of GDP are projected to decline from 16.2 per cent in 2005-06 to 15.3 per cent in 2011-12, reflecting the ongoing implementation of tax reduction measures, including the reductions announced in the Tax Fairness Plan.
ü	The Canada Employment Insurance Commission has set the 2007 premium rate at $1.80 per $100 of insurable earnings, down from the 2006 rate of $1.87. The premium rate reduction, combined with an increase in the maximum insurable earnings to $40,000, will save employers and employees $420 million.
ü	This Economic and Fiscal Update builds on the changes made in Budget 2006 to improve the transparency and accountability of budget planning. It includes the Government’s own estimate of the surplus as well as the estimates of four leading private sector forecasting organizations to allow comparison between different views on the fiscal outlook.
ü	The fiscal projections are subject to risks associated with the economic outlook and changes in the relationship between economic growth and tax revenues, particularly personal and corporate income tax revenues. For 2006-07, the level of departmental spending is also an important variable. The projections of the Government’s fiscal position for the current and the next two fiscal years will be updated in the budget.

31

New Approach to Budget Planning and Fiscal Forecasting

Budget 2006 introduced a new approach to budget planning. Under this new approach:

• The Government will plan on achieving annual debt reduction of $3 billion.

• The former practice of adjusting the budget projections for economic prudence has been discontinued.

• Quarterly updates of the fiscal outlook for the current year are now provided.

• The focus of budget planning will be on the near term, where uncertainties are fewer and the Government can reasonably be held to account.

     This Economic and Fiscal Update builds on the changes made in Budget 2006.

• Canada’s New Government believes that we should aim as a country to eliminate Canada’s total government net debt by 2021 at the latest.

• The federal government will show leadership by continuing to plan on annual debt reduction of $3 billion.

• The federal government is also advancing its commitment to reduce the federal debt-to-GDP ratio to 25 per cent by one year, to 2012–13. This will bring the federal debt burden to its lowest level since the late 1970s.

• To ensure that Canadians benefit directly from reductions in the federal debt, the Government will dedicate the effective interest savings from debt reduction each year to personal income tax reductions.

• To the extent that the Government realizes unanticipated surpluses, it will accelerate debt and personal income tax reductions.

• For planning purposes and to show the medium-term implications of current policies, The Economic and Fiscal Update presents fiscal projections for the current and the next five years. However, since a short planning horizon is appropriate for budgetary decisions, the budget will continue to focus on a two-year horizon.

32

• In this Update, the Government’s fiscal projection is presented alongside those of four private sector organizations. While the Government’s projection is the basis for fiscal planning, presenting the four private sector fiscal projections separately allows comparison between different views on the fiscal outlook.

• To incorporate objective economic assumptions, the Government’s fiscal projection is based on the average of private sector economic forecasts, consistent with past practice. A total of 15 economic forecasters responded to the latest survey by the Department of Finance. The four private sector organizations used their own economic assumptions to prepare their fiscal projections.

33

Changes in the Fiscal Outlook Since the May 2006 Budget

Table 2.1
Summary of Changes in the Fiscal Outlook Since the May 2006 Budget

	Actual		Projection
	2005–06		2006–07		2007–08
	(billions of dollars)
May 2006 budget underlying surplus		8.0		3.6		4.4
Impact of economic and fiscal developments
Budgetary revenues
Personal income tax		0.7		2.9		2.9
Corporate income tax		-2.8		-2.6		-1.8
Goods and services tax		1.1		1.1		1.1
Other revenues		2.3		0.4		0.6
Total revenues		1.3		1.9		2.8
Program expenses
Transfer payments		0.0		0.2		0.0
Direct program expenses		3.9		2.2		1.2
Total program expenses		3.9		2.4		1.2
Public debt charges		-0.1		0.2		0.2
Total economic and fiscal developments		5.2		4.4		4.1
Impact of policy changes
Net impact of measures announced since the budget1				-0.8		-1.2
Revised underlying surplus		13.2		7.2		7.3

Notes: A positive number implies an improvement in the budgetary balance.
A negative number implies a deterioration in the budgetary balance.
Totals may not add due to rounding.
1	A detailed list of the measures is provided in Table 2.2.

Table 2.1 shows the changes to the Government’s fiscal position as a result of economic and fiscal developments since the May 2006 budget. The Government’s fiscal situation is now stronger than projected at the time of the budget, primarily due to lower than expected program expenses and higher than expected personal income tax revenues.

34

     In Budget 2006, the underlying surplus was estimated at $8.0 billion for 2005–06, $3.6 billion for 2006–07 and $4.4 billion for 2007–08. The final budget surplus for 2005–06 was larger than expected primarily because of lower than expected program expenses. Program expenses were $3.9 billion lower while revenues were $1.3 billion higher than projected in the budget, largely reflecting one-time accounting adjustments. The surplus resulted in a corresponding reduction in the federal debt.

     Going forward, revenues are projected to be $1.9 billion higher in 2006–07 and $2.8 billion higher in 2007–08. The increase in 2006–07 is largely driven by an upward revision to projected personal income tax revenues, which have grown at roughly twice the rate of growth in personal income in the first six months of 2006–07. The higher level of personal income tax revenues in 2006–07 carries forward to 2007–08.

     In contrast, corporate income tax revenues in 2006–07 are projected to be $2.6 billion lower than projected at the time of the May 2006 budget. This revision reflects the carry-forward of the lower than expected 2005–06 outcome, when corporate income tax revenues grew more slowly than corporate profits. The impact of the lower 2005–06 outcome is expected to be mitigated somewhat in 2007–08, due to stronger forecast growth in corporate profits relative to the budget projection.

     Goods and services tax (GST) revenues are projected to be higher than projected at the time of the budget, reflecting the carry-forward of higher than expected GST revenues in 2005–06.

     Before the cost of measures announced since the budget, program expenses are expected to be $2.4 billion lower in 2006–07 and $1.2 billion lower in 2007–08 than expected at the time of the budget, largely reflecting the Government’s commitment to implement new programs only when they are ready. Spending on a number of programs announced in the May 2006 budget, as well as programs announced by the previous government, will be lower than projected at the time of the budget. This is in addition to the $1 billion of savings this year and next announced in Budget 2006 and confirmed by the President of the Treasury Board in September.

35

     In the 2005 budget, the previous government launched a reform of government procurement. Savings from this initiative were estimated at $204 million for 2006–07, rising to $888 million per year for 2009–10 and subsequent years.

     After taking office, Canada’s New Government undertook an assessment of the procurement reform initiative and has determined that the projected savings were significantly over-estimated. The Government currently estimates that the shortfall will be $1.4 billion over the 2007–08 to 2011–12 period. This revised fiscal target is reflected in the spending projections. Additional work is required and the Government will report on progress in the 2007 budget.

     The net impact of new measures announced since Budget 2006 is $0.8 billion in 2006–07 and $1.2 billion in 2007–08. A detailed list of the measures is provided in Table 2.2. Spending measures include costs associated with extending Canada’s mission in Afghanistan, the evacuation of citizens from Lebanon, as well as funding for the 2010 Olympic Games in Vancouver. On the revenue side, tax reduction measures include the increase of the age credit and pension income splitting announced as part of the Government’s Tax Fairness Plan. The Canada-United States Softwood Lumber Agreement will lead to higher revenues and expenses, but it will have no net fiscal impact as the revenue and expense flows are offsetting.

     These developments result in a revised underlying surplus of $7.2 billion in 2006–07 and $7.3 billion in 2007–08.

36

Table 2.2
Measures Announced Since the May 2006 Budget

	2006–07		2007–08
	(millions of dollars)
Spending measures
Afghanistan mission		206		515
Lebanon evacuation		94
2010 Olympic Games				50
Extension of employment insurance (EI) pilots— additional five weeks1		14		92
Meteorological services in Newfoundland and Labrador		2		2
Older workers in vulnerable communities		21		38
Eastern Ontario Development Program		10
Extension of transitional measures for EI1		13		25
Recognition programs for ethnocultural groups				6
Transformational Plan—Department of Fisheries and Oceans		57		59
City of Québec airport		15
Egmont Group secretariat				2
Subtotal		432		788
Less
Funding included in the fiscal framework		218		603
Revenue measures
Increase of the age credit		405		345
Pension income splitting		165		675
Beer and wine excise duty reduction		6		8
Subtotal		576		1,028
Canada-United States Softwood Lumber Agreement (SLA)
Spending impact
Remittance to provinces of export charge revenue		482		516
Transfer of revenue to U.S. interests under terms of SLA		500
Revenue impact
Export charge		-482		-516
Special charge		-500
Net cost		0		0
Net cost of measures announced since the May 2006 budget		790		1,213

Note: Totals may not add due to rounding.
1	Fully reflected in the EI rate.

37

Summary of Five-Year Fiscal Projection

Table 2.3
Summary Statement of Transactions

	Actual		Projection
	2005–06		2006–07		2007–08		2008–09		2009–10		2010–11		2011–12
	(billions of dollars)
Budgetary revenues		222.2		229.4		238.0		245.4		253.9		264.6		276.8
Program expenses		175.2		187.6		196.1		204.4		213.1		220.7		228.6
Public debt charges		33.8		34.6		34.7		34.6		34.7		34.6		34.6
Total expenses		209.0		222.2		230.8		239.1		247.8		255.2		263.1
Underlying surplus		13.2		7.2		7.3		6.4		6.1		9.4		13.7
Government fiscal commitments
Planned debt reduction				3.0		3.0		3.0		3.0		3.0		3.0
Reduce GST to 5 per cent												1.5		6.4
Interest savings dedicated to personal income tax reductions
$13.2-billion debt reduction in 2005–06						0.7		0.7		0.7		0.7		0.7
$3-billion-per-year debt reduction starting in 2006–07						0.2		0.3		0.5		0.6		0.8
Total						0.8		1.0		1.1		1.3		1.4
Planning surplus1				4.2		3.5		2.4		2.0		3.6		2.9
Federal debt2		481.5		478.5		475.5		472.5		469.5		466.5		463.5
Per cent of GDP3
Budgetary revenues		16.2		15.9		15.8		15.5		15.3		15.3		15.3
Program expenses		12.8		13.0		13.0		12.9		12.9		12.7		12.6
Public debt charges		2.5		2.4		2.3		2.2		2.1		2.0		1.9
Total expenses		15.2		15.4		15.3		15.1		15.0		14.7		14.5
Federal debt		35.1		33.2		31.6		29.9		28.4		26.9		25.6
Nominal GDP (billions of dollars, calendar year)		1,371		1,440		1,506		1,580		1,655		1,734		1,813

Note: Totals may not add due to rounding.
1	The remaining surplus of $4.2 billion in 2006–07 will be used to reduce federal debt and fund other priorities.
2	For planning purposes, federal debt is assumed to be reduced by $3 billion per year.
3	These calculations do not reflect the commitment to dedicate interest savings to personal income tax reductions and the reduction of the GST to 5 per cent.

38

Table 2.3 summarizes the Government’s fiscal projections for the current and the next five years.

     Budgetary revenues are expected to increase by $7.2 billion in 2006–07, $8.6 billion in 2007–08, $7.4 billion in 2008–09 and $8.5 billion in 2009–10. Thereafter, revenues increase by $10.7 billion in 2010–11 and $12.2 billion in 2011–12. This takes into account the measures announced since the budget, including tax reductions announced in the Tax Fairness Plan.

     In 2005–06, program expenses fell $1.1 billion, the first decline in nine years. With this decline, program expenses in 2005–06 were $3.9 billion lower than projected in the May 2006 budget. Reflecting the Government’s diligent approach to expenditure management, program expenses in 2006–07 and 2007–08 are also projected to be lower than estimated in the budget by $1.2 billion and $0.5 billion respectively. This takes into account the cost of measures announced since the budget, including the Canada-United States Softwood Lumber Agreement, where the federal government acts as a financial intermediary, with incremental spending offset by additional revenues.

     From 2008–09 to 2011–12, growth in program expenses is expected to average 3.9 per cent, well below average GDP growth over that period.

     The increase in interest rates over the past year is expected to raise public debt charges by $0.8 billion in 2006–07. Thereafter, public debt charges are expected to remain relatively unchanged over the five-year horizon.

     Accounting for planned annual debt reduction of $3 billion, the reduction of the GST to 5 per cent and the commitment to dedicate interest savings to personal income tax reductions (see box on interest savings from debt reduction) leaves a planning surplus of $4.2 billion in
2006–07, $3.5 billion in 2007–08, $2.4 billion in 2008–09 and $2.0 billion in 2009–10. The planning surplus rises in the following two years, to $3.6 billion and $2.9 billion. These surpluses are available for new spending and debt and tax reduction initiatives.

39

Interest Savings From Debt Reduction

• To ensure that Canadians benefit directly from reductions in the federal debt, the Government will dedicate the effective interest savings from debt reduction each year to personal income tax reductions.

• The effective interest savings resulting from debt reduction will be calculated as the annual reduction in federal debt multiplied by the average effective interest rate on the Government’s unmatured debt, currently 5 per cent.

• Annual reductions in the federal debt are reflected in both decreases in the Government’s interest-bearing debt, which directly reduce interest costs, as well as increases in the Government’s net assets. Most of these net assets generate immediate returns or can be converted to cash in the future to pay down interest-bearing debt.

• The commitment will apply to debt reduction for 2005–06 and subsequent fiscal years. Combined with the interest savings from the $13.2-billion surplus realized in 2005–06, the Government’s planned debt reduction of $3 billion per year will create room for personal income tax reductions of about $800 million in 2007–08, rising to $1.4 billion per year by 2011–12.

40

Revenue Ratio Declining Due to Tax Reductions

A useful perspective on movements in tax revenues can be obtained by examining the revenue ratio—total revenues collected by the federal government in relation to total income in the economy (GDP). This ratio can be thought of as a proxy for the overall federal “tax burden” imposed on the economy.

     The status quo revenue ratio is projected to decline from 16.2 per cent in 2005–06 to 15.9 per cent in 2006–07, reflecting the impact of tax reduction measures, principally the 1-percentage-point reduction to the GST rate. Over the medium term, revenues are projected to grow more slowly than the economy, reflecting the ongoing implementation of tax reduction measures, including the reductions announced in the Tax Fairness Plan and increases to the basic personal amount. The commitment to dedicate interest savings to personal income tax reductions and the reduction of the GST to 5 per cent would lower the revenue ratio further to 14.8 per cent by 2011–12.

41

New Tax Reduction Measures Since Budget 2006

Since Budget 2006, the Government has demonstrated that tax relief is a priority by announcing and committing to tax reductions, totalling $22.2 billion over six years, that will benefit all Canadians.

• The Tax Fairness Plan, announced on October 31, will reduce taxes by restoring balance and fairness to the federal tax system. Under this Plan, the Government will:

– Enhance the age credit by increasing it by $1,000 to $5,066, effective January 1, 2006.

– Introduce a new mechanism for pension income splitting by allowing Canadian residents to allocate to their resident spouse (or common-law partner) up to one-half of income qualifying for the existing pension income tax credit.

– Introduce a distribution tax on distributions from publicly traded income trusts and limited partnerships.

– Reduce the general corporate income tax rate by one-half percentage point, to 18.5 per cent, beginning in 2011.

• In addition, the employment insurance (EI) premium rate will be reduced in 2007 to $1.80 per $100 of insurable earnings, from $1.87 in 2006. This premium rate is forecast by the Human Resources and Social Development (HRSD) Chief Actuary to generate just enough premium revenue in 2007 to cover EI program costs for that year. The HRSD Chief Actuary has also calculated the maximum insurable earnings (MIE) for 2007 as being $40,000, up $1,000 from its 2006 level. Taking into account the additional contributions associated with the rise in the MIE, the reduction in the rate will save employers and employees $420 million compared to the 2006 premium rate and MIE.

• To ensure that Canadians benefit directly from reductions in the federal debt, the Government will dedicate the effective interest savings from debt reduction each year to personal income tax reductions. Combined with the interest savings from the $13.2-billion surplus realized in 2005–06, the Government’s planned debt reduction of $3 billion per year will create room for personal income tax reductions of about $800 million in 2007–08, rising to $1.4 billion per year by 2011–12.

• In addition, the Government will reduce the GST rate to 5 per cent starting no later than January 1, 2011, leading to additional savings for Canadians of about $7.9 billion.

	2006–07		2007–08		2008–09		2009–10		2010–11		2011–12		Total
	(millions of dollars)
Tax Fairness Plan		570		1,020		1,065		1,105		1,240		1,545		6,545
EI premiums		125		420		420		420		420		420		2,225
Interest savings				810		960		1,110		1,260		1,410		5,550
GST										1,500		6,370		7,870
Total tax relief commitments since Budget 2006		695		2,250		2,445		2,635		4,420		9,745		22,190

42

Program Expenses-to-GDP Ratio Lower Than Projected in Budget 2006

Following unsustainable increases between 1999–2000 and 2004–05, program expenses as a share of GDP declined significantly in 2005–06 to 12.8 per cent from 13.7 per cent in 2004–05. For 2006–07 and 2007–08, program expenses as a percentage of GDP are lower than projected in Budget 2006, reflecting tight control over the implementation of programs announced in the 2006 and previous budgets. In 2008–09 and beyond, program expenses are projected to decline as a proportion of GDP on a status quo basis.

     In some years, growth in program expenses may exceed the rate of growth of the economy, for example because economic growth is lower than expected or because unforeseen factors require a temporary increase in spending. In general, and as a matter of principle, the Government is committed to keeping the growth of program expenses below the growth of the economy over the medium term. The Government took an important step in meeting this objective in 2005–06, when program expenses fell for the first time in nine years. To the extent spending growth is kept below the growth in the economy, this will contribute to further reductions in public debt and in taxes given the commitment to dedicate interest savings to tax reductions.

43

Debt-to-GDP Ratio Falling

The federal debt-to-GDP ratio (accumulated deficit) stood at 38.3 per cent in 2004–05. As a result of the $13.2-billion surplus in 2005–06 the ratio dropped to 35.1 per cent, its lowest level in 24 years. For planning purposes, federal debt is assumed to be reduced by $3 billion each year. Taking into account planned debt reduction, along with the projected growth of the economy, the debt-to-GDP ratio is expected to fall to 25.6 per cent in 2011–12, on target to meeting the new medium-term objective of 25 per cent by 2012–13. This will bring the federal debt burden to its lowest level since the late 1970s and will contribute towards the elimination of total government net debt in less than a generation.

This goal of eliminating total government net debt can be achieved by 2021 if provincial-territorial governments maintain balanced budgets and the Canada Pension Plan/Quebec Pension Plan continue to build assets as currently projected. For its part, Canada’s New Government will continue to plan for an annual debt reduction of $3 billion. Any surpluses recorded by provincial-territorial governments and federal surpluses in excess of $3 billion will contribute to accelerate the elimination of Canada’s total government net debt.

44

     The falling debt burden is expected to result in declines in the share of revenues devoted to public debt charges. To ensure that Canadians benefit directly from reductions in the federal debt, the Government will dedicate the effective interest savings from debt reduction each year to personal income tax reductions.

Federal Debt (Accumulated Deficit) and Total
Government Net Debt

Federal Debt (Accumulated Deficit)

Since 2002–03, the financial statements of the Government of Canada have been presented on a full accrual basis of accounting. Under the previous accounting standard—modified accrual accounting—net debt and the accumulated deficit were identical. Under the new standard, net debt now includes a comprehensive costing for financial liabilities but excludes non-financial assets. The accumulated deficit includes both. It is the sum of all surpluses and deficits in the past.

Federal debt, referred to in the budget documents and in the Annual Financial Report of the Government of Canada , is the accumulated deficit. It is the federal government’s main measure of debt, as annual changes in this measure correspond to the budgetary balance.

Total Government Net Debt

The full impact of public debt on the economy includes not only the federal government’s debt, but also debt of provincial-territorial and local governments, and the assets of the Canada Pension Plan and Quebec Pension Plan. That is why a standard measure of debt used by organizations such as the Organisation for Economic Co-operation and Development (OECD) is total government net debt.

The OECD definition of total government net debt allows for comparisons across countries. It is calculated on a National Accounts basis. As such, the OECD definition is not directly comparable to federal debt (accumulated deficit) and excludes government employee unfunded pension liabilities, which are fully accounted for in federal debt (accumulated deficit). The annex contains more details.

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Outlook for Budgetary Revenues

Table 2.4
Revenue Outlook

	Actual		Projection
	2005–06		2006–07		2007–08		2008–09		2009–10		2010–11		2011–12
	(millions of dollars)
Tax revenues
Income tax
Personal income tax		103,691		111,630		117,390		123,355		129,260		136,850		144,405
Corporate income tax		31,724		32,780		35,005		33,890		33,720		33,690		35,400
Other income tax		4,529		4,340		4,315		4,545		4,680		4,655		4,420
Total income tax		139,944		148,750		156,710		161,790		167,660		175,195		184,225
Excise taxes/duties
Goods and services tax		33,020		30,970		30,895		32,150		33,595		35,320		37,005
Customs import duties		3,330		3,530		3,710		3,885		4,045		4,195		4,360
Other excise taxes/ duties		9,806		10,165		10,245		10,205		10,235		10,050		9,915
Total excise taxes/ duties		46,156		44,665		44,850		46,240		47,875		49,565		51,280
Total tax revenues		186,100		193,415		201,560		208,030		215,535		224,760		235,505
Employment insurance premium revenues		16,535		16,155		16,140		16,655		17,105		17,730		18,370
Other revenues		19,568		19,860		20,335		20,745		21,280		22,110		22,925
Total budgetary revenues		222,203		229,430		238,035		245,430		253,920		264,600		276,800
Per cent of GDP
Personal income tax		7.6		7.8		7.8		7.8		7.8		7.9		8.0
Corporate income tax		2.3		2.3		2.3		2.1		2.0		1.9		2.0
Goods and services tax		2.4		2.2		2.1		2.0		2.0		2.0		2.0
Total tax revenues		13.6		13.4		13.4		13.2		13.0		13.0		13.0
Employment insurance premium revenues		1.2		1.1		1.1		1.1		1.0		1.0		1.0
Other revenues		1.4		1.4		1.4		1.3		1.3		1.3		1.3
Total		16.2		15.9		15.8		15.5		15.3		15.3		15.3

Note: Totals may not add due to rounding

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Table 2.4 provides an overview of the Government’s fiscal projections for budgetary revenues. Budgetary revenues are expected to grow by 3.3 per cent in 2006–07, 3.8 per cent in 2007–08 and 3.1 per cent in 2008–09. Revenue growth averages 4.1 per cent per year in the three years to 2011–12. These growth rates are lower than average growth in the past two years of 5.8 per cent, reflecting the expected slowing in nominal GDP growth and the implementation of tax reduction measures.

     Personal income tax revenues—the largest component of budgetary revenues—are projected to increase by $7.9 billion, or 7.7 per cent, in 2006–07, significantly higher than the 4.7-per cent growth in the underlying personal income tax base. This updated projection is consistent with the strong growth in personal income tax revenues recorded last year and through the first half of this fiscal year. The projection incorporates the cost of the recently announced increase in the age credit, retroactive to January 1, 2006, and the introduction of pension income splitting, effective January 1, 2007. In the following three years, personal income tax revenues are projected to grow more in line with GDP, reflecting the impact of tax measures offsetting the upward drift in tax revenues due to projected real income gains.

     In 2006–07, corporate income tax revenues are expected to increase 3.3 per cent, following a gain of 5.9 per cent in the previous year. The more modest growth reflects smaller gains in profitability in 2006, the elimination of the corporate capital tax as of January 1, 2006, and the ongoing reduction in the corporate surtax. Absent policy changes, corporate income tax revenues are projected to grow largely in line with profit growth over the remainder of the projection period. From 2008–09 to 2010–11, corporate income tax revenues are projected to decline, reflecting the elimination of the corporate surtax and the legislated reductions in the general tax rate, including the recently announced 0.5-percentage-point reduction in the general corporate income tax rate effective in 2011. The projection of corporate tax revenues reflects the tax on distributions from publicly traded flow-through entities, effective in 2011, introduced under the Government’s Tax Fairness Plan, although this is offset in part by lower personal income taxes and lower non-resident withholding taxes.

47

     Other income tax revenues—largely withholding taxes levied on nonresidents—are expected to decline by 4.2 per cent in 2006–07, following a 27.2-per-cent increase last year, which was attributable to strong growth in dividend payments to non-residents. Other income tax revenues are projected to decline by 0.5 per cent in 2010–11 and by 5.0 per cent in 2011–12 with the introduction of the tax on publicly traded flow-through entities under the Tax Fairness Plan. Under the new regime, certain distributions of these entities will be subject to tax, thereby reducing distributions to non-residents.

     GST revenues are expected to decline by 6.2 per cent in 2006–07, reflecting the 1-percentage-point reduction in the GST rate, effective July 1, 2006. GST revenues decline by a further 0.2 per cent in 2007–08, the first fiscal year in which the lower GST rate is fully reflected. Thereafter, GST revenues grow in line with the underlying consumption base.

     After a decline of 2.0 per cent in 2005–06, other excise taxes and duties are projected to rise 3.7 per cent in 2006–07, largely reflecting the introduction of an export charge on softwood lumber exports to the U.S. effective October 12, 2006, consistent with the Canada-United States Softwood Lumber Agreement. The new export charge is determined in part by the price of softwood lumber, the volume of Canadian exports by region and the border measure that a province selects. The new export charge will have no net impact on the budgetary balance as export charge revenues collected by the Government of Canada, net of the costs of administering the agreement, will be distributed to provincial governments.

     EI premium revenues are expected to decline 2.3 per cent in 2006–07, reflecting the decline in the premium rate from $1.95 to $1.87 per $100 of insurable earnings effective January 1, 2006, a further reduction to $1.80 per $100 of insurable earnings in January 2007, as well as the transfer to the province of Quebec of the responsibility for delivering maternity and parental benefits in that province along with the associated premium room, effective January 1, 2006. Consistent with the EI premium rate-setting mechanism, implemented in 2005, EI premiums are assumed to match projected EI program costs in the outer years of the projection.

48

     Starting in 2007, insurable earnings covered by EI will increase because of the indexation of annual maximum insurable earnings to the growth in the average industrial wage. In 1996, the maximum level of insurable earnings, or the level of employment income on which EI premiums are payable, under the EI legislation was frozen at $39,000 until the average industrial wage reached that level. This will occur in 2007, with the result that annual maximum insurable earnings will increase to $40,000, rising thereafter in line with the average industrial wage. This change affects future growth in both premium revenues and benefits.

     Other revenues include those of consolidated Crown corporations, net gains/losses from enterprise Crown corporations, foreign exchange revenues, returns on investments and proceeds from the sales of goods and services. These revenues are volatile, owing partly to the impact of exchange rate movements on the Canadian-dollar value of foreign-denominated interest-bearing assets and to net gains/losses from enterprise Crown corporations. In 2006–07, other revenues are expected to increase by 1.5 per cent. This weak growth reflects lower expected foreign exchange revenues, which were boosted last year by the change in the accounting treatment of the Government’s subscriptions with the International Monetary Fund.

49

Outlook for Program Expenses

Table 2.5
Program Expenses Outlook

	Actual		Projection
	2005–06		2006–07		2007–08		2008–09		2009–10		2010–11		2011–12
	(millions of dollars)
Major transfers to persons Elderly benefits		28,992		30,615		32,060		33,435		34,915		36,505		38,270
Employment insurance benefits1		14,417		14,375		15,075		15,565		15,980		16,560		17,150
Children’s benefits		9,200		11,120		11,875		11,880		11,915		11,960		12,005
Total		52,609		56,110		59,010		60,880		62,810		65,025		67,425
Major transfers to other levels of government
Federal transfers in support of health and other programs		27,225		28,640		30,150		31,430		33,035		34,475		36,000
Fiscal arrangements		15,739		13,055		13,190		13,640		14,105		14,580		15,065
Alternative Payments for Standing Programs		-2,731		-2,870		-3,010		-3,165		-3,325		-3,525		-3,750
Early learning and child care				650
Canada’s cities and communities		582		600		800		1,000		2,000		2,000		2,000
Total		40,815		40,075		41,130		42,905		45,815		47,530		49,315
Direct program expenses		81,789		91,430		95,935		100,650		104,480		108,100		111,825
Total program expenses		175,213		187,615		196,075		204,435		213,105		220,655		228,565
Per cent of GDP
Major transfers to persons		3.8		3.9		3.9		3.9		3.8		3.8		3.7
Major transfers to other levels of government		3.0		2.8		2.7		2.7		2.8		2.7		2.7
Direct program expenses		6.0		6.3		6.4		6.4		6.3		6.2		6.2
Total program expenses		12.8		13.0		13.0		12.9		12.9		12.7		12.6

Note: Totals may not add due to rounding.

¹ EI benefits include regular, sickness, maternity, parental, compassionate care, fishing and work-sharing benefits, as well as employment benefits and support measures. These represent 90 per cent of total EI program expenses. The remaining EI program costs (amounting to $1.6 billion in 2005–06) relate to administration costs.

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Table 2.5 provides an overview of the Government’s projections for program expenses. Program expenses are expected to grow by 7.1 per cent in 2006–07 and 4.5 per cent in 2007–08. This growth reflects both lower expenses in 2005–06 and the slower than anticipated implementation of programs announced in the 2006 and previous budgets. Indeed, for 2006–07 and 2007–08, program expenses are lower than projected in Budget 2006. Growth in the following four years averages 3.9 per cent, well below growth of the economy over that period.

     Program expenses consist of three major components: major transfers to persons, major transfers to other levels of government and direct program expenses—the latter includes subsidies and other transfers, as well as National Defence and all other departmental operating expenses.

     Major transfers to persons consist of elderly, EI and children’s benefits.

• Elderly benefits grow by $1.6 billion, or 5.6 per cent, in 2006–07, reflecting the $18-per-month increases in the Guaranteed Income Supplement in January 2006 and January 2007. In the following five years, elderly benefits grow by an average of 4.6 per cent per year, reflecting the growth in the elderly population and changes in consumer prices, to which benefits are fully indexed.

• EI benefits are estimated to decline slightly in 2006–07, reflecting improved labour market conditions as well as the transfer to the province of Quebec of the responsibility for delivering maternity and parental benefits in that province under the new Quebec Parental Insurance Plan starting January 1, 2006. This is partly offset by the first full-year impact of the labour market pilot projects, relating to high-unemployment regions, announced in 2005–06. The projected increase in 2007–08 reflects a rise in the private sector forecast of the number of unemployed (see Chapter 1). Furthermore, starting in 2007, EI benefits are projected to increase because of the indexation of annual maximum insurable earnings to the growth in the average industrial wage in 2007.

• Children’s benefits, including the Canada Child Tax Benefit (CCTB) and the Universal Child Care Benefit (UCCB), are expected to rise by $1.9 billion in 2006–07 and $0.8 billion in 2007–08, primarily reflecting the introduction of the UCCB on July 1, 2006. Starting in 2008–09, the growth in children’s benefits is largely determined by the growth in the number of children and changes in consumer prices, to which the CCTB is indexed.

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     Major transfers to other levels of government in 2006–07 are $0.7 billion, or 1.8 per cent, lower than in 2005–06, reflecting one-time payments made to the provinces and territories for post-secondary education infrastructure, public transit and affordable housing. Over the medium term, transfers increase from just over $40 billion in 2006–07 to almost $50 billion in 2011–12, averaging 4.2 per cent growth per year. This growth reflects the impact of rising transfers for health, equalization and Territorial Formula Financing, as well as growing support for cities and communities. For planning purposes, this Update assumes the continuation of support for Canada’s cities and communities of $2 billion for 2010–11 and 2011–12.

     Direct program expenses include expenses for National Defence, Crown corporations, transfers administered by departments (for example transfers for farm income support and Aboriginal programming) and departmental operating costs. In 2005–06, direct program expenses declined by 1.6 per cent. For 2006–07 and 2007–08, including measures announced since the May 2006 budget, the total amount of direct program expenses is $1.0 billion and $0.5 billion lower than expected at the time of the budget, reflecting tight control over the implementation of programs announced in the 2006 and previous budgets. For planning purposes, this Update assumes that support for all infrastructure-related projects is maintained through 2011–12. Starting in 2008–09, growth in direct program expenses is projected to average less than 4 per cent per year.

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Private Sector Five-Year Fiscal Projections

Table 2.6
Private Sector Projections of Underlying
Surplus on a Public Accounts Basis

	2006–07		2007–08		2008–09		2009–10		2010–11		2011–12
	(billions of dollars)
Conference Board of Canada		5.3		4.4		7.2		7.6		10.8		15.3
University of Toronto		7.0		4.5		5.4		6.6		9.9		13.1
Global Insight		6.7		5.4		6.5		7.2		9.7		11.9
Centre for Spatial Economics		6.9		7.6		7.9		7.2		9.5		13.8
Average of private sector projections		6.5		5.5		6.8		7.2		10.0		13.5
Range of private sector projections		1.7		3.2		2.5		0.9		1.3		3.5
Government projection based on private sector economic assumptions		7.2		7.3		6.4		6.1		9.4		13.7
Difference between government projection and the average of private sector projections		0.7		1.8		-0.4		-1.1		-0.6		0.2

Note: Numbers may not add due to rounding.

To provide context for the Government’s fiscal projections, four private sector organizations developed their own fiscal projections. The four organizations are the Conference Board of Canada, the Institute for Policy Analysis of the University of Toronto, Global Insight and the Centre for Spatial Economics.

     Under the new approach, the four organizations each provided their own fiscal projections on both a National Accounts and a Public Accounts basis. The process involved three key steps.

• Each of the four private sector forecasters developed projections of the federal budget balance on a National Accounts basis, based on their own economic forecasts and on tax and spending policies in place at the time of the May 2006 budget.

• These projections were then translated to a Public Accounts basis. The conversions were largely prepared by the Department of Finance, subject to review and approval by the private sector organizations.

• Finally, the Department of Finance adjusted the private sector Public Accounts projections to reflect the cost of initiatives announced since the budget and the updated projection of direct program expenses.

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     These figures can be directly compared to the Government’s projection of the underlying surplus presented in Table 2.3. For reference, the projections on a National Accounts basis prepared by each organization are provided at the end of this chapter.

     The four private sector organizations prepared their fiscal projections based on information publicly available as of the end of September. In preparing its fiscal projections, the Government had access to financial results for August and September 2006, which were not available to the four private sector organizations when they completed their projections.

     Table 2.6 presents the four private sector forecasting organizations’ projections of the underlying surplus. On average, the four private sector organizations project a surplus of $6.5 billion in 2006–07 and $5.5 billion in 2007–08, rising thereafter to $6.8 billion in 2008–09, $7.2 billion in 2009–10, $10.0 billion in 2010–11 and $13.5 billion in 2011–12.

     The range between the lowest and highest projection is $1.7 billion in the first year of the planning period. It rises to above $3 billion in 2007–08 and falls to below $3 billion in the following three years. In the last year of the projection, where uncertainty is greatest, the range widens to $3.5 billion. Compared to the sum of revenues and expenses, (over $430 billion in 2005–06 and growing), the range of private sector projections is very small.

     When compared to the private sector average, the Government’s projection of the underlying surplus is larger in the first two years but lower in subsequent years, with the exception of 2011–12, when the Government’s projection is slightly higher. In 2006–07 and 2007–08, the Government projects budgetary surpluses that are $0.7 billion and $1.8 billion larger than the private sector average. While underlying assumptions for GDP growth are similar in the Government and private sector fiscal projections, the Government expects a higher tax yield in these years. The higher tax yield in the Government’s projection reflects a view that the conditions that led to a high tax yield in 2005–06 and in the first half of the current fiscal year will persist over the near term.

     The differences between the Government’s projection and the average private sector projection are relatively small in relation to combined federal revenues and expenses. In 2007–08, the year in which the difference is largest, the $1.8-billion difference represents 0.4 per cent of the combined revenues and expenses projected by the Government for that year.

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     Given the inherent uncertainty underlying economic and fiscal projections, the differences between the five projections presented are remarkably small. This should not be interpreted as an indication that the underlying uncertainty is negligible. Rather, it should be viewed as a sign that, overall, the various views converge to similar outcomes, in spite of the underlying uncertainty. The following section discusses the risks and uncertainties underlying the fiscal projections.

Risks to the Fiscal Projections

Risks associated with the fiscal projections primarily relate to risks to the Canadian economic outlook and volatility in the relationship between fiscal variables and the underlying activity to which they relate.

Risks to the Canadian Economic Outlook

As detailed in Chapter 1, forecasts of the economic outlook contain an unavoidable level of uncertainty. Key economic concerns for the fiscal projections are provided below.

• Economic developments since September point to lower commodity prices, which could lead to slower than expected nominal GDP growth for the current year. Going forward, a larger than expected decline in commodity prices, which are currently well above their historical levels, would translate into lower than expected Canadian nominal GDP over the medium term and put downward pressure on budgetary revenues.

• The ongoing correction in the U.S. housing market could be greater than expected, leading to weaker than expected U.S. consumer spending and residential investment. This would have negative implications for Canadian economic growth.

• Global current account imbalances remain large and continue to pose a medium-term risk to the economic outlook. While several factors could help reduce imbalances, there is a risk that the main channel of adjustment could be a further depreciation of the U.S. dollar against floating currencies such as the Canadian dollar.

     Tables illustrating the sensitivity of the budget balance to a number of economic shocks are provided later in this chapter. These tables are generalized rules of thumb that provide a guide to the impact of changes in economic assumptions on the fiscal projections.

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Risks to the Fiscal Projections

Even if the economic outlook were known with certainty, there would still be risks associated with the fiscal projections because of the uncertainty in the translation of economic developments into spending and tax revenues. Growth in tax bases does not always translate in a predictable way into tax revenues.

     The following are the key near-term risks to the projections.

• Growth in personal income tax revenues was almost twice the rate of growth in the personal income tax base through the first six months of 2006–07, a faster rate of growth relative to the tax base than would normally be expected. The sensitivity of personal income tax revenues to changes in the personal income tax base is summarized by a measure called the income elasticity of personal income tax revenues. This captures the change in tax revenues resulting from a 1-per-cent change in personal income. A 1-per-cent increase in personal income generally translates into an increase of more than 1 per cent in personal income tax revenues, due to the progressivity of the tax system—taxpayers pay progressively higher tax rates as their earned real income rises. In a “normal” year, where income gains are distributed evenly across income groups and all sources of income increase at roughly the same rate, the elasticity is about 1.2. However, in any given year this relationship may not hold. For example, during years when real income gains are particularly strong or capital gains realizations are high, the elasticity will be higher. Conversely, declines in real incomes and capital losses considerably lower the elasticity. In 2001–02, following the stock market correction, the elasticity was just 0.3. Every 0.1-percentage-point change in the elasticity translates into about a $500-million change in revenues. The personal income tax elasticity is assumed to be about 1.8 in 2006–07, before falling to its historical average of 1.2 in 2007–08. Given the recent slowing in nominal GDP growth from unusually high rates of growth in 2004 and 2005, the assumed drop in the personal income tax elasticity is warranted.

• Corporate income tax revenues for the first six months of 2006–07 are up 11.7 per cent, compared to profit growth of 7.9 per cent. Growth in corporate income tax revenues for a given year can differ substantially from growth in corporate profits for the same year due to provisions in the Income Tax Act that allow corporations to smooth taxable income from year to year by shifting losses backward or forward. In addition, reassessments, which generally pertain to past tax years, may contribute to a divergence between growth in corporate tax revenues and the tax base.

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Furthermore, year-to-date profit growth in 2006–07 masks a divergence between very strong profit growth in the energy sector and a decline in manufacturing sector profits. The outcome for corporate income tax revenues in 2006–07 will depend heavily on energy prices and how these will affect profitability in the various sectors of the economy.

•

On the expense side, the extent to which departments and agencies do not fully use all of the resources appropriated by Parliament varies from year to year and can materially affect the fiscal outcome. In addition, during the course of the fiscal year, departments and agencies often incur liabilities for which no payments are made. These liabilities are recognized throughout the year and are updated following the close of the fiscal year as part of the normal year-end accrual adjustments. Changes in estimates of liabilities can be significant.

Sensitivity of the Budget Balance to Economic Shocks

Changes in economic assumptions affect the size of projected tax bases and expenditures that are sensitive to economic factors, such as EI benefits and public debt charges.

     The following tables illustrate the sensitivity of the budget balance to a number of economic shocks:

1.	A one-year, 1-percentage-point decrease in real GDP growth driven equally by lower productivity and employment growth.
2.	A decrease in nominal GDP growth resulting solely from a one-year, 1-percentage-point decrease in the rate of GDP inflation.
3.	A sustained 100-basis-point decrease in all interest rates.

     These sensitivities are generalized rules of thumb that assume any decrease in economic activity is proportional across income and expenditure components. EI premium rates are assumed to be fixed during the first calendar year in which the shock occurs, and to adjust for subsequent years, such that EI revenues exactly offset program expenses, consistent with the new EI rate-setting legislation introduced in 2005. Equal and opposite impacts would result from an increase of equal magnitude in real or nominal GDP growth and interest rates.

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Table 2.7
Estimated Impact of a One-Year, 1-Percentage-Point Decrease in Real GDP Growth on Federal Revenues, Expenses and Budgetary Balance

	Year 1		Year 2		Year 5
	(billions of dollars)
Federal revenues
Tax revenues
Personal income tax		-1.0		-1.3		-1.6
Corporate income tax		-0.4		-0.4		-0.5
Goods and services tax		-0.3		-0.3		-0.4
Other tax revenues		-0.2		-0.2		-0.2
Total tax revenues		-1.9		-2.3		-2.7
Employment insurance premium revenues		-0.1		0.7		0.8
Other revenues		0.0		0.0		0.0
Total budgetary revenues		-2.1		-1.6		-1.8
Federal expenses
Major transfers to persons
Elderly benefits		0.0		0.0		0.0
Employment insurance benefits		0.6		0.6		0.8
Total		0.6		0.6		0.8
Other program expenses		-0.1		-0.1		-0.3
Public debt charges		0.0		0.1		0.4
Total expenses		0.6		0.7		0.9
Budgetary balance		-2.6		-2.2		-2.7

Note: Totals may not add due to rounding.

     A 1-percentage-point decrease in real GDP growth reduces the budgetary balance by $2.6 billion in the first year, $2.2 billion in the second year and $2.7 billion in the fifth year.

     Tax revenues from all sources fall by a total of $1.9 billion in the first year, $2.3 billion in the second year and $2.7 billion by the fifth year. Personal income tax revenues decrease as employment and wages and salaries fall. Furthermore, due to the progressivity of the tax system, as individuals earn lower real incomes, they pay proportionally less of their income in taxes. Corporate income tax revenues fall as output and profits decrease. GST revenues decrease as a result of lower consumer spending associated with the fall in employment and personal income.

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     Since EI premium rates for a given year are set based on projections carried out in October of the previous year, EI premium revenues decline marginally in the first year of the shock (reflecting lower wages and salaries), but rise thereafter, reflecting the upward adjustment to the break-even rate necessary to meet increased program costs. For the purpose of the simulations, it is assumed that EI premium rates are increased as a result of the weaker economy. This is consistent with the legislation governing rate setting. However, the legislation also provides the Government with the option to leave rates unchanged if it believes this to be appropriate.

     Expenses rise, mainly reflecting higher EI benefits (due to an increase in the level of unemployment) and higher public debt charges (reflecting a higher stock of debt due to the lower budgetary balance).

Table 2.8
Estimated Impact of a One-Year, 1-Percentage-Point Decrease in GDP Inflation on Federal Revenues, Expenses and Budgetary Balance

	Year 1		Year 2		Year 5
	(billions of dollars)
Federal revenues
Tax revenues
Personal income tax		-1.3		-1.3		-1.4
Corporate income tax		-0.4		-0.4		-0.5
Goods and services tax		-0.3		-0.3		-0.4
Other tax revenues		-0.2		-0.2		-0.2
Total tax revenues		-2.3		-2.3		-2.5
Employment insurance premium revenues		-0.1		-0.1		-0.1
Other revenues		-0.1		-0.1		-0.1
Total budgetary revenues		-2.4		-2.4		-2.7
Federal expenses
Major transfers to persons
Elderly benefits		-0.2		-0.3		-0.4
Employment insurance benefits		-0.1		-0.1		-0.1
Total		-0.3		-0.4		-0.5
Other program expenses		-0.3		-0.3		-0.7
Public debt charges		0.0		0.1		0.3
Total expenses		-0.5		-0.6		-0.9
Budgetary balance		-1.9		-1.8		-1.8

Note: Totals may not add due to rounding.

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     A 1-percentage-point decrease in nominal GDP growth resulting solely from lower GDP inflation (assuming that the Consumer Price Index moves in line with GDP inflation) lowers the budgetary balance by $1.9 billion in the first year and $1.8 billion in the second and fifth year.

     Lower prices result in lower nominal income and, as a result, personal income tax, corporate income tax and GST revenues all decrease, reflecting declines in the underlying nominal tax bases. Compared to the impacts of the real GDP shock, the effects on personal income tax revenues are more pronounced in the initial year, due to the lag with which changes in the inflation rate are reflected in the tax system (tax brackets are indexed to the percentage change in the Consumer Price Index for the 12-month period ending September 30 of the previous year). For the other sources of tax revenue, the negative impacts are similar under either the real or nominal GDP shocks. EI premium revenues decrease marginally in the price shock in response to lower earnings. However, unlike the real GDP shock, EI benefits do not rise since unemployment is unaffected by price changes.

     Partly offsetting lower revenues are the declines in the cost of statutory programs that are indexed to inflation, such as elderly benefit payments and the Canada Child Tax Benefit, as well as federal wage and non-wage expenses. Payments under these programs are smaller if inflation is lower. Public debt charges rise due to the higher stock of debt.

Table 2.9
Estimated Impact of a Sustained 100-Basis-Point Decrease in All Interest Rates on Federal Revenues, Expenses and Budgetary Balance

	Year 1		Year 2		Year 5
	(billions of dollars)
Federal revenues		-0.4		-0.5		-0.8
Federal expenses		-1.4		-2.0		-2.7
Budgetary balance		1.0		1.5		1.8

Note: Totals may not add due to rounding

     A decrease in interest rates raises the budgetary balance by $1.0 billion in the first year, $1.5 billion in the second and $1.8 billion in the fifth. The improvement stems entirely from decreased expenses associated with public debt charges. The impact on debt charges rises through time as longer-term debt matures and is refinanced at lower rates. Moderating the overall impact is a fall in revenues associated with the decrease in the rate of return on the Government’s interest-bearing assets, which are recorded as part of non-tax revenues.

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Private Sector National Accounts Projections

Table 2.10
Private Sector Surplus Projections on a National Accounts Basis

	2006–07		2007–08		2008–09		2009–10		2010–11		2011–12
	(billions of dollars)
Conference Board of Canada		-5.5		-0.6		3.0		3.5		5.9		10.9
University of Toronto		-3.8		-0.5		0.9		2.1		4.4		7.7
Global Insight		-3.9		0.4		2.2		3.2		4.6		7.2
Centre for Spatial Economics		-3.9		2.6		3.4		2.8		4.0		8.7
Average		-4.3		0.5		2.4		2.9		4.7		8.6

Table 2.10 provides the private sector fiscal projections on a National Accounts basis. The projections are based on their own economic forecasts and on tax and spending policies in place at the time of the May 2006 budget.

     On average, the four forecasting organizations project a deficit of $4.3 billion in 2006–07. Thereafter, they project a surplus of $0.5 billion in 2007–08 and $2.4 billion in 2008–09, rising to $8.6 billion by 2011–12.

     To translate the National Accounts surplus projections to a Public Accounts basis, several adjustments are required. These include adjustments to reflect:

• Differences in the definition of the government sector in the two accounting systems.

• Inclusion of certain revenues in the Public Accounts that are not accounted for in the National Accounts, such as revenues from asset sales and the impact of revaluations of financial assets, as well as some payables and receivables.

     Making these adjustments and incorporating the cost of initiatives announced since the budget and the updated projection of direct program expenses leads to the fiscal projections on a Public Accounts basis presented in Table 2.6.

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Annex

Canada’S Financial Performance
IN AN International Context

Summary

This annex reviews Canada’s financial position on a comparable basis with those of the other Group of Seven (G7) countries (United States, United Kingdom, France, Germany, Japan and Italy) as well as several other countries in the Organisation for Economic Co-operation and Development (OECD). For Canada, this includes the federal, provincial-territorial and local government sectors, as well as the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP).

	On a total government, National Accounts basis:
•	Canada is currently the only G7 country in surplus.
•	The OECD expects that Canada will be the only G7 country to record a surplus in both 2006 and 2007.
•	Canada’s debt burden has declined from the second highest to the lowest among G7 countries.
•	Canada’s net debt declined to 30.2 per cent of gross domestic product (GDP) in 2005, compared to an average of 52.7 per cent for the G7.1 The OECD expects Canada’s net debt to continue to decline.
•	While Canada’s net debt is low relative to that of other G7 nations, some OECD countries have moved to net asset positions in recent years.
	This annex also compares the fiscal situation of the federal governments in Canada and the United States:
•	In 2005–06, the Canadian federal government posted a surplus of C$13.2 billion, or 1.0 per cent of GDP, while the U.S. federal government incurred an “on-budget” deficit of US$434 billion, or 3.3 per cent of GDP.
•	For 2006–07, the Canadian federal government is forecasting a surplus of C$4.2 billion, or 0.3 per cent of GDP. On the other hand, the U.S. Administration does not project a return to balanced budgets for at least the next five years.
•	The federal market debt-to-GDP ratio in Canada has been below the U.S. figure since 2003–04, with the gap expected to widen further in coming years.

¹ These figures are on a National Accounts basis for the total government sector and as such are not directly comparable to the Government of Canada’s target of reducing its debt burden (accumulated deficit) to 25 per cent of GDP by 2012–13, which is on a Public Accounts basis and covers only the federal government. More details on the breakdown of Canada’s total government net debt by level of government are provided later in this annex.

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In 2005, all levels of government contributed to Canada’s total government surplus

• Two important factors need to be taken into account in making international comparisons: differences in accounting methods among countries, which affect the comparability of data, and differences in financial responsibilities among levels of government within countries.

• For these reasons, international comparisons rely on the standardized System of National Accounts estimates for the total government sector (i.e. the combined national and subnational levels). The OECD produces a complete series of estimates based on this system.

• According to the OECD, Canada’s total government sector, which includes the federal, provincial-territorial and local governments, as well as the CPP and QPP, recorded a surplus of 1.7 per cent of GDP in 2005.

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• The provincial-territorial-local government sector recorded a surplus of 0.7 per cent of GDP compared to 0.4 per cent at the federal level.

• The combined CPP/QPP sector also recorded a surplus in 2005. This sector has consistently recorded surpluses since the pension reforms of the late 1990s, which ensured partial pre-funding of the Canadian public pension system, placing it on a sustainable path in advance of the aging of the population.

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Canada is again expected to be the only G7 country in surplus in 2006 and 2007

• Canada was the only G7 country to record a surplus in 2005.

• The OECD expects that Canada will continue to be the only G7 country to post a surplus both this year and next.

• Canada’s surplus is expected to be 2.2 per cent of GDP in 2006 and 1.8 per cent of GDP in 2007, compared to an average deficit of about 3.5 per cent in the G7 countries.

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Canada’s debt burden has declined from the second highest to the lowest among G7 countries

• Given Canada’s strong fiscal performance at all levels of government, Canada has had the lowest ratio of total government net financial liabilities to GDP among G7 countries since 2004.

• Canada’s ratio declined to 30.2 per cent of GDP in 2005 compared to an estimated average of 52.7 per cent for all G7 countries. Canada’s debt burden has dropped by more than 40 percentage points from its peak in 1995, when it was the second highest in the G7. According to the OECD, this ratio is expected to fall further in coming years.

• In contrast, the debt burdens of all other G7 countries, except the United States, have increased since 1995 and are expected to remain near their current levels for at least the next two years.

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However, other major industrialized countries have also significantly reduced their debt burdens or have moved to net asset positions

• Similar to Canada, other OECD countries have significantly reduced their debt levels as a share of GDP over the past decade and some countries, including Australia, New Zealand and Sweden, have recently moved into total government net asset positions.

• Sweden, which had a total government net debt of 25.9 per cent of GDP in 1995, recorded a net asset position of 12.4 per cent of GDP in 2005. This represents an estimated improvement of more than 38 percentage points, slightly below that of Canada over the same period. Australia and New Zealand, which in 1995 had net debt-to-GDP ratios of 26.5 and 38.1 per cent respectively, recorded modest net asset positions in 2005.

• Denmark and Ireland have also significantly reduced their debt burdens and have net debt-to-GDP ratios below that of Canada.

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The largest portion of Canada’s total government net debt is attributable to the federal government

• Based on the OECD definition of net debt, Canada’s total government net debt was 30.2 per cent of GDP in 2005, most of which reflected debt held at the federal government level. At 25.8 per cent of GDP, federal net debt was more than twice the aggregate net debt of the provincial-territorial and local governments.

• However, on a Public Accounts basis, the federal debt burden (accumulated deficit) amounted to 35.1 per cent of GDP in 2005–06, almost 10 percentage points higher than the federal net debt calculated using the OECD definition. This discrepancy mainly reflects the exclusion of government employee unfunded pension liabilities from the National Accounts measure of net debt used by the OECD (the Government of Canada fully accounts for these liabilities in its Public Accounts).

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• On a total government basis, debt burdens at the three levels of government were partially offset by the significant net assets that are building up in the CPP/QPP to cope with future pressures from population aging.

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The federal government in Canada has maintained a budgetary surplus since 1997–98, unlike the U.S.

• There are certain fundamental differences in the accounting practices and expenditure responsibilities of the Canadian and U.S. federal governments. For example, the U.S. federal budgetary balance includes the substantial surpluses in the Social Security system, whereas surpluses in the CPP are not included in the Canadian federal figures. For this reason, the Canadian federal budgetary balance is more comparable with the “on-budget” balance in the U.S. (excluding Social Security).

• Like the Canadian federal budgetary balance, the U.S. federal on-budget balance moved from large deficits to surpluses in the latter half of the 1990s. However, since 2000–01 the U.S. has returned to deficits whereas Canada has continued to record surpluses.

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• The Canadian federal government posted a surplus of C$13.2 billion, or1.0 per cent of GDP, in 2005–06, while the U.S. federal government incurred an on-budget deficit of US$434 billion, or 3.3 per cent of GDP. Even when Social Security surpluses are included, the U.S. “unified budget” deficit was US$248 billion, or 1.9 per cent of GDP, in 2005–06.

• While the Canadian federal government is forecasting a surplus of C$4.2 billion, or 0.3 per cent of GDP, in 2006–07, the U.S. Administration projects another large deficit for this fiscal year. In fact,the Administration does not project a return to balanced budgets for at least the next five years.

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The federal market debt-to-GDP ratio is lower in Canada than in the U.S., and the gap is widening

• For reasons similar to those for the budgetary balance comparisons, Canadian federal market debt (rather than the accumulated deficit) and U.S. federal debt held by the public are the most comparable measures of the federal debt burden in the two countries.

• As a result of continued surpluses at the federal level in Canada and the deterioration in U.S. federal finances, the federal market debt-to-GDP ratio in Canada fell below the comparable U.S. figure in 2003–04.

• The Canadian ratio fell to 31.2 per cent in 2005–06, compared to an estimated 37.3 per cent in the U.S. The gap is expected to widen further in coming years.

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EX-99.C-10

 
 
 
 
 
 
 
 
 
 

EXHIBIT C-10

 
 
 
 
 
 
 
 
 
 

CANADA’S NEW GOVERNMENT

Advantage
Canada

Building a Strong Economy
for canadians

Department of Finance
Canada Ministère des Finances
Canada

© Her Majesty the Queen in Right of Canada (2006)
All rights reserved

All requests for permission to reproduce this document
or any part thereof shall be addressed to Public Works
and Government Services Canada.

Available from the

Distribution Centre
Department of Finance Canada
Room P-135, West Tower
300 Laurier Avenue West
Ottawa, Ontario K1A 0G5
Tel: 613-995-2855
Fax: 613-996-0518

Also on the Internet at www.fin.gc.ca

Cette publication est aussi disponible en français.

Cat. No.: F2-105/2006-3E
ISBN 0-662-44506-6

Table of Contents

Foreword by the Minister of Finance	5
Executive Summary	7
1 A Strong Canada in a Changing World	15
Strategic Context	17
Principles and Advantages	22
2 Focusing Government	25
Canada’s Fiscal Advantage	27
Maintaining Low Inflation	36
Restoring Fiscal Balance	36
A Stronger Economic Union	39
3 Creating New Opportunities and Choices for People	41
Encouraging Work, Knowledge and Skills, and Saving	43
Improving Opportunities for Canadians	48
4 Investing for Sustainable Growth	55
World-Class Research and Development	57
A Cleaner, Healthier Environment	63
Modern Infrastructure	66
5 Freeing Businesses to Grow and Succeed	71
Reducing Taxes on Business Investment	73
Improving Canada’s Regulatory Framework	78
Improving the Framework for Competition	81
A Leading-Edge Financial System	82
Openness to Trade and Foreign Investment	85
6 Success Factors and Implementation	89
Success Factors	91
Implementation	92

Foreword by the Minister of Finance

Canada is a great country. We are among the world’s safest, cleanest and most prosperous nations—a place where generations of people have come to live their dreams. But we need to keep Canada great. That means creating jobs, maintaining low unemployment and low interest rates, and reducing taxes. It also means rewarding hard work, helping people to get ahead, and ensuring our economy stays strong to preserve and protect our social programs—like health care.

The people who built this country worked hard. They had ambition and vision, and they helped ensure that our country achieved the success and prosperity that we enjoy today.

We have both the responsibility and the opportunity to build on that foundation.

Over the past number of years, the ground rules of the global economy have changed. It has been an important and exciting time, with advances in communications technology, reduced trade barriers and declining transportation costs, which have changed the world. People, jobs and investment capital move more rapidly across the globe than ever before. Talented, motivated people have become the world’s most valuable resource.

Governments have a responsibility to create the right conditions and opportunities for people and families to be successful. While we face challenges and barriers that stand between us and a higher quality of life, we can—and we will—overcome them.

This is what Advantage Canada: Building a Strong Economy for Canadians is all about.

Advantage Canada is an economic plan designed to make Canada a world leader for today and future generations. It will build a strong Canadian economy and make our quality of life second to none through competitive economic advantages.

5

These advantages are:

• Tax Advantage—Reducing taxes for all Canadians and establishing the lowest tax rate on new business investment in the G7.

• Fiscal Advantage—Eliminating Canada’s total government net debt in less than a generation.

• Entrepreneurial Advantage—Reducing unnecessary regulation and red tape and increasing competition in the Canadian marketplace.

• Knowledge Advantage—Creating the best-educated, most-skilled and most flexible workforce in the world.

• Infrastructure Advantage—Building the modern infrastructure we need.

By committing to principles and policies that will deliver these advantages, Canada’s New Government is setting the stage for economic growth, opportunity and choices for people. Together, we will build a prosperous economy that provides Canadians with what they deserve: good, well-paying jobs; the ability to save more for retirement; the chance to start a new business; the opportunity to help children and grandchildren; and the chance to improve their overall quality of life.

Advantage Canada will allow us to show the world who and what we are: a modern, dynamic and tolerant country.

This is a plan of action that will involve partnerships, cooperation and dialogue. It is also a plan for the long term, which will require focus, discipline and commitment.

This is an exciting time for Canada, and an exciting time to be Canadian. The world is not standing still, and working together—as one—Canadians have the energy, the ambition, the skills and the tools to succeed in a global competitive marketplace.

Sincerely,

The Honourable James M. Flaherty
Minister of Finance

6

Executive
Summary

Canadians understand the extraordinary potential of their country. Canada is a place where people can realize their dreams; where families can enjoy a quality of life that is second to none, and where businesses and organizations can achieve excellence on a global scale.

All of us can be proud of what Canada stands for in today’s world. We are a successful, independent nation that believes in tolerance, justice and providing a helping hand to the less fortunate. As the world changes, Canadians need to work together to make Canada even more prosperous and strong.

That’s why Canada’s New Government has developed Advantage Canada: Building a Strong Economy for Canadians. Advantage Canada is a strategic, long-term economic plan designed to improve our country’s economic prosperity both today and in the future. It will strengthen our nation, and show a modern, ambitious and dynamic Canada to the world.

Making Canada a World Leader for Today and Future Generations

Advantage Canada is optimistic, but realistic. It is visionary, but pragmatic and results-oriented. It is ambitious, but grounded in the realities of world markets, and of Canada’s existing economic and social realities.

Canadians are a proud, hard-working, ambitious people who want better lives for themselves, their children and future generations.

That’s why this plan is focused on helping people and businesses strive for excellence. It will help all Canadians improve their quality of life and achieve their dreams. It will create jobs, help entrepreneurs start businesses, and provide the wealth Canada needs to invest in health care and strong communities. It will shape Canada’s future through principles and policies that will help us to reach our full potential.

Advantage Canada is a plan that will help Canadians to build a strong economy. Government has an important role to play in creating the right conditions for Canadians—and Canadian businesses and organizations—to thrive. This plan will create new opportunities and choices for Canadians.

9

A Strong Canada in a Changing World

Canada is back: we are fully assuming our role in world affairs and we stand on the best economic footing of any of the Group of Seven (G7) economies. We are an emerging energy superpower that is taking action to make concrete improvements to our environmental sustainability. This economic plan will make a strong Canada even stronger, by building a country that is a formidable economic player in the world.

The world economy is changing. New players are emerging as major economic powers. Competition in world markets is fierce. Meanwhile, Canada’s baby boomers are set to retire in record numbers, testing our capacity to maintain our improved standard of living. These are challenges we will meet head-on. And as we adapt, these global changes will bring tremendous new opportunities for Canadians.

To that end, Canada’s New Government committed in Budget 2006 to develop this plan.

Advantages We Need to Improve Our Quality of Life

Other countries—from Ireland to Singapore to the United Kingdom—are developing competitive advantages based on their own strengths. Given Canada’s social, demographic and economic circumstances, we have the opportunity to create competitive advantages of our own.

Advantage Canada is focused on creating five Canadian advantages that will help us improve our quality of life and succeed on the world stage. These are:

Tax Advantage:

• Canada’s Tax Advantage will reduce taxes for all Canadians and establish the lowest tax rate on new business investment in the G7.

Fiscal Advantage:

• Canada’s Fiscal Advantage will eliminate Canada’s total government net debt in less than a generation, creating a strong foundation on which to build sustainable prosperity.

10

Entrepreneurial Advantage:

• Canada’s Entrepreneurial Advantage will reduce unnecessary regulation and red tape and lower taxes to unlock business investment. By building a more competitive business environment, consumers will get goods at lower prices and Canadian businesses will be better equipped for global success.

Knowledge Advantage:

• Canada’s Knowledge Advantage will create the best-educated, most-skilled and most flexible workforce in the world.

Infrastructure Advantage:

• Canada’s Infrastructure Advantage will create modern, world-class infrastructure to ensure the seamless flow of people, goods and services across our roads and bridges, through our ports and gateways, and via our public transit.

Principles to Shape Policy for Today and Tomorrow

Advantage Canada is based on four core principles. These principles are prisms that will guide policy decisions to improve our quality of life and make Canada a world leader for today and future generations.

The principles are:

• Focusing government. Government will be focused on what it does best. It will be responsible in its spending, efficient in its operations, effective in its results and accountable to taxpayers.

• Creating new opportunities and choices for people. Government will create incentives for people to excel—right here at home. We will reduce taxes and invest in education, training and transition to work opportunities so Canadians can achieve their potential and have the choices they want.

• Investing for sustainable growth. Government will invest and seek partnerships with the provinces and the private sector in strategic areas that contribute to strong economies—including primary scientific research, a clean environment and modern infrastructure.

• Freeing businesses to grow and succeed. Government will create the right economic conditions to encourage firms to invest and flourish.

11

Policies and Plans

When government policies and plans are complementary, their positive impact is multiplied. That is why Advantage Canada’s policies and plans build upon one another, creating a whole that is greater than the sum of its parts. The following is a summary of Advantage Canada’s policies and plans.

Focusing Government

When governments are good at the things they need to do, everyone benefits. Making governments more focused on the things they need to do well will improve services and help build a climate for the overall economy to perform better. Advantage Canada will:

• Eliminate Canada’s total government net debt in less than a generation. Canada’s New Government will show leadership by reducing the federal debt to 25 per cent of gross domestic product (GDP) by 2012–13—a full year ahead of what had been planned previously.

• Dedicate all interest savings from federal debt reduction to ongoing personal income tax reductions to ensure that Canadians benefit directly from debt reduction.

• Use unanticipated surpluses to accelerate debt and personal income tax reductions.

• Keep the rate of growth of program spending, on average, below the rate of growth of the economy.

• Introduce a new Expenditure Management System to ensure existing spending is effective, efficient, focused on areas of federal responsibility and provides value for money.

• Renew the inflation-control agreement with the Bank of Canada until the end of 2011; the inflation target will continue to be the 2 per cent mid-point of the 1 to 3 per cent range.

• Restore fiscal balance by limiting federal spending power, ensuring stable, predictable and principle-based fiscal arrangements with provinces and territories, and strengthening the economic union.

• Provide leadership to ensure competitive, open markets within our borders, which benefit consumers, workers and businesses.

12

Creating New Opportunities and Choices for People

Talented, creative people are the most critical contributor to a successful national economy over the long term. At a time when Canada’s population is aging and labour shortages are very real, governments must do what they can to help people enter the labour market and reach their full potential.

Advantage Canada will:

• Deliver on the Government’s commitment to reduce the goods and services tax (GST) rate to 5 per cent.

• Help low- and modest-income Canadians over the “welfare wall” by implementing a Working Income Tax Benefit.

• Continue to reduce personal income taxes to make the tax system fairer to attract and retain highly skilled workers, who are key to Canada’s future economic competitiveness.

• Reduce taxes on savings, including capital gains, to make them more competitive with the tax treatment of savings in other countries.

• Increase participation in the labour market and make sure Canadians can work wherever they want across Canada.

• Enhance workers’ skills through post-secondary education and training so that Canadians are equipped to succeed.

Investing for Sustainable Growth

The world economy’s ground rules have changed in recent years. Government has an important role to ensure that Canadian people, businesses and organizations have the advantages they need to succeed on a global scale. Advantage Canada will:

• Maintain Canada’s leadership in the G7 for public sector research and maximize its value by focusing on excellence and increased linkages with the private sector.

• Create a healthier environment and more sustainable economic growth, including through responsible use of our natural resources and effective use of technology.

• Build modern infrastructure that enhances Canada’s quality of life and commerce within Canada and across our borders.

13

Freeing Businesses to Grow and Succeed

Excessive tax and regulatory burdens are holding Canadian businesses back. These burdens have harmed our country’s productivity performance for too long. The time has come for action. Advantage Canada will:

• Establish the lowest tax rate on new business investment in the G7.

• Reduce the administrative burden on business by cutting paperwork by 20 per cent, and consider a principle-based legislative framework to guide regulatory departments and agencies.

• Improve the framework for competition through effective rules and regulations and modern competition policies.

• Build on our leading-edge financial system to ensure that investment is directed to its most productive use.

• Be open to trade and foreign investment so goods, services and technologies flow freely into Canada and Canadian firms have ready access to foreign markets to compete with the best in the world.

Implementation and Key Success Factors: The Will of Canadians to Succeed

Long-term economic success requires the discipline to focus on the principles and policies of this plan. It also requires sticking with the plan. That’s why Advantage Canada is a multi-year strategy that will require commitment. Achieving the economic and societal benefits of this plan will take time. For this plan to truly be successful, it will take strong leadership from governments across Canada, commitment by the private sector and the dedication and energy of the Canadian people.

Advantage Canada will grow our standard of living and improve our quality of life. It will create good jobs, prosperity and new opportunities for Canadian families. Working together—governments, businesses, organizations and people—there is nothing we cannot achieve.

Through this plan, working towards this common purpose, we will remain a shining example to the rest of the world of what a truly great, prosperous and compassionate nation can be.

14

C h a p t e r

A Strong
Canada In
a Changing
World

Strategic Context

Purpose: To Improve Our Quality of Life
and Make Canada a World Leader for Today
and Future Generations

Just as successful businesses and organizations pursue clear, focused strategies to succeed, Canada must also be guided by a comprehensive long-term economic plan.

This is Advantage Canada: Building a Strong Economy for Canadians. This plan will achieve a higher standard of living and better quality of life for Canadians as the world economy continues to transform. It is based on the core belief that Canada can be a world leader today and for future generations.

Advantage Canada is rooted in the realities of global competition and Canada’s existing strengths and economic challenges. It is visionary, yet concrete. It will serve as a framework for government decision making for years to come. And it is fundamentally based on the understanding that the passion, ingenuity and dreams of individuals ultimately make economies strong.

The New Ground Rules for Success
in Global Markets

Over the past 20 years, the rise of emerging economies, along with reduced trade barriers and lower telecommunications and transportation costs, has transformed the global economy. Production of goods and services is now organized along global supply chains, spread across countries according to their comparative advantage.

Advantage Canada is based on a clear recognition that the modern world economy has changed. From Canada’s perspective, the new ground rules for success can be summarized in three core, fundamental truths:

• People and capital are mobile.

• Talented, creative people are the most critical asset to a successful national economy.

• A favourable business environment is essential to retaining, attracting and growing high-quality, innovative enterprises and encouraging them to compete with the very best.

17

Much analysis has gone into determining the key ingredients for success in this new global economy. Think tanks, academics and organizations such as the Organisation for Economic Co-operation and Development (OECD) have all considered this subject extensively. The economic and societal foundations that provide the conditions for long-term economic growth are well understood. Indeed, there is widespread consensus that the fundamental determinants of long-term economic growth in developed countries are:

• A skilled and highly educated workforce.

• High rates of private and public investment in research and innovation.

• Modern infrastructure.

• High rates of business investment in machinery and equipment.

In turn, private investments in these key determinants of growth are encouraged by:

• Low public debt and low and stable inflation.

• Low taxes on work, savings and business investment.

• A high-quality and accessible education system.

• A competitive business environment, including effective regulation and competition policies.

• Stability and efficiency in the financial system.

• Openness to trade and investment.

• Flexible labour markets.

Governments can help create the right conditions and opportunities for businesses and organizations, and ultimately people, to succeed. This leads to a vibrant and healthy economy. Advantage Canada is designed to reduce the barriers to investment and help Canadians and Canadian businesses build on their current strengths.

18

Canada’s Competitive Position

A Proud Past, A Brighter Future

Canada is great because Canadians made it great. We are building from a position of strength. We are the eighth largest economy, and we have the seventh highest standard of living in the world.

Canadians are ambitious, and our people, businesses and organizations have the ability and the confidence to succeed on the world stage. Indeed, our many strengths provide the foundation for success in today’s global economy:

• Canada’s job creation has been the strongest in the G7 over the past decade. Our unemployment rate is close to a 30-year low and the share of the adult population holding jobs is near a record high.

• Canadians are highly educated and Canada leads in primary scientific research. Canadians pursue post-secondary education at a higher rate than anybody else, and Canada invests proportionately more on primary scientific research than all other G7 countries.

• Canada is in a solid fiscal position. The federal debt has fallen by $81 billion from its peak, and debt interest costs—which peaked at $49.4 billion annually in 1995-96—have been reduced to $33.8 billion. Canada’s total government net debt-to-GDP ratio has decreased from the second highest in the G7 in the mid-1990s to the lowest now.

• We are an emerging energy superpower. At a time of global shortages, we are already ranked fifth in the world in total energy production, seventh in oil production, third in natural gas production and first in hydroelectric generation.

Challenges Advantage Canada Will Address

While Canada’s many strengths form the foundation for excellence and success in today’s modern economy, there are barriers and challenges we cannot ignore if we are to improve our quality of life and become a world leader for today and future generations. These barriers and challenges include:

• High taxes that are discouraging investment and initiative. Income taxes on individuals and businesses in Canada remain high by international standards. Personal and corporate income taxes as a percentage of GDP are higher in Canada than in all other G7 countries.

19

• Business investment in equipment, innovation and training. Businesses in other OECD countries are investing on average more in research and development, and machinery and equipment than do our businesses. Participation in workplace training is also higher in other leading OECD countries.

• The need for skilled labour. There are shortages of skilled labour in a number of provinces and territories. These shortages are particularly acute in Alberta and Saskatchewan, where more than one-quarter of manufacturers report that labour scarcity is limiting operations.¹

• Our aging population. The decline in the share of the population of working age is common to most industrialized countries, but projections by the United Nations show that over the next 25 years, Canada will experience the second largest decline among G7 countries and the fourth largest among all OECD countries. An aging population will add to the shortages of labour that are already developing in our economy, putting downward pressure on living standards. At the same time, the aging of our society will create additional demand for health and social services.

New Challenges and Opportunities

Two additional factors merit a separate, more in-depth analysis because they create both challenges and opportunities for Canada. These are the rise of emerging markets and the strength of the Canadian dollar.

New Emerging Economies

Emerging economies such as China, India and Brazil, with their large pools of inexpensive labour, are becoming increasingly important in the world economy. These countries have traditionally had low labour costs, and their labour costs will remain lower than Canada’s for the foreseeable future. This labour cost advantage is being maximized by increasingly effective trade, and information and financial linkages with the global economy.

Freer trade, advances in communications technology and relatively inexpensive transportation costs have helped firms to locate where they get the greatest advantage. Many labour-intensive activities have moved to emerging economies, while developed countries are increasingly specializing in higher-value-added activities—such as research and development, engineering and product design—that tend to be more capital- and knowledge-intensive.

¹ Statistics Canada, Business Conditions Survey, third quarter (2006).

20

The rise of emerging economies creates both challenges and new opportunities for Canada. In the near term, emerging economies have increased the competitive pressure on low-skilled, labour-intensive sectors. Over time, the ability of developing countries to compete in higher-value-added activities will also increase.

Canada will need to continue to innovate and shift to higher-value-added activities to maintain a competitive advantage and create better jobs. We cannot simply rely on our traditional strengths or past expertise. We must continue to renew and maintain a long-term comparative advantage by specializing in higher-value-added parts of the global supply chain.

The rise of emerging economies brings significant opportunities for Canada.

• First of all, rising incomes in these economies are creating new markets for Canadian exports of finished goods and services.

• Secondly, the increasing integration of the global economy has brought with it a shift to lower-cost production, which has driven down prices for business inputs and consumer goods.

• Thirdly, as these emerging economies develop, their demand for raw materials will increase. This increased demand for oil, base metals and other commodities helps Canadian exporters as commodity prices increase. For example, from 2002 to 2005, China accounted for more than one-quarter of the increase in global oil demand and nearly 80 per cent of the increase in global demand for all base metals.

Canadian businesses must take advantage of these opportunities, and Canadian governments must do what they can to help open markets and ensure that we have the right economic and social conditions to stay ahead.

The Strength of the Canadian Dollar

The Canadian dollar appreciated by 40 per cent against the U.S. dollar between the end of 2002 and early November 2006. This has created significant challenges for Canada’s exporters, particularly in the manufacturing sector.

Overall, our economy has adjusted well to the higher Canadian dollar. While the decline in manufacturing employment has clearly been difficult for the workers affected and their families, many new jobs have been created in high-wage industries such as scientific and technical services, professional services, finance, insurance and real estate, and information and culture.

21

Within the manufacturing sector, machinery and equipment costs have come down thanks to our higher dollar. As a result, manufacturing investment is up strongly, and manufacturing output is higher than in 2002.

This is a positive trend, and it shows that Canadian businesses are replacing the artificial advantages that a lower dollar provided with real productivity improvements. This must continue. Canadian businesses must relentlessly seek efficiency, productivity and quality improvements—while specializing in higher-value-added activities.

Principles and Advantages

The analysis of Canada’s competitive position in the world points to key issues that require strategic focus. Advantage Canada‘s principles address these issues and form the basis of the policies that follow within this plan. These are principles for the long term, and they will serve as prisms through which consistent policy decisions can be made to deliver on the key objectives of the Advantage Canada plan.

Advantage Canada‘s principles are:

• Focusing government. Government will be focused on what it does best. It will be responsible in its spending, efficient in its operations, effective in its results and accountable to taxpayers (Chapter 2).

• Creating new opportunities and choices for people. Government will create incentives for people to excel—right here at home. We will reduce taxes and invest in education, training and transition to work opportunities so Canadians can achieve their potential and have the choices they want (Chapter 3).

• Investing for sustainable growth. Government will invest and seek partnerships with the provinces and the private sector in strategic areas that contribute to strong economies—including primary scientific research, a clean environment and modern infrastructure (Chapter 4).

• Freeing businesses to grow and succeed. Government will create the right economic conditions to encourage firms to invest and flourish (Chapter 5).

Strategic success also means making choices that are most likely to deliver results. Five advantages will be instrumental in improving Canadians’ quality of life. These five advantages are summarized below, and will be referenced throughout the Advantage Canada plan.

22

FIVE CANADIAN ADVANTAGES

Advantage Canada is about making Canada a world leader for today and future generations. It will achieve a better quality of life for Canadians by creating five Canadian advantages:

1. Tax Advantage:

• Reduce taxes for all Canadians and establish the lowest tax rate on new business investment in the G7 (p. 33).

2. Fiscal Advantage:

• Eliminate Canada’s total government net debt in less than a generation (p. 29).

3. Entrepreneurial Advantage:

• Create a business environment that unlocks private investment by reducing taxes, unnecessary regulation and red tape (p. 88).

4. Knowledge Advantage:

• Create the best-educated, most-skilled and most flexible workforce in the world (p. 53).

5. Infrastructure Advantage:

• Build modern infrastructure to ensure the seamless flow of people, goods and services (p. 70).

The Advantage Canada Plan

Advantage Canada is about ideas, and it is about acting on those ideas. Based on Advantage Canada‘s principles, the policies and priorities that follow provide an action plan for government. These policies and priorities are bold. They are complementary—creating a whole that is greater than the sum of its parts.

Together, Canadians and their government can create a sustainable advantage for our country by building a stronger economy. History shows that change creates both challenges and opportunities. The most successful societies respond by capitalizing on their strengths to turn change to their advantage.

This plan outlines proposals of Canada’s New Government to create conditions where Canadian people and families can achieve their full potential, where we can create the wealth to invest in things that matter—such as first-class health care and education and strong communities. As Canadians, working with common purpose, we will be a shining example to the world of what a truly great, prosperous and compassionate nation can be.

23

C h a p t e r

Focusing
Government

Less Debt, Lower Taxes and More Effective Government

Canadians want their governments to be fiscally prudent and to deliver results. Focusing government is about reducing debt, lowering taxes, efficient spending, low, stable and predictable inflation, restoring fiscal balance and making the economic union more competitive and efficient. This strong financial foundation is essential to the achievement of the other elements of this plan.

Canada’s Fiscal Advantage

Eliminating Total Government Net Debt

High levels of government debt hurt Canadians. Interest paid on debt is not available for more productive uses. That’s why a key part of Advantage Canada is to work toward the elimination of Canada’s total government net debt in less than a generation.

Canada’s New Government believes that a low public debt is essential to our long-term prosperity. Reducing debt:

• Frees up funds currently absorbed by interest costs to reduce taxes or to invest in other priorities, such as health care, public services and national security (see box below).

• Promotes economic stability by helping keep interest rates low, allowing Canadians to borrow money for things that matter—such as new equipment and information technology for businesses, or education and home renovations for families.

• Strengthens our country’s ability to deal with economic shocks and challenges such as the aging of the population.

Debt reduction is about fairness and equity toward future generations of Canadians. Debt represents a tax on future generations. It is only fair that those who benefited from the run-up in the debt assume responsibility for bringing it down. To do otherwise is to mortgage the future of our children and grandchildren.

The full impact of public debt on the economy includes not only the federal government’s debt, but also debt of provincial-territorial and local governments, and the assets of the Canada Pension Plan and Quebec Pension Plan. That is why a standard measure of debt used by organizations such as the OECD is total government net debt. (The annex of The Economic and Fiscal Update contains more details on the various measures of debt.)

27

In Canada’s case, all orders of government have made considerable fiscal progress in recent years. As measured by the OECD, Canada has moved from having the second highest net debt-to-GDP ratio among the G7 countries to the lowest today.

Benefits of Reducing Public Debt

Revenues Devoted to Debt Charges (2005-06)

• Federal and provincial governments currently devote a significant share of their revenues to pay interest charges on their public debt.

• At the federal level, debt charges absorb $34 billion a year, or 15 cents of every revenue dollar. That is more than the federal government spends on national defence, employment insurance benefits and international assistance combined.

• At the provincial-territorial level, a somewhat smaller share of revenues is absorbed by debt charges ($21 billion, or 9 cents of every revenue dollar).

• The growing assets of the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) will ensure public pensions are secure and affordable for generations to come.

• Reducing Canada’s debt will allow governments to lower the tax burden on Canadians and to devote more resources to priorities, such as health care, education, the environment and national security.

28

Canada’s New Government believes that we now have the opportunity to turn our strong fiscal performance into a fiscal advantage for Canada and to ensure that the legacy we leave for our children and grandchildren is one of opportunity and choice.

The Government believes that all governments should aim to eliminate Canada’s total government net debt in less than a generation. We can achieve this goal by 2021 if provincial-territorial governments maintain balanced budgets and the CPP/QPP continue to build assets as currently projected. For its part, Canada’s New Government will continue to plan for an annual debt reduction of $3 billion. Any surpluses recorded by provincial-territorial governments and federal surpluses in excess of $3 billion will contribute to accelerate the elimination of Canada’s total government net debt.

Eliminating Canada’s total government net debt will require the concerted action of federal, provincial-territorial and local governments as well as the continued diligent management of the CPP and QPP. By doing so, Canada will be able to count itself among the very few countries that are in a net asset position.

Canada’s Fiscal Advantage

Eliminating Canada’s Total Government Net Debt in Less Than a Generation

All orders of government have made considerable fiscal progress in recent years, and we now have the opportunity to turn our strong fiscal performance into a fiscal advantage for Canada. This will ensure that the legacy we leave for our children and grandchildren is one of opportunity and choice.

Advantage Canada proposes to eliminate Canada’s total government net debt in less than a generation.

29

The federal government will do its part by continuing to plan on annual debt reduction of $3 billion. Further, it is advancing its commitment to reduce the federal debt-to-GDP ratio to 25 per cent by one year, to 2012–13, from 35 per cent today. This will bring the federal debt burden to its lowest level since the late 1970s and will further the objective of reducing Canada’s total government net debt to zero by 2021.

Eliminating Canada’s total government net debt will mean that fewer dollars will be spent on interest costs. It will mean that more money will remain in people’s pockets so they can spend it or save it as they see fit.

30

Policy Commitment

Canada’s New Government believes that we should aim as a country to eliminate Canada’s total government net debt by 2021 at the latest.

The federal government will show leadership by continuing to plan on annual debt reduction of $3 billion.

The federal government is also advancing its commitment to reduce the federal debt-to-GDP ratio to 25 per cent by one year, to 2012–13. This will bring the federal debt burden to its lowest level since the late 1970s.

Directing Interest Savings to Personal Income Tax Reductions

Canadians pay too much tax. High tax rates create a disincentive for people to work and achieve their full potential, and prevent Canada from retaining and attracting the highly skilled people we need.

Advantage Canada’s commitment to reduce Canada’s federal debt will reduce the amount of interest the Government needs to pay. These lower interest costs will provide the opportunity to lower personal income taxes.

The $13.2-billion debt reduction in 2005–06 will result in ongoing interest savings of $660 million per year. Combined with interest savings from the planned $3-billion annual debt reduction, this will create room for personal income tax reductions of about $800 million in 2007–08, rising to $1.4 billion per year by 2011–12. To the extent that the Government realizes unanticipated surpluses, these will be used to accelerate the reduction of the debt and create further room for personal income tax reductions.

Lower personal income taxes will offer people greater incentives to work, save and invest in Canada—thereby benefiting families by increasing their standard of living and quality of life.

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Policy Commitment

To ensure that Canadians benefit directly from reductions in the federal debt, the Government will dedicate the effective interest savings from debt reduction each year to personal income tax reductions.

To the extent that the Government realizes unanticipated surpluses, it will accelerate debt and personal income tax reductions.

Dedicating Interest Savings From Debt Reduction to Personal Income Tax Reduction

Calculation of Permanent Personal Income Tax Reduction

Debt reduction	Budget surplus of $13.2 billion in 2005-06 is allocated to debt reduction.
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Interest savings	This debt reduction translates into $660 million per year in interest savings ($13.2 billion times the effective interest rate on government debt).
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Personal income tax reduction	In Budget 2007, $660 million per year would be allocated to permanent, ongoing personal income tax reduction. Combined with interest savings from the planned $3-billion annual debt reduction, this would create room for personal income tax reductions of about $800 million in 2007-08, rising to $1.4 billion by 2011-12.

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Canada’s Tax Advantage

Reducing Taxes for All Canadians and Establishing the Lowest Tax Rate on New Business Investment in the G7

Low taxes result in stronger economies, and Canada’s taxes are not low. The level of personal and business taxation we are burdened with in Canada is not good for families, it is not good for businesses, and it is not good for the long-term national interest. That’s why lowering taxes is so central to Advantage Canada.

To create a Canadian tax advantage over the coming years, Canada’s New Government will:

• Deliver on its commitment to reduce the GST to 5 per cent.

• Help low-income Canadians over the welfare wall by implementing a Working Income Tax Benefit.

• Continue to reduce personal income taxes to make the tax system fairer and to attract and retain highly skilled workers, who are key to Canada’s future economic competitiveness.

• Reduce taxes on savings, including capital gains, to make them more competitive with the tax treatment of savings in other countries.

• Establish a broader corporate tax advantage for Canada in the treatment of business investment. Step one is to create a meaningful tax advantage over the United States, our closest economic partner. Step two is to achieve the lowest tax rate on new business investment in G7 countries.

The Canadian tax advantage will help individuals, families and businesses to get ahead. It will reward initiative and make Canada the investment destination of choice. And the results delivered from these lower taxes will be amplified by actions that will reduce unnecessary regulation and create a stronger business climate for Canada.

Containing the Growth of Spending

The commitment to reduce Canada’s debt burden reflects the Government’s ongoing commitment to control spending. Focused spending will help lower the debt, reduce Canada’s tax burden and redirect funds towards other important priorities. Reducing waste and unnecessary spending is a never-ending job: it is always the right thing to do.

That’s why Canada’s New Government delivered over $1 billion of ongoing savings this year and next at the same time as it achieved a substantial budgetary surplus in 2005–06.

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Also, the 2006 Economic and Fiscal Update projects that program spending in 2006–07 will come in $1.2 billion lower than anticipated in Budget 2006.

Canada’s New Government is committed to keep the rate of growth of program spending, on average, below the rate of growth of the economy. The Government took an important step in meeting this objective in 2005–06, when program spending fell for the first time in nine years. In some years, the growth rate in program spending may exceed the growth rate of the economy, for example because economic growth is lower than expected or because unforeseen factors require a temporary increase in spending. But in general, and as a matter of principle, the Government’s approach to fiscal planning will limit the rate of growth of program spending, on average, to below the rate of growth of the economy.

Policy Commitment

Canada’s New Government is committed to keeping the rate of growth of program spending, on average, below the rate of growth of the economy.

More Effective, Results-Oriented Government

Keeping the growth rate of program spending below the growth rate of the economy will require focus and discipline. Budget 2006 announced that the Government would develop a new approach to managing overall spending to ensure that all government programs:

• Are effective and efficient.

• Are focused on results.

• Provide value for taxpayers’ money.

• Are aligned with the Government’s priorities and responsibilities.

Successful businesses and organizations are following precisely these kinds of principles in order to achieve their goals as effectively as possible. Modern comptrollership and efficiency tools should also be used within government to provide taxpayers with the best possible value for their money.

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Policy Commitment

The President of the Treasury Board will outline the Government’s new Expenditure Management System, which will focus on good management and value for money. Under the new system:

• Departments and agencies will manage their programs to clearly defined results, and assess their performance against those results.

• The Treasury Board Secretariat will oversee the quality of these assessments and ensure that departments explicitly address risk as well as cost-effectiveness.

• Building on these assessments, Cabinet will systematically review the funding and relevance of all program spending to ensure that spending is aligned with Canadians’ priorities and effectively and efficiently delivers on the Government’s responsibilities.

• Cabinet will undertake a rigorous examination of all new spending proposals, taking explicit account of the funding, performance and resource requirements of existing programs in related areas.

The new Expenditure Management System will make responsible spending the norm for how the Government does business, approving only the funding that is actually needed to deliver measurable and effective results, and provide value for money on behalf of Canadians.

In restoring fiscal balance, Canada’s New Government is committed to limiting the use of the federal spending power and focusing new spending in areas of federal responsibility.

Policy Commitment

Canada’s New Government will limit the use of the federal spending power and focus new spending on areas of federal responsibility.

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Maintaining Low Inflation

Since the early 1990s, the policy of low, stable and predictable inflation has served Canadians very well. By helping to keep interest rates low, it has allowed households and businesses to make better long-range plans, and it has provided the required flexibility to adjust to domestic and external shocks.

In 1991, the Government and the Bank of Canada jointly agreed that the Bank should target inflation, first with the goal of reducing it from high levels to progressively lower levels and then—once a low level of inflation was achieved—to keep it low. The current 1 to 3 per cent band with a 2 per cent mid-point target has been in place since the beginning of 1996.

Canada’s current 2 per cent target has served the country very well. Inflation has declined significantly since the regime was introduced. Annual Consumer Price Index inflation, which averaged 6 per cent in the 10-year period preceding the establishment of inflation targeting in 1991, has averaged about 2 per cent since then.

Policy Commitment

To maintain low inflation, the Government and the Bank of Canada have agreed to renew the inflation-control target for a period of five years to the end of 2011. Under the renewed agreement, the inflation target will continue to be the 2 per cent mid-point of the 1 to 3 per cent inflation-control range.

Restoring Fiscal Balance

Restoring fiscal balance is founded on the respect for the roles and responsibilities of each order of government. It is inspired by the idea of open federalism, where governments work together in the national interest, and seek to build a stronger economy and better quality of life for Canadians.

Federal, provincial, territorial and municipal governments working together have created a network of programs covering a range of economic and social policies that improve the quality of life of Canadians and enhance the economic performance of the country. Effective fiscal arrangements underpin the relationships between governments and support the achievement of shared priorities in areas such as health, post-secondary education, training, social services and infrastructure.

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The September 2004 federal-provincial health care agreement, known as the 10-Year Plan to Strengthen Health Care, provides long-term predictable federal funding for health care with a legislated annual escalator of 6 per cent to 2013–14.

While fiscal circumstances have improved for all governments in recent years, concerns have arisen about the fiscal balance between governments—particularly about the stability of fiscal arrangements other than health care and about a lack of clarity in the roles and responsibilities of each order of government.

In response, Budget 2006 set out in detail the Government’s commitments to restore fiscal balance in Canada based on five principles:

• Accountability through clarity of roles and responsibilities.

• Fiscal responsibility and budget transparency.

• Predictable, long-term fiscal arrangements.

• A competitive and efficient economic union.

• Effective collaborative management of the federation.

Important initial steps were taken in Budget 2006, including major tax reductions, significant new investments in areas of core federal responsibility, and a commitment to provide an additional $3.3 billion to provinces and territories for shared priorities.

Canada’s New Government also committed in the budget to bringing forward additional proposals to restore fiscal balance after consultations with provinces, territories and individual Canadians. These include proposals on renewed and strengthened Equalization and Territorial Formula Financing programs. They will also include a new approach to long-term predictable funding for post-secondary education and training, and infrastructure. The Government also set out to work with provinces to strengthen the economic union and, most importantly, committed to ongoing tax reductions.

The Government has since followed through on its commitment to consult on restoring fiscal balance. The key message the Government has heard is that Canadians support a system of fiscal arrangements that funds national priorities and redistributes wealth from the more prosperous regions to the less prosperous ones—but that these arrangements must be founded on principles of fairness and predictability.

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The fiscal balance strategy will follow that principle-based approach and also ensure that no Equalization-receiving province ends up with a fiscal capacity higher than that of a non-Equalization-receiving province. The strategy will also follow the principle that direct transfers to governments other than Equalization should be based on the principle of providing equal support for all Canadians.

Policy Commitment

Canada’s New Government is committed to restoring fiscal balance. The result will be a principle-based transfer system, with a clearer delineation of responsibilities among different orders of government, and with greater overall efficiency for governments and enhanced accountability for citizens.

To this end, the Government is committed to:

• Limiting the use of the federal spending power.

• Establishing principle-based programs for Equalization and Territorial Formula Financing to ensure all provinces and territories can provide reasonably comparable economic and social programs and services.

• Introducing long-term predictable funding for infrastructure and post-secondary education and training.

• Addressing concerns associated with unplanned surpluses by dedicating all interest savings from debt reduction to reducing personal income taxes.

• Strengthening the economic union by working with provinces and territories to enhance internal trade and labour mobility and create a common securities regulator, and by encouraging the provinces to move ahead with the harmonization of sales taxes with the GST.

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A Stronger Economic Union

A major objective of restoring fiscal balance is to ensure that all governments can work together to strengthen the Canadian economic union. Progress on restoring fiscal balance and strengthening the economic union goes hand-in-hand. A strong and efficient economic union ensures that all Canadians get the most from their skills and knowledge, and that businesses and organizations in Canada can invest to obtain the greatest returns. The development of a strong and competitive internal market is necessary for Canada to be successful in the global economy. For example, businesses operating across Canada could realize cost savings and expanded markets if regulatory differences across provinces were eliminated. Similarly, individuals could more easily take a job in another part of Canada if their qualifications were recognized nationally.

All governments within Canada have a responsibility to allow our internal market to operate as freely as possible. In that regard, encouraging progress has been made recently. The governments of Alberta and British Columbia have signed a comprehensive agreement that could significantly enhance the movement of goods, services and capital between these two provinces. This agreement is the broadest interprovincial trade agreement negotiated to date, applying to a range of government policies that affect trade, investment and labour mobility. Also, in September 2006, all provinces reached agreement on an ambitious action plan to reduce interprovincial barriers to trade and labour mobility.

The momentum gained through these agreements is vital for the economic health of the Canadian economy, particularly considering the impending labour market realities of an aging population and acute labour shortages in some regions of the country. Continued progress by provinces and territories in reducing these barriers will build a stronger economy and benefit all Canadians.

Policy Commitment

The Government intends to foster a stronger Canadian economic union by continuing to engage with the provinces and territories to enhance internal trade and labour mobility and create a common securities regulator, and by encouraging the provinces to move ahead with the harmonization of sales taxes with the GST.

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C h a p t e r

Creating New
Opportunities
and Choices
for People

A Skilled, Educated and Adaptable Workforce

Advantage Canada is ultimately about people and families. It is about helping people to reach their full potential, and ensuring that they have the incentives, opportunities and choices they need to build a better quality of life.

High taxes are limiting Canadians’ opportunities and choices. With a more focused government, we can lower taxes to create incentives for Canadians to succeed. Canada’s New Government has reduced the GST rate from 7 to 6 per cent to ensure that all Canadians keep more of their money for the things that matter to them. The Government is committed to further reducing the GST rate to 5 per cent. Advantage Canada will also reduce personal income taxes to encourage work, knowledge and skills, and saving.

Creating new opportunities and choices for people is about keeping our best and brightest in Canada. It is also about providing a helping hand to those who need support in joining the workforce, and attracting the immigrants Canada will need given our changing demographics and labour shortages. Creating opportunities and choices is also about providing the training and educational opportunities Canadians need to thrive in a knowledge economy. The results: more people with the right skills to succeed, more and better-paying jobs, fewer people unemployed and a brighter future for our children.

Encouraging Work, Knowledge and Skills, and Saving

Compared to other countries with which we are competing for jobs, talent and investment, Canada’s taxes are too high. High taxes reduce the rewards to Canadians from working, saving, and investing in new knowledge and skills. Budget 2006 increased the amount Canadians can earn without paying federal personal income tax, permanently reduced the bottom personal income tax rate, introduced the Canada Employment Credit and put in place several targeted tax relief measures, such as the credit for public transit passes.

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The Tax Fairness Plan for Canadians, released on October 31, 2006, will ensure that the corporate tax burden is not unfairly shifted onto the backs of hard-working individuals and families. This package also increased the age credit amount and introduced income splitting for pensions. Pension income splitting will increase the rewards to pensioners and seniors from retirement saving, while preserving incentives to participate in labour markets for working families.

More needs to be done. Canada’s New Government will continue to reduce personal income taxes to help Canadian families to be better off and more secure. The Government will also make Canada’s tax system fairer, focusing on initiatives that contribute the most to economic growth, including:

• Making work pay for the many low- and modest-income individuals who face obstacles to joining or staying in the workforce.

• Making Canada a better place for our highly skilled workers to live and work, and making it more rewarding for all Canadians to invest in the knowledge and skills that will lead to a more productive economy.

• Helping Canadians save for their futures, whether to finance their retirement or the education of their children.

Helping People Over the “Welfare Wall”

For too many low- and modest-income Canadians, working can mean being financially worse off. For example, a typical single parent with one child who takes a low-income job can lose almost 80 cents of each dollar earned to taxes and reduced income support from government programs. In addition, he or she could also lose in-kind benefits such as subsidized housing and prescription drugs, and could often take on work-related expenses. This is often referred to as the “welfare wall,” which discourages many low- and modest-income Canadians from getting the jobs they and their families need to have.

With labour shortages already emerging in some regions of the country and an aging population, actions to improve work incentives for low- and modest-income Canadians must be an imperative for all governments.

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Policy Commitment

Canada’s New Government announced in Budget 2006 that it would work with the provinces and territories to further lower the welfare wall by implementing a Working Income Tax Benefit (WITB) to make work pay for low- and modest-income Canadians. The Government will implement the WITB in Budget 2007.

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Reducing the Tax Burden on Highly Skilled Workers

A fundamental reality of the modern world economy recognized in this plan is that talented people can—and do—go places where they can earn more and improve their quality of life. Advantage Canada understands that talented, creative people are the most critical contributor to a successful national economy over the long term.

Many of us know of bright, talented, young Canadians who have left Canada for opportunities in places like the United States, Europe and Asia. It is in Canada’s national interest to create homegrown opportunities for our best and brightest, and to attract the skilled professionals, entrepreneurs and tradespersons that Canada needs to be a world leader.

Canada’s tax burden on highly skilled workers is too high relative to other countries, especially compared to other dynamic economies such as the United Kingdom, the United States and Ireland (Chart 3.2). Canada needs lower personal income tax rates to:

• Attract and retain highly skilled workers.

• Encourage more Canadians to realize their full potential and improve their standard of living here in Canada.

• Encourage all workers to invest in training and education to fuel growing segments of the economy.

• Provide incentives to firms that employ highly skilled workers to invest in Canada.

Policy Commitment

Canada’s New Government will continue to reduce personal income tax to make the tax system fairer and ensure Canada attracts and retains the highly skilled workers necessary to foster innovation and growth.

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Reducing Taxes on Savings

Saving plays an extremely important role in the economy: it supports investment that is critical for economic growth. The returns from these savings—interest, dividends or capital gains—are important for Canadians as they plan for important life events such as retirement, or when their children pursue post-secondary education. When the return from savings is subject to income taxes, this creates a bias toward consumption over saving. Savings are subject to income tax twice: once when the income is earned and again when the investment income is earned on the savings.

There are a number of features already within Canada’s tax system that reduce the double taxation of savings. Outside of tax-efficient savings plans, savings are generally taxed more heavily in Canada than in other countries with which we are competing for investment, jobs and talent. The maximum limits for tax-efficient retirement savings, such as registered pension plans (RPP) and registered retirement savings plans, are also much higher in other countries.

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Taxes on savings can also have a direct impact on competitiveness. Lower RPP limits can hamper the ability of Canadian employers to attract and retain highly skilled employees. Taxes on capital gains can also have a negative impact on productivity and economic growth by reducing rewards for risk taking and innovation.

Policy Commitment

Canada’s New Government will reduce personal income taxes on savings, including capital gains. This will support investment and economic growth while enhancing the overall fairness and neutrality of the tax system. It will also make our tax treatment of savings more competitive in relation to other countries.

Improving Opportunities for Canadians

Canada has a well-educated and highly skilled workforce. However, a sea change in labour markets is creating new challenges. A decade ago, the biggest challenge facing Canada was creating enough jobs for our workers. Now, there are labour shortages in some regions of the country—shortages that will only intensify as our population ages and baby boomers begin to retire in large numbers. While efforts to attract skilled immigrants and assist people in entering the labour force will help, these efforts will not be enough to keep our standard of living growing at its recent pace. Higher skills and knowledge will become increasingly important.

Globalization and the growth of the knowledge-based economy are also sharply increasing the importance of the skills, education and adaptability of our workforce for global competitiveness. This means that we need to focus on enhancing the education and skills of Canadians so they get the best jobs, earn a better living and build a strong future for their children. These are the opportunities and challenges education and labour market policies need to address.

To do so, we must move forward on three fronts:

• Quantity: Increasing the participation of Canadians and immigrants in the workforce to meet current and future labour shortages.

• Quality: Enhancing the quality of education, skills development and training, and developing interest and excellence in research in Canada.

• Efficiency: Facilitating workforce mobility and providing the information necessary to make informed labour market choices.

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Quantity Initiatives: Increasing the Participation of Canadians and Immigrants in the Workforce

Given slowing labour force growth and emerging skills shortages, we need more workers in the labour force. That means ensuring that as many Canadians as possible have the opportunity to participate in the workforce, and welcoming more immigrants who are most likely to succeed in the modern Canadian economy.

There are several ways that governments can contribute to achieving this goal. In addition to improving work incentives for low-income Canadians by helping people over the “welfare wall” (see previous section), the Government will work with the provinces and territories to examine Canada’s current array of labour market, employment and skills development programming that help Canadians find and keep jobs. Labour market programs were designed at a time of high unemployment and may no longer be in the best interest of Canadians. The programs need to be modernized and rationalized in a way that respects the primary responsibility of provinces and territories for delivering these services. The results should be effective spending, clarified roles and responsibilities, streamlined delivery and improved accountability.

Programs need to help people who have traditionally been under-represented in the workforce. Aboriginal Canadians, older workers and persons with disabilities are three groups facing unique challenges to participating in the workforce. We will build on programs such as the Aboriginal Skills and Employment Partnership Program and the recently announced Targeted Initiative for Older Workers.

Our immigration policies should be more closely aligned with our labour market needs. Greater use of the Provincial Nominee Program could help address local shortages. Particular attention should be given to skilled temporary foreign workers with Canadian work experience and foreign graduates from Canadian colleges and universities, as these groups are well placed to adapt quickly to the Canadian economy.

At the same time, more also needs to be done to ensure that immigrants already in Canada are able to utilize fully the skills and knowledge that they bring with them. Too many immigrants face challenges in adapting their knowledge to the Canadian setting, and recently some immigrants have had difficulties integrating into the Canadian workforce. Their employment rates have fallen below those of other Canadians, and their relative earnings, particularly for the university-educated, are lower.

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To address this issue, in Budget 2006 the Government made significant investments in settlement and integration programming. The Government will also move forward on the commitment to expedite foreign assessment and recognition processes through a new foreign credentials recognition agency.

Policy Commitment

Canada’s New Government will take action to increase participation in the workforce by:

• Reviewing systematically and eliminating barriers to labour force participation for under-represented groups.

• Improving labour market programming so that it helps Canadians develop the skills they need and employers want.

• Making improvements to the Temporary Foreign Worker Program to respond to employer needs.

• Examining ways to make it easier for Canadian-educated foreign students and temporary foreign workers to stay in Canada and become Canadian citizens.

Quality Initiatives: Enhancing Opportunities to Acquire Knowledge and Skills

Actions to increase participation in the labour force will help create a foundation for continued growth, but improving the skills and knowledge of Canadians will be of foremost importance. This is not only necessary to meet skills shortages, but also benefits workers, who will have more job opportunities and choices.

Post-Secondary Education

A quality education system—from early childhood development to higher education to ongoing learning—is critical for Canada’s continued prosperity. Canadians must adapt to changing technologies and rising skills and knowledge requirements. Fortunately, we start from a strong foundation: Canada has the highest post-secondary attainment rates among OECD countries, and enrolment in post-secondary education continues to grow.

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Canada’s colleges and universities need to look to the future and position Canada and themselves for long-term success. Our colleges and universities must continue to adapt to changing skills requirements and technological advances, and help meet the needs of adult learners. Other countries are challenging the competitive advantage provided by our education system as they expand and improve their own systems.

Substantial financial assistance for students is offered by both federal and provincial-territorial governments. This assistance improves access and has been effective in supporting increases in the number of Canadians attending post-secondary education. The effectiveness of these programs may be compromised by their complexity, keeping some potential students from obtaining financial help. The Government will work with provinces and territories to better integrate and simplify the administration and delivery of student aid and make supports more transparent and predictable for students.

Governments must work together to meet these challenges. While provinces and territories are primarily responsible for the post-secondary education system, the federal government plays an important role through transfers to provinces and territories as well as by providing considerable direct support for students and research. All of this is aimed at achieving excellence in post-secondary education.

Policy Commitment

Canada’s New Government will further support improvements in the quality of education for Canadians and ensure that Canada remains the OECD leader in the proportion of the population with a university or college education by:

• Strengthening the quality and competitiveness of the post-secondary education system by providing stable and predictable funding to provinces and territories.

• Working with provinces and territories to develop shared objectives and targets, clarify roles and responsibilities and enhance public accountability.

• Modernizing Canada’s system of student financial assistance to make it more effective.

• Encouraging the best foreign students to attend Canadian colleges and universities by marketing the excellence of Canada’s post-secondary education system.

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Excellence in University Research

As businesses increase their investments in knowledge and innovation, they will require more workers with advanced science, technology and business skills. Yet fewer Canadians complete science and engineering degrees than in other leading OECD countries.

The Government’s investments in university research help create an environment in which Canada’s needs for highly skilled graduates can be met. A first-class education at this level depends on the quality of facilities, instructors and experience provided to young Canadians. Students need the opportunity to work in facilities that are on par with the best in the world, so that they have experience using the most advanced tools and equipment. Sustaining facilities at international levels of excellence has an additional benefit: they attract the best and brightest students from around the world and retain top-notch researchers in Canada.

Federal granting councils fund projects that provide students with opportunities to work with the best minds and participate in groundbreaking research. This experience prepares students to add tremendous value to Canadian businesses, health science centres, and Canada’s health, social service and other organizations once they graduate. Practical internships also offer young people superb learning opportunities in important sectors of our economy.

Policy Commitment

Canada’s New Government will help prepare young Canadians for success and maintain Canada’s G7 leadership in public sector R&D investment by:

• Investing in research equipment and facilities in universities and colleges to compete with the best in the world.

• Increasing graduate scholarship support, including for the sciences and engineering.

• Exposing more students to private sector research challenges through internships and targeted collaborative research.

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Skills Development

Training provided by employers is another key element of Canada’s learning system, particularly for apprentices in skilled trades and employees who must upgrade their skills to adapt to new challenges. Canadian employers have the opportunity to do more when it comes to training workers. Training and skills development are critical in order for Canadian businesses to compete successfully on the world stage. Canada’s employers, however, are not keeping pace with major competitors in the amount of training they provide to their workers. Having a more competitive business environment supported by strong economic fundamentals will increase the returns from training to both employers and employees.

Policy Commitment

Canada’s New Government will support workplace training for Canadians by:

• Reducing taxes and creating a business environment conducive to business investment in training.

• Working with provinces, territories and the private sector to make training and skills development more widely available to Canadian workers and better aligned with the needs of the economy.

Canada’s Knowledge Advantage

Creating the Best-Educated, Most-Skilled and Most Flexible Workforce in the World

Talented, creative people are a critical contributor to a successful national economy over the long term. Canada has a long and proud history of excellence and achievement in higher education, and Canadians have the skills needed to create high-quality, value-added products and services.

Given the importance of learning, creativity, innovation and skills in today’s global economy, we must strive for nothing less than first place in the knowledge-based economy. Creating the best-educated, most-skilled and most flexible workforce in the world means that Canadians, businesses, federal and provincial governments, and educational organizations must all commit to achieving a Knowledge Advantage, and take action to achieve and deliver excellence.

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Efficiency Initiatives: Reducing Barriers to the Mobility of Canadians

An efficient and effective labour market is necessary for a country to succeed in a highly competitive global economy. Workers must be able to pursue the best employment opportunities across the country and practise their occupation wherever those opportunities exist. While encouraging progress has been achieved, interprovincial barriers to labour mobility continue to exist. Provinces and territories have agreed to recognize credentials from other places within Canada by April 1, 2009. Canada’s New Government is prepared to provide additional assistance to accelerate these efforts.

Canadians also need relevant, detailed and accessible labour market information so that they will know what job opportunities are available across the country. To plan for the future, employers, students and institutions need enhanced information about what jobs and skills are likely to be in demand and where those jobs will be.

Good labour relations and workplace practices that are both fair and flexible to employers and workers can also make an important contribution to efficient labour markets. The Commission for the Review of Federal Labour Standards has recently submitted its comprehensive review of Part III of the Canada Labour Code to the Government, providing a range of proposals on how to modernize labour standards within private sector enterprises under federal jurisdiction. The Government will seek the views of business and labour before deciding on a course of action.

Policy Commitment

To create a more efficient national labour market, Canada’s New Government will:

• Support the removal of barriers to labour mobility across the country.

• Enhance labour market information available to Canadians so that they can make optimal choices for themselves.

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C h a p t e r

Investing For
Sustainable
Growth

Building a Solid and Sustainable Foundation for the Economy

In addition to becoming more focused and providing the incentives for people to achieve their full potential, governments must also play a leadership role by making investments to support sustainable growth. These investments provide the foundation for global success and an environment where people can achieve excellence.

These strategic investments include support for world-class research in our universities, which will spur innovation and improve our competitiveness. They also include investments to create a cleaner, healthier environment that will improve the quality of life of Canadians and help Canada become a leader in the development of environmental technologies. Finally, government investment is required to modernize Canada’s infrastructure to ensure that trade will occur as seamlessly and efficiently as possible both within our borders and with the rest of the world.

World-Class Research and Development

Business innovation truly distinguishes an economy. Yet business research and development (R&D) investments in Canada have been lower than in most OECD nations, despite very favourable targeted tax measures and substantial public investments in primary research (Chart 4.1).

Advantage Canada’s actions to transform Canada’s tax and business environment should be instrumental in helping to make Canada an R&D and innovation leader. More value can also be generated from the Government’s investments in public R&D. Since R&D is so important for modern economies, more needs to be done.

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The Minister of Industry has been consulting with key stakeholders on a national science and technology strategy. Some of the key challenges that have emerged from this consultation are the need to:

• Maximize the impact of the Government’s investments in research.

• Create centres of research excellence that will be more responsive to business needs.

• Create a business environment conducive to innovation.

Policy Commitment

The Minister of Industry, in collaboration with the Minister of Finance, will develop and release a new science and technology strategy.

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Maximizing the Impact of the Government’s Investments

Canada leads the G7 in public sector R&D investment as a share of GDP, and the public sector currently finances 85 per cent of primary research in Canada. The federal government funds research in a number of ways, including through investments in infrastructure, direct support for researchers and the indirect costs of research, resources to help universities attract and retain leading researchers, and support for graduate students. Given the significant public funds devoted to science and technology, Canadians have a right to expect that the greatest possible benefits are realized from these investments. Continued investments in primary research must focus on excellence and must be measured rigorously and objectively.

The Government anticipates spending close to $3 billion this year in support of research conducted in post-secondary institutions. Much of this money is provided through the federal granting councils. Industry Canada is undertaking a review of the federal granting councils, and will report on ways to allocate resources more effectively in support of research excellence and the translation of research outcomes into social and economic benefits for Canadians.

We must ensure that the public is getting value from these investments in research. This will require better measurement and reporting of results. The Government will get more value for research investments by:

• Consolidating the range of available funding mechanisms.

• Allocating funding to the highest priorities.

The Government also spends more than $2 billion each year on its own research activities. Some of this money supports health, safety and regulatory activities; other research has broader social and economic objectives. As the Government reinvests in its science capacity, it will explore opportunities to transfer the management of some federal laboratories to universities. This would increase coordination with proven scientific leaders in universities and also provide additional training opportunities for Canadian students.

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Policy Commitment

While maintaining its G7 leadership in public sector R&D investment, Canada’s New Government will increase the impact from its investments in science and research by:

• Ensuring that excellence is the primary criterion for government research support.

• Focusing on results and improved accountability by establishing clear objectives and improved results measurement for the granting councils and other research entities.

• Considering transferring the management of some non-regulatory federal laboratories to universities in order to lever university and private sector strengths, create better learning opportunities for students and foster research excellence.

Creating Centres of Excellence and Responding to Business Needs

The research undertaken at Canadian universities creates new ideas and technologies that enrich our economy and society. Internationally renowned Canadian research in fields such as health, information and communications technologies, energy and environmental technologies helps to solve social and environmental problems. As recent graduates enter the labour market, they transfer this new knowledge from universities to businesses. World-class Canadian research also creates exactly the kinds of jobs we need to be a leader in key economic sectors.

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Canada—An Emerging Energy Superpower

With ample supplies of hydrocarbons, uranium and hydropower, Canada is poised to become a global energy superpower. We already rank fifth in energy production in the world, and we are the single largest foreign supplier of oil, natural gas, uranium and electricity to the United States.

This is just the beginning. There is huge potential yet to be tapped and new opportunities in renewable energy sources such as biofuels. Realizing this potential requires us to recognize that energy is just as much a knowledge industry as the high-technology sector. Advances in technology have made the Alberta oil sands a viable alternative to conventional sources and are pushing down costs of production for renewable sources. In the oil sands alone investments could top $100 billion over the next decade. But nothing will happen without a large number of skilled workers. The production of oil and gas is no longer limited to western provinces, with significant offshore production of oil in Newfoundland and Labrador and natural gas in Nova Scotia.

The Government will support Canada’s emergence as an energy superpower by making the needed investments in knowledge and people and creating the economic environment that will attract capital from home and abroad. For example, the Canada Foundation for Innovation has invested in energy and environment research at the University of Calgary. One research project at the university is aimed at developing new techniques to improve the efficiency of heavy oil extraction, helping make the process less costly and more environmentally sound. On the east coast, the Ocean Engineering Research Centre at Memorial University of Newfoundland is applying its more than 25 years of research experience to the development of offshore structures and underwater vehicles that can be used in the offshore oil and gas industry.

To strengthen the links between companies and our post-secondary educational institutions, the Government is considering new ways to help businesses get access to people, knowledge and ideas. In the auto sector, colleges and universities are already working with companies to deliver leading-edge research to businesses and provide enriched learning opportunities to students. Other sectors can benefit from a similar approach.

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Along with private sector and provincial contributions, federal funding for collaborative leading-edge science initiatives and commercialization facilities, such as the MaRS (Medical and Related Sciences) Centre, have reinforced Canada’s leadership in important sectors. However, we need a more systematic approach to evaluate research and commercialization projects through a rigorous and competitive process. This will ensure that future investments reflect national priorities and deliver value for taxpayers’ dollars.

The Government also supports university-led research collaboration with the private sector through the Networks of Centres of Excellence program. Introducing research networks managed and led by the private sector and focused on addressing the practical needs of businesses will create more value from business-university collaboration. As there may be insufficient economic incentives for the private sector alone to support this type of partnership, there may be a limited role for government support. The Government can also help businesses, including small and medium-sized enterprises, become more innovative by accessing the technology development and application capacity residing in community colleges.

Policy Commitment

Canada’s New Government will support research excellence and help to better align Canada’s post-secondary research capacity with the needs of businesses by:

• Targeting new investments in R&D, including those through the granting councils, to areas where Canada has the potential to be a world leader, such as energy, environmental technologies and health sciences.

• Introducing competitive funding, potentially via the Canada Foundation for Innovation, that levers investment by the private sector and other levels of government in large-scale, national scientific projects and commercialization partnerships.

• Strengthening the links between universities, colleges and the private sector through mechanisms such as business-led Networks of Centres of Excellence to enhance the commercialization of Canadian ideas and knowledge.

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Creating a Business Environment Conducive to Innovation

Canadian firms invest less than many of their OECD counterparts in research, development, and machinery and equipment, possibly missing out on opportunities to grow and succeed in lucrative areas. As a country, we must translate our strong primary research base into innovative new products, services and technologies. The private sector must be the leader in turning research and knowledge into innovation that benefits Canadians and people around the world. Improving the business environment (as discussed in Chapter 5) will help create conditions more favourable to business innovation.

A Cleaner, Healthier Environment

Protecting Canada’s environment is central to the Advantage Canada plan and an important source of long-term economic strength for Canada. Here’s why:

• A healthier and cleaner environment enriches the quality of life in Canada, and attracts and retains the highly skilled and mobile people we need to succeed in the global economy.

• Responsible development of our natural resources ensures future jobs and wealth creation across the country.

• Energy efficiency and environmentally sustainable business practices are increasingly important competitive advantages for our businesses.

• Canada has the potential to be a leader in the rapidly emerging business of environmental technology.

Canada’s New Government is focused on outcomes and achievable results to create a healthier environment for ourselves and future generations.

Through strong, clear environmental laws and regulations coupled with market forces, governments can create incentives and conditions in which businesses and people protect our natural environment and respond to environmental challenges with entrepreneurial innovation. For Canada, strong environmental protection laws are not costs—they are benefits that preserve our natural beauty, attract “new economy” firms and entrepreneurs, and incubate world-leading environmental protection industries.

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Canada’s Clean Air Act

Canada’s Clean Air Act will provide:

• The first-ever comprehensive federal regulation to reduce air pollution and smog.

• The first-ever federal regulation that will reduce greenhouse gas emissions in Canada, and not use taxpayers’ money to buy emission reduction credits abroad.

• The first-ever federal clean air regulation of all industrial sectors in Canada.

Environmental Regulation: Creating the Right Circumstances for Private Investment

Canada’s New Government has introduced Canada’s Clean Air Act and will begin to regulate emissions from transportation, industry, and consumer and commercial products.

The Government has established a long-term target to reduce greenhouse gas emissions by between 45 and 65 per cent from 2003 levels by 2050. The National Roundtable on the Environment and the Economy will provide advice to the Government on the long-term target and how it can be achieved. The Minister of the Environment is also consulting with industries on realistic short-term targets to reduce air pollution and greenhouse gas emissions, with a view to establishing targets by early 2007.

Action will also be taken to improve standards and labelling for energy efficiency and address indoor air quality concerns. The clean air agenda moves Canada away from weak voluntary approaches and a patchwork of regulatory processes across the country to mandatory national standards that will deliver results.

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The Government will work with industry, provinces and territories, and other stakeholders to establish a performance-based, efficient environmental regulatory regime that:

• Supports the development and deployment of new environmental and energy technologies.

• Maintains Canada’s competitiveness through:

– The pursuit of market-based approaches.

– Coordination of actions on reducing pollutants.

– Long-term targets that provide clarity and predictability to industry.

– Harmonization across jurisdictions.

• Ensures that no sector bears a disproportionate cost.

• Reflects the opportunities offered by the capital investment cycle in Canadian industries.

The Government is also working with provinces and territories on tougher, more stringent regulations and controls to address municipal waste water effluents, which are the most significant contributor to water pollution.

Finally, Canada’s New Government will work to implement a more streamlined environmental assessment process based on greater coordination both within the federal government and with provincial and territorial governments to ensure that projects can proceed in a timely fashion, while safeguarding the environment.

Accelerating Environmental Progress Through Targeted Initiatives

In addition to tough and appropriate regulatory measures, the Government will also find ways to:

• Promote a cleaner, renewable energy supply.

• Encourage greater energy efficiency in Canadian homes, buildings and businesses.

• Increase Canada’s capacity to adapt to a changing climate.

These initiatives will support an integrated, nationally consistent approach to protecting the health and environment of Canadians and will help spur businesses to develop and adopt the new technologies required to meet Canada’s environmental challenges.

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Creating Business Opportunity Through Environmental Technologies

Canada is a world leader in research into many environmental technologies. We will build on this advantage. New investments in primary research will be targeted, including in the area of energy and environmental technology. The links between universities, colleges and the business sector will also be strengthened so that businesses have better access to the people, knowledge and ideas developed through federal investments in primary research.

Policy Commitment

The Government’s environmental approach will include actions that:

• Create a cleaner, healthier environment that improves the quality of life of Canadians.

• Pursue efficient regulation using market-based instruments wherever possible and ensure no sector bears a disproportionate cost.

• Implement a more streamlined environmental assessment process.

• Complement regulation with targeted initiatives that are cost-efficient, and lever funding from the private sector and other orders of government.

• Support the development and deployment of new environmental and energy technologies.

Modern Infrastructure

High-quality, modern public infrastructure that allows goods and people to move freely and efficiently is essential to our long-term prosperity. Budget 2006 provided unprecedented infrastructure funding to help provinces, territories and municipalities meet their infrastructure needs.

Infrastructure matters. Its financing, construction and maintenance are important areas where government can—and must—play a leadership role. As a nation whose exports are so critical to our economic growth and prosperity, the infrastructure that provides gateways to foreign markets is especially important to Canada.

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Canada’s Gateways to Asia-Pacific Markets

By virtue of our geography and transportation infrastructure, Canada is well positioned to take advantage of the tremendous trade opportunities associated with the growing economies of Asia. In particular, our east and west coast ports and connecting rail lines offer competitive routes between China, India and the Asian Tigers, and North America’s heartland. This infrastructure has strong potential to capture a greater share of commerce between these regions and to improve the ability of firms in all parts of Canada to conduct business in Asia.

Decisive and concerted action by all levels of government and the private sector is required to improve the capacity and the efficiency of our transportation system. For example, on October 11, 2006, the Government of Canada announced $591 million for Canada’s Asia-Pacific Gateway and Corridor Initiative. The bulk of this funding will be used to finance infrastructure investments, such as better roads and new road/rail grade separations.

The Government understands how smarter, less costly project plans can be established when predictable, long-term, multi-year funding frameworks between governments are in place.

A core challenge is to ensure that federal spending has maximum impact. This can be achieved by taking advantage of innovative financing sources through public-private partnerships (P3s). Greater use of P3s will also provide opportunities for Canadian pension funds and other investors to participate in infrastructure projects here in Canada rather than being forced to look abroad, as is often the case now.

Experience around the world shows that properly designed P3s can preserve appropriate public control and deliver public infrastructure more efficiently than relying exclusively on government for the provision of infrastructure.

Some provinces are implementing P3 projects and have already started to put in place the structures that will allow them to harness the opportunities provided by P3s in helping to renew public infrastructure and improving the delivery of related public services. For example, in recent years public agencies, such as Partnerships British Columbia and L’agence des partenariats public-privé du Québec, were set up to provide expert services to public bodies in evaluating the feasibility of P3 projects and to facilitate the negotiation, conclusion and management of partnership contracts.

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For its part, Canada’s New Government intends to establish a federal P3 office that will facilitate a broader use of P3s in Canadian infrastructure projects. The Government will also encourage the development and use of P3 best practices by requiring that P3s be given consideration in larger infrastructure investments that receive federal program funding.

Windsor-Detroit Corridor

The Windsor-Detroit Corridor is Canada’s most important entry to the U.S. market. Congestion at the Windsor-Detroit border crossing can have a significant negative impact on Canada’s economy, particularly the auto sector. It has been demonstrated that a new crossing is required to meet long-term needs. The challenges of building such new infrastructure are significant. It:

• Requires a partnership between governments in two different countries.

• Entails the construction of a crossing with customs plazas and access roads on both sides of the border.

• Requires that the interests of various stakeholders be balanced.

The foremost importance of this project demands that progress must be made to ensure that the new crossing is in place by no later than 2013.

Strategically located gateways and border crossings play a vital role in fostering Canada’s competitiveness. The bulk of our trade with the rest of the world flows through a number of key gateways and border crossings. For example, 28 per cent of merchandise shipments between Canada and the United States pass through the Windsor-Detroit Corridor. The Port of Vancouver is seeing rapidly growing container traffic with the Asia-Pacific region. The ports of Montreal, Saint John and Halifax are also important trade terminuses. Our national economy—and our ability to compete and succeed on the world stage—are highly dependent on the efficiency of these gateways to world markets.

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Policy Commitment

Canada’s New Government will work toward a comprehensive plan for infrastructure that includes:

• Long-term predictable funding.

• A fair and transparent provincial allocation for a program envelope to support: (1) improvements to the core national highway system, (2) large-scale provincial, territorial and municipal projects such as public transit and wastewater management, and (3) small-scale municipal projects.

• Separate national infrastructure funds, accessible on a merit basis, to support: (1) P3 projects, and (2) gateways and border crossings, particularly projects selected pursuant to a new national gateway and trade corridor policy.

• A requirement that provinces, territories and municipalities consider P3 options for all larger projects receiving funding from the program envelope and the national infrastructure fund for gateways and border crossings.

• The establishment of a federal P3 office to help facilitate the increased use of public-private partnerships in Canadian infrastructure projects.

As well, the Government will further its efforts towards the construction of a new border crossing at the Windsor-Detroit Corridor. The Government will:

• Continue to work closely with the United States, Ontario and Michigan as part of a comprehensive, binational planning process for that new crossing.

• Define a financing strategy for this vital crossing in Budget 2007.

• Ensure the new crossing is in place by no later than 2013.

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Border Security

Today, we need to reduce the risk that security issues prevent our goods and services from reaching global markets. Canada’s economic success has its foundations in the North American market. In this regard, our land border represents a vital economic gateway to the world’s largest economy—next door in the United States. Enhancing the efficiency and security of our shared border with the U.S. is critical for ensuring that Canadian businesses can fully exploit the advantages of our North American Free Trade Agreement relationship.

The events of September 11th quite literally changed the world and created very legitimate and profound anxieties for people everywhere, but especially in the United States. The risk of terrorism remains a major threat to global stability and security.

To retain Canada’s critical access to the U.S. market, both security and border trade efficiency must be increased. The Prime Minister and the Presidents of the United States and Mexico have identified border issues as a priority under the work plan of the Security and Prosperity Partnership of North America. The three leaders have also called upon the newly established North American Competitiveness Council, a private-sector-led advisory group, to assist them in identifying priorities for enhancing North American competitiveness. Border security and efficiency will be a key part of their efforts, which will include seeking regulatory convergence. Regulatory convergence is critical, as it will help eliminate unnecessary barriers to the free flow of people, goods, services and investment.

Canada’s Infrastructure Advantage

Building Modern Infrastructure to Ensure the Seamless Flow of People, Goods and Services

Modern, world-class infrastructure will provide Canada with advantages that come from efficient networks that move people, goods and services seamlessly within the country.

Canada also needs to build modern and effective gateways to foreign markets, including the United States, Asia and Europe. Investing in these gateways is a priority, and Canada’s New Government will explore innovative financing and partnerships to maximize their value to Canadians.

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C h a p t e r

Freeing
Businesses
to Grow
and Succeed

     

A Competitive, Dynamic, Business Environment

Advantage Canada will create the conditions for our businesses to invest in equipment, innovation and training. This will help Canadian businesses make our country the base from where they succeed globally. To improve the business environment, Advantage Canada will lower business taxes, reduce regulatory and administrative burdens, enhance competition, ensure our capital markets are globally competitive and encourage free trade and foreign investment. These measures will also help small businesses to grow and create jobs in communities across the country.

Reducing Taxes on Business Investment

Business investment is critical to our long-term prosperity. It yields innovation and growth, with more jobs and higher wages for Canadian workers. High business taxes are harmful because they reduce the returns from investment, thereby reducing the amount of investment that takes place in Canada. With increasingly mobile capital, Canada needs a business tax advantage to encourage businesses to invest in Canada instead of other countries.

Many other countries have also recognized that an internationally competitive business tax system is important. The trend among industrialized countries has been to reduce statutory corporate income tax rates (Chart 5.1). These countries include Canada, all other G7 countries as well as smaller countries with generous social benefit systems, such as Sweden and Finland.

Currently, Canada has a statutory tax rate advantage over the United States of 3.8 percentage points. However, the United States is in the process of phasing in a 3.15-percentage-point reduction in its tax rate on manufacturing income by 2010. The Government’s business tax relief plan announced in Budget 2006 will ensure Canada keeps its statutory corporate tax rate advantage over the United States for manufacturing income by 2010, and will increase our advantage for general corporate income. Budget 2006 also supported the growth of small businesses by increasing the income threshold for the small business tax rate to $400,000 from $300,000 in 2007, and reducing the small business income tax rate to 11.5 per cent in 2008 and 11 per cent in 2009. The Tax Fairness Plan will further enhance Canada’s advantage by reducing the general corporate income tax rate by a half percentage point to 18.5 per cent in 2011.

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The overall impact of the business tax system on investment can be measured by the marginal effective tax rate (METR).¹ With already announced tax reductions, Canada will have a meaningful METR advantage over the United States by 2011. The Advantage Canada plan will further improve Canada’s business tax competitiveness by establishing the lowest METR in the G7.

Improved competitiveness can be achieved not only by reducing tax rates but also by improving the structure of the tax system. Harmonizing provincial retail sales taxes with the GST is an example of a structural change that would improve competitiveness (see next subsection).

¹ METRs are comprehensive indicators of the impact of the tax system on new investment. The methodology underlying the calculation of METRs is described in the evaluation report “Marginal Effective Tax Rates on Business Investment: Methodology and Estimates for Canadian and US Jurisdictions” in the 2005 edition of Tax Expenditures and Evaluations (Department of Finance). This analysis has been updated and extended to include 34 other countries, and results will be included in the forthcoming 2006 edition of Tax Expenditures and Evaluations.

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Ensuring that the capital cost allowance (CCA) rate for an asset is in line with the useful life of that asset is also important. Where a CCA rate is too low to reflect an asset’s useful life, an increase to that CCA rate can reduce the tax burden on investment and increase the efficiency of the tax system. The Government will continue to review CCA rates to ensure that they reflect the useful life of assets and will explore other opportunities to improve competitiveness, encourage investment and promote the neutrality of the tax system.

We need to make the tax system simpler and fairer. Simplifying Canada’s tax system helps reduce the compliance and administrative burden on businesses, thereby reducing their costs. Fairness in our tax system means establishing a level playing field so all taxpayers pay their fair share of taxes on income earned in Canada or abroad. Fairness is also enhanced by making the tax system more neutral across firm size, business structures and sectors. This will help ensure that investment choices are not distorted but are instead directed towards the most productive projects.

Advantage Canada is about making Canada a world leader for today and future generations. As such, this plan will require government to make bold, sometimes difficult, decisions. One such decision was part of the Government’s Tax Fairness Plan—which restored balance and fairness to the federal tax system by creating a level playing field between income trusts and corporations. This was the right thing to do for Canadian competitiveness over the long term, and the right thing to do given the risk that potential future income trust conversions were posing to Canada’s tax base.

Working With Provinces to Build a More Competitive National Tax System

Provincial governments have an important role to play in improving our national tax competitiveness. Already, nine provinces and the three territories have entered into tax collection agreements with the federal government. These agreements make the tax system more effective by streamlining the tax process and generating compliance savings for taxpayers. Tax harmonization not only results in administrative efficiencies for governments but, more importantly, makes tax payments simpler by allowing businesses to file only one return, which reduces their costs.

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The recently concluded Canada-Ontario Memorandum of Agreement on corporate tax collection provides a positive background for further consultations with provinces on improving the efficiency and effectiveness of tax systems. Building on this effective partnership, the Government would encourage provinces to work towards a more competitive business tax system by:

• Harmonizing their retail sales taxes with the GST, effectively eliminating retail sales taxes on business inputs and capital goods. This would reduce the cost of new investment, help simplify the tax system for consumers and businesses, and streamline government administration. For example, if Ontario were to replace its retail sales tax with a value-added tax, or harmonize with the GST, its METR would be 9 percentage points lower (Chart 5.2).

• Eliminating their capital taxes, which are a direct tax on productive investment: they tax firms even when these firms fail to make a profit.

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Canada’s New Government has reduced the GST rate from 7 to 6 per cent and is committed to reduce it further to 5 per cent. This reduction in the GST provides provinces with an opportunity to improve the competitiveness and efficiency of their own sales tax systems. In that context, the OECD recommended:

...replacing provincial retail sales taxes with value added tax structures harmonised with the GST. Doing so would provide a more productivity-friendly environment for business, without necessarily increasing the overall tax burden on consumers.²

Newfoundland and Labrador, New Brunswick and Nova Scotia harmonized their retail sales taxes with the GST in 1997 and Quebec adopted a value-added tax in 1991. If all provinces were to eliminate their capital taxes and harmonize their retail sales taxes with the GST or adopt a value-added tax, Canada would have the lowest tax rate on new business investment among the G7 countries by 2011 (Chart 5.3).

² OECD, Economic Survey of Canada, Paris: OECD (2006), p. 12.

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Policy Commitment

Advantage Canada proposes to establish the lowest tax rate on new business investment (METR) in the G7 by:

• Making further progress on aligning capital cost allowances for business investment with useful life.

• Considering opportunities to reduce tax distortions in areas where the tax system is favouring or impeding particular sectors and business structures or size.

• Encouraging harmonization of the remaining provincial retail sales taxes with the GST, which would substantially reduce the rate of taxation on new investments.

Improving Canada’s Regulatory Framework

Regulation is an important tool for protecting the health and safety of Canadians, preserving the environment and securing the conditions for an innovative and prosperous economy. In Canada, we must ensure that we have strong and effective regulations to protect people and enhance our quality of life, while minimizing regulations that are unnecessary or that put Canada at a significant competitive disadvantage.

The External Advisory Committee on Smart Regulation has reported that the federal government could use regulation more efficiently. It has recommended that action be taken to:

• Increase cooperation and coordination between federal government departments and among federal, provincial and territorial governments.

• Promote better international regulatory cooperation with key trading partners.

• Improve cost-effectiveness and timeliness of the regulatory process.

• Strengthen performance and accountability measurement.

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Principles and processes have been identified that will help Canada to achieve higher levels of regulatory efficiency. Action—including the use of legislation—should be taken to help Canada’s regulatory bodies be more efficient and effective through:

• The adoption and mutual recognition of international standards.

• The enforcement of regulations of another order of government; or alternatively,

• The delegation of federal enforcement to the provinces.

Canada’s New Government will also work with the provinces to address specific regulatory issues, such as the responsiveness of the current environmental assessment process. Internationally, Canada is working with the United States and Mexico on the regulatory aspects of the Security and Prosperity Partnership of North America to eliminate redundant testing and certification requirements when it is beneficial to Canadians.

Policy Commitment

Canada’s New Government will improve Canada’s regulatory framework by:

• Moving to finalize a new modern approach to smart regulation.

• Considering a principle-based legislative framework to guide federal regulatory departments and agencies in measuring the impact of their regulations and developing plans to improve their efficiency.

• Working with the United States and Mexico through the Security and Prosperity Partnership of North America to improve regulatory coordination and cooperation.

Reducing the Paper Burden by 20 Per Cent

Reducing the administrative and paper burden on Canadian businesses can improve our national competitiveness—especially for our small businesses, which are important to our economy. A 2001 OECD study shows that government paper burden has a disproportionate impact on small businesses: costs per worker are about five times higher for firms employing fewer than 20 employees than for those employing 50 or more.³

³ OECD, Businesses’ Views on Red Tape, Paris: OECD (2001).

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Canada’s New Government has been working to improve the administrative efficiency of regulations in Canada. Collaborating with groups such as the Canadian Federation of Independent Business (CFIB) and the provinces, through the Advisory Committee on Paperwork Burden Reduction and the Canada Revenue Agency’s Action Task Force on Small Business Issues, several practical initiatives are being developed:

• In 2006 the Committee released a report calling for a long-term, sustained approach to reducing the paperwork burden. The report calls for the measurement of administrative burden across government, a 20-per-cent reduction in the burden on business, and the development of an inventory of information obligations imposed on small businesses.

• Statistics Canada’s Survey of Regulatory Compliance Costs is measuring the cost and time burdens imposed by regulation on small business, and will identify areas that require action.

• Budget 2006 recognized the importance of reducing paper burden for small business by expanding the BizPaL (Business Permits & Licences) initiative. It brings together the federal, provincial-territorial and municipal governments to streamline and harmonize permit and licence requirements to reduce the time and cost burdens imposed on businesses.

• Within two years, businesses throughout Ontario will benefit from one tax return, one set of rules and one point of contact as a result of a corporate income tax collection agreement signed on October 6, 2006, by the federal and Ontario governments.

Policy Commitment

Canada’s New Government will reduce the administrative burden on business by:

• Reducing paper burden by 20 per cent by working with the CFIB, through the Advisory Committee on Paperwork Burden Reduction to implement the recommendations in its report.

• Measuring the compliance burden and identifying targeted cost and compliance action priorities from Statistics Canada’s Survey of Regulatory Compliance Costs on the impact of paperwork burden on small business.

• Targeting areas that are of most importance to small business, such as expanding the rollout of BizPaL.

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Improving the Framework for Competition

Competition drives firms to become more efficient, invest in new technologies and introduce new products and services that benefit consumers. A highly competitive and open national economy also helps our companies and organizations to be more successful when competing in global markets—which means more and better jobs in Canada.

Government has a role to play in creating the ground rules for competition in Canada. Consistent with the overall purpose and principles of the Advantage Canada plan, Canada’s framework for competition will:

• Create competitive marketplaces that serve both individual and business consumers with low prices, choice, quality and service.

• Drive and foster innovation, investment and efficiency that grow productivity and competitiveness.

• Promote a more resilient, adaptable economy.

Competitive telecommunications markets are vital to a strong economy, especially given the rapid changes in information technologies that are transforming how businesses operate and how individuals communicate and gather information. The Government has begun to update the regulatory and policy regime for the Internet age by tabling a proposed policy that instructs the Canadian Radio-television and Telecommunications Commission to regulate in a way that relies on market forces to the maximum extent feasible.

Policy Commitment

Canada’s New Government will:

• Review its competition policies to ensure that they provide competitive marketplaces.

• Take further steps to ensure that Canadians can benefit more fully from increased competition in the telecommunications sector, while preserving safeguards against anti-competitive behaviour that could hurt consumers.

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A Leading-Edge Financial System

A strong economy must be supported by a financial system that instills confidence and efficiently provides a wide range of financial services to households and businesses. Canada has a strong and sound financial system that serves Canadians well. It is an asset unto itself, providing high-end, knowledge-based and well-paying jobs for Canadians.

In the coming years, Canada’s financial system will need to adapt to the evolving needs of households and businesses, the increasing technology intensity of financial service delivery, global developments such as consolidation of institutions and exchanges, and the increasing participation of households in the management of their own financial affairs.

Keeping Canada’s financial institutions and markets innovative and competitive, with a flexible regulatory framework founded on sound principles, will ensure that they continue to meet the needs of our growing economy.

A Dynamic and Globally Competitive Financial Services Industry

The financial services industry contributes 6 per cent to Canada’s GDP and accounts for around 700,000 jobs, or 4 per cent of employment nationally. Building on a strong domestic base, Canadian banks and insurance companies are also among the most international companies in our economy. Thanks to their global knowledge and reach, they also support the development of globally oriented Canadian businesses in other sectors.

Canada has the opportunity to build upon this strength. A vibrant financial services industry will be founded on vigorous domestic competition that will deliver the best services to consumers at the best price. This will be facilitated by a regulatory framework that promotes access and opportunity for a wide range of providers, from global firms to credit unions and caisses populaires. Regular reviews of financial institution statutes will contribute to creating this environment, as will reduced barriers to international capital flows, as may be achieved, for example, by updating the Canada-U.S. Tax Treaty.

The policy framework must also support the global development of our financial services industry so that it may realize fully its potential and maximize its contribution to the Canadian economy. For example, the Government is proposing to allow Canadian financial institutions to add more foreign experts to their boards, so long as the majority of directors remain Canadian residents.

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A Competitive Advantage in Global Capital Markets

Many Canadians have large portions of their savings in stocks, bonds and other financial products such as mutual funds. Our personal prosperity, the prosperity of our businesses and the prosperity of Canada depend on strong and efficient capital markets.

Capital market rules, currently established under 13 separate jurisdictions and applied by separate regulators, raise the cost of financing and reduce the attractiveness of Canada as a place to invest. Canada needs a more efficient capital market regulatory system that ensures principles and rules are applied and enforced consistently across the country.

Progress on improving our capital market regulation is being made. Through “passport” and other initiatives led by the Council of Ministers of Securities Regulation and the Canadian Securities Administrators, Canada’s capital markets and securities framework is slowly being harmonized and streamlined.

But more needs to be done. Canada could achieve a competitive advantage through a less complicated system of regulation, founded on principles that recognize the different needs and capacities of small and large businesses. Canada can draw lessons from the experience of the United Kingdom, which has distinguished itself internationally and attracted a large share of international business to London through pragmatic, principle-based regulation. The British example—and the strength of its financial services industry as a source of wealth and prestige—shows how an economy can benefit from a competitive regulatory environment.

Canadians would best be served by a common securities regulator that would:

• Administer a single code anchored in sound principles.⁴

• Have a governance structure with equal participation of all governments involved.

• Be responsive to regional needs.

Benefits of having a common securities regulator would include:

• Providing clearer accountability and more responsive decision making in a rapidly evolving capital market.

⁴ Constructive proposals to this end were put forward in June 2006 by a panel of distinguished Canadians headed by Purdy Crawford.

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• Strengthening enforcement and the fight against white-collar crime.

• Providing Canadian retail investors with wider access to investment products such as “Maple bonds,” which are issued in Canadian dollars by foreign borrowers but which are not currently available to Canadian retail investors.

• Making it easier and less costly for Canadian entrepreneurs and businesses to access money from investors across Canada and the world.

• Strengthening Canada’s capacity to work with international partners to improve the efficiency of global capital markets for the benefit of Canadian investors and businesses.

A Secure Financial System

In an increasingly connected world, terrorists and criminal organizations are becoming more sophisticated in their attempts to move, conceal and launder funds. Canada is currently chairing the Financial Action Task Force, the international standard-setting body for the fight against money laundering and terrorist financing. Toronto has been chosen to become the permanent home for the Egmont secretariat of financial intelligence units from around the world. At home, the Government has tabled legislative proposals to toughen Canada’s anti-money laundering and anti-terrorist financing framework in line with international standards and domestic needs.

Policy Commitment

To help foster a leading-edge financial system, Canada’s New Government will:

• Ensure that the regulatory framework remains responsive to domestic and global developments, and maintain the regular practice of five-year reviews of the financial institution statutes.

• Work with the U.S. to conclude the Canada-U.S. Tax Treaty, which would facilitate cross-border capital flows.

• Allow Canadian financial institutions to add more foreign experts to their boards, so long as the majority of directors remain Canadian residents.

• Work with provinces to create a common securities regulator and advance an approach to regulation founded on principles, with strong enforcement.

• Continue to act decisively in combatting money laundering and terrorist financing and protecting the integrity of the financial system.

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Openness to Trade and Foreign Investment

Canada’s openness to international markets provides substantial benefits for Canadians. For Canadian workers, international trade and investment bring better, more rewarding jobs and higher living standards. For consumers, trade provides a greater variety of goods and services at lower prices. Foreign firms investing in Canada bring expertise and innovation, and encourage Canadian firms to emulate best practices. Through increased competition, trade provides more incentives for firms to become more productive. Trade and investments abroad give Canadian firms access to foreign know-how and greater opportunities to reap rewards from their investments and innovations.

Trade

The signing of the Canada-U.S. Free Trade Agreement in 1988 and the North American Free Trade Agreement (NAFTA) in 1992, and the completion of the Uruguay Round in 1994, dramatically increased our openness to trade. However, recent difficulties in concluding the Doha round of multilateral trade negotiations have led many countries—including our NAFTA partners—to pursue bilateral or regional negotiations to capture the benefits of freer trade. Canada has lagged behind its NAFTA partners on this front. Canada can and should do more to pursue bilateral trade agreements because our prosperity is dependent on our ability to export to the world.

Canada has what it takes to compete successfully in world markets, and it is in our national interest to be open to free trade opportunities. More trade agreements will help our economy to be even stronger and more successful within the rapidly changing global economy.

Canada’s tax treaties are also an important part of the global environment for businesses operating in Canada, with the Canada-U.S. Tax Treaty having a particular significance. Negotiations to update the treaty are ongoing and have progressed very well. The new treaty would have important benefits, including reducing borrowing costs for business and reducing barriers to cross-border trade and mobility.

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The Importance of Trade Liberalization for Canada’s Investment Performance

The fragmentation of the global value chain means that firms increasingly locate production of different components of a product across several countries, based on those countries’ comparative advantage. When firms make these decisions on where to invest, they must be assured that the goods and services produced in each part of the global chain can be combined seamlessly and sold to markets around the world. To be a part of this chain, countries must not only be open to foreign investment, but also ensure that the goods and services produced get easy access to other markets. Improved access to foreign markets encourages firms, through strategic investments, to locate the skill-intensive activities of their global chains in Canada.

In that context, the fact that our NAFTA partners have developed broad networks of trade agreements, while Canada has not, has potential negative implications for Canada’s investment prospects. It is in Canada’s best interest to engage in trade agreements to utilize a full suite of trade and investment policy instruments and improve access to foreign markets.

Policy Commitment

To ensure that Canadian businesses can fully participate in global market opportunities, Canada’s New Government will develop a new approach to international trade policy through a comprehensive Global Commerce Strategy that will:

• Build on our NAFTA advantage through improved border efficiency and increased regulatory convergence through the Security and Prosperity Partnership of North America initiative and in consultation with the North American Competitiveness Council and other stakeholders.

• Pursue regional and bilateral trade, investment and science and technology agreements, ideally together with our NAFTA partners.

The Government will also work with the U.S. to conclude the Canada-U.S. Tax Treaty, which would lower borrowing costs for businesses and reduce cross-border barriers to trade and labour mobility.

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Foreign Investment

Both inward and outward foreign direct investment bring substantial benefits to Canada. Foreign direct investment provides additional capital to fuel firms’ growth and exposes domestic firms to new technologies, innovative ways of doing business and healthy competition. Foreign direct investment abroad allows Canadian firms to be integrated into global supply chains, be more productive and competitive, and ultimately create more and better jobs here in Canada.

While Canadian firms are investing more abroad and becoming more diversified by reaching out to new investment opportunities, Canada’s share of total inward foreign investment directed to the G7 and OECD countries has been failing. No other country in the G7 comes close to matching Canada’s decline, and firms from other G7 countries have reduced their overall relative presence in Canada.

Policy restrictions on foreign investment in Canada have contributed to our economy’s relative decline in foreign direct investment flows. According to the OECD, Canada has the highest level of explicit restrictions on foreign-equity ownership in the G7—primarily in the transportation and telecommunications sectors.⁵

Foreign investment restrictions also include screening procedures under the Investment Canada Act, and business operations restrictions such as restrictions on length of stay for non-resident executives. Residency requirements for boards of directors may also impede global investment. These measures can limit opportunities for Canadian firms competing in a global economy to attract expertise, strengthen their networks and pursue new business opportunities. These policies may contribute to perceptions that Canada is not fully open to foreign investment, and these perceptions matter. In that regard, a survey of global executives ranked Canada as the least attractive country to invest in the G7.⁶

However, it should be acknowledged that there may be rare occasions where a particular foreign investment might damage Canada’s long-term interests. For example, foreign investment by large state-owned enterprises with non-commercial objectives and unclear corporate governance and reporting may not be beneficial to Canadians. While such cases are very much the exception rather than the rule, the Government needs a principle-based approach to address these situations.

5	Golub, Stephen S., “Measures of Restrictions on Inward Foreign Direct Investment for OECD countries,” OECD Economic Studies No. 36 (2003), p. 85-116.
6	A.T. Kearney, FDI Confidence Index (2005).

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Since Advantage Canada is designed to position Canada as a destination of choice for people and investors, we need to ensure that our approach to foreign direct investment is modern and in line with best practices around the world. The Investment Canada Act has not been amended significantly since its introduction in 1985, during which time there have been dramatic changes in the world economy.

Policy Commitment

The Government will work to increase foreign investment in Canada by:

• Reviewing its foreign investment policy framework, including the Investment Canada Act, with the aim of maximizing the benefits of foreign investment for Canadians, while retaining our ability to protect national interests.

• Allowing Canadian financial institutions to add more foreign experts to their boards, as long as the majority of directors remain Canadian residents, to enhance their capacity to be competitive in foreign markets.

Canada’s Entrepreneurial Advantage

Creating a Business Environment That Unlocks Private Investment by Reducing Taxes, Unnecessary Regulation and Red Tape

A competitive business climate is essential for a vibrant and healthy private sector. The performance of the Canadian private sector is currently good. It must become great. Businesses must respond by investing more in training, equipment and innovation. To trigger that leap, Canada’s New Government will take steps to create a competitive business environment that encourages entrepreneurship by:

• Reducing taxes on business investment.

• Improving Canada’s regulatory framework.

• Reducing the paper burden on business.

• Improving the framework for competition.

• Building on a leading-edge financial system.

• Increasing the country’s openness to trade and investment.

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C h a p t e r

Success
Factors and
Implementation

Success Factors

While there are many factors that will influence the successful implementation of specific policies within Advantage Canada, there are three key success factors that are critical to the overall success of this effort.

• Engagement. Canadians are proud of their country and want Canada to take its rightful place on the world stage as a respected, modern, dynamic and tolerant society. We can do that—if Canadians work together. Individual Canadians are seeking post-secondary education and training opportunities like never before. This must continue, and governments must do their part to support education and training. Canadian businesses are investing in people, equipment and technology. But more needs to be done. As businesses improve their own competitiveness and productivity by investing in people, equipment and technology, they help all Canadians to be better off and more secure.

• Partnership. Advantage Canada is a national plan, and its success depends on clarifying, enhancing and strengthening the relationships between different levels of government. Governments at all levels—provincial, territorial, municipal and federal—need to work together in the spirit of cooperation, united by the vision of a stronger, better, more prosperous Canada for all Canadians. Advantage Canada also recognizes the foremost importance of partnerships with the private sector in achieving the results we need.

• Commitment. The successful implementation of Advantage Canada will require long-term focus and discipline. This plan is about fundamentally refocusing government on what it does best. This will take time, and it will take patience. The implementation of the principles and policies of Advantage Canada will require governments to remain committed to this ambitious strategy over the long term.

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Implementation

The implementation of Advantage Canada has already begun. A number of initiatives within Budget 2006 support Advantage Canada’s principles, as do the measures outlined in the Tax Fairness Plan for Canadians. This implementation will continue through measures to be proposed in Budget 2007 and beyond, as well as in other key policy and legislative initiatives of the Government.

While we must remain steadfast in our resolve to achieve the ultimate purpose and direction of Advantage Canada, Canadians will work together to determine the best ways to achieve these goals. Canada’s New Government will actively seek input and ideas regarding the most effective and efficient ways to implement the details of this plan.

In some cases, the policies and priorities of Advantage Canada will be implemented relatively quickly. But the principles that form the foundation of this plan, and the advantages they will create, are designed to serve Canadians for years to come. They should be reviewed and refined as global dynamics and Canada’s competitive position change.

Our country has a great history of success and achievement. We need to build upon the strong foundations we have, given the economic realities of today. Canada’s New Government believes that, working together, we can build a Canadian standard of living and quality of life that are second to none in the world.

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EX-99.C-11

 
 
 
 
 
 
 
 
 
 

EXHIBIT C-11

 
 
 
 
 
 
 
 
 
 

     Joint Statement of the Government of Canada and the Bank of Canada
     on the Renewal of the Inflation-Control Target

     The primary objective of Canada’s monetary policy is to enhance the well-being of Canadians by contributing to sustained economic growth, rising levels of employment and improved living standards. Experience has clearly shown that the best way monetary policy can achieve this goal is by giving Canadian households and businesses confidence in the value of their money.

     It has been 15 years since Canada adopted an inflation-targeting framework to guide its monetary policy. During this time, Consumer Price Index (CPI) inflation has been reduced to a low, stable and predictable level of close to 2 per cent, real output has expanded at an average rate of 3 per cent per year and the unemployment rate has fallen to 30-year lows. Although a generally supportive international environment, coupled with significant domestic economic reforms and a prudent fiscal policy track, has played an important role in these positive developments, a key contributor has been Canada’s monetary policy under the inflation-targeting framework. The joint commitment of the Government of Canada and the Bank of Canada to the inflation targets has helped anchor inflation expectations. It has also provided a more stable and certain economic environment in which Canadians can make their investment and spending decisions.

     Based on this positive experience, the Government of Canada and the Bank of Canada agree to renew the inflation target on the following basis:

• The target will continue to be defined in terms of the 12-month rate of change in the total CPI.

• The inflation target will continue to be the 2 per cent mid-point of the 1 to 3 per cent inflation-control range.

• The agreement will run for another five-year period, ending 31 December 2011.

     The Bank will continue its ongoing research into potential improvements in the monetary policy framework. Before the end of 2011, the Government and the Bank will review the experience over the period and the results of the research, and determine the appropriate target for the years ahead.

     The commitment by the Government and the Bank to this inflation-control target will ensure that Canadians continue to derive the economic and social benefits from low, stable and predictable inflation and will underpin confidence in Canada’s economic prospects in the coming years.