The following post was originally delivered as a speech at the Canadian Club, Montreal, on November 25, 2010.
Today, I would like to talk about some of the near- and long-term challenges our country faces.
First, the good news. Our economy has fared relatively well in the past couple of years. Compared to other advanced countries, our recession was shallower and our recovery stronger.
That's reason to be proud. But we can't be complacent. For one, we are not out of the woods yet. There are some pressing near-term challenges that will influence the pace of our recovery. For another, there are even more challenging, longer-term, structural issues that could impact our standard of living.
My concern is that we will focus on the immediate issues, at the expense of those just over the horizon. That would be a grave mistake. We are entering a new era where tough choices will be required about the kind of country we want for ourselves, and for future generations. What's more, I believe Canada is uniquely positioned to achieve a permanent competitive advantage relative to other countries if we do, in fact, focus on tackling the longer-term issues.
Let me start with the pressing challenges.
To begin, we cannot rely on the external environment to support a robust economic recovery in Canada. The United States is still going through a pretty tough time. And that clearly has a profound impact on us, given how heavily we rely on our largest trading partner to grow our own economy.
America's recession was induced by a financial crisis. History tells us that recoveries from such events are slow and drawn out. Their real estate market remains weak and will be that way for a very long time. Unemployment remains high, and will be slow to decline.
There's also a psychological dimension to consider. Household and business confidence has been shattered, and Americans are still struggling to come to terms with what happened. The mid-term elections revealed just how frustrated they are about the slow and bumpy recovery. The fragile state of the American psyche may actually impede the recovery. That's because people must be confident in the future if they are going to invest and spend.
The US government has done its utmost to support the recovery but this has come with a massive fiscal cost. Europe's ongoing fiscal challenges need to be factored into the mix as well. The austerity measures undertaken there will dampen economic growth, and in turn, impact recoveries on this side of the Atlantic. Make no mistake, a US recovery is underway. But don't think a robust US economy is just around the corner.
In light of this, Canada should continue to diversify and strengthen economic ties around the world. Exploring free trade agreements is a smart option. Ottawa deserves credit for opening up discussions up with India.
Still Canadian exports will be constrained by our strong dollar. From a business perspective, a key challenge will be improving and sustaining our productivity levels to make us competitive in a high dollar world.
The world economy has enormous imbalances. Many developed countries are running huge trade deficits, while key emerging market economies are posting large surpluses.
Across the industrialized world, most nations would like to see weaker domestic currencies. This simply is not possible all at the same time. Some developing countries are resisting appreciation in their currencies. These imbalances run the risk of protectionism raising its ugly head. And it could lead to a longer period before currencies are re-priced to reflect the competiveness of their national economies.
So stepping back, where do we find ourselves? The global economy is on the mend, thanks in large part to the swift and coordinated actions of governments and central banks from around the world. Yet major structural issues remain unresolved:
First, the US housing crisis: There's no quick answer to this crisis. The overhang of houses in foreclosure, to be foreclosed, or under water constrains housing price growth, reduces the mobility of people in search of work, and saps consumer confidence.
Second, the US fiscal predicament: Washington has two intertwined issues. The recession and the bank bailouts have increased the fiscal deficit dramatically while, more importantly, long-term trends present major challenges to the government's ability to pay for the country's growing social security costs, Medicare and other related entitlement programs.
Third, the sovereign risk crisis in Europe: The EU has moved vigorously to stem the immediate issues surrounding Greece and Ireland. But key issues have yet to be resolved. Specifically, the long-term feasibility of a unified currency with disparate economies, and the level of indebtedness relative to the earnings capabilities of certain countries.
And fourth, global trade imbalances: A number of emerging economies have built their growth strategies around unsustainable levels of exports, with matching low consumption rates, and high domestic savings rates. These strategies create their own internal pressures like high domestic inflation, and the need for capital controls while constraining growth in the developed world.
These issues are acting as a drag on the recovery, and undermine investor and consumer confidence about the future. We cannot let these structural issues fester -- they must be fixed. That's the big lesson learned from Japan's lost decade. So what does this all mean for Canada, and our business community? We clearly don't have to contend directly with these major issues. But challenges remain. Let's take a look at some of the immediate ones.
The federal and provincial governments ran up significant deficits during the economic downturn. This reflected the weakness in the economy, as well as the decisions to stimulate the economy in order to mitigate the depth of the recession. It was the right thing to do, and governments should get credit for their swift and decisive actions.
Now that the recovery is underway, attention can be turned to eliminating the deficits over a reasonable length of time. Something Ottawa plans to do over the next five years.
Some will say Canada's slow growth economy calls for more stimulus or further delays in spending restraint. Others will say our fiscal situation is far better than other nations, so there is less urgency or need to eliminate Canada's deficits. I disagree. I believe the federal government's time line for a balanced budget is about right. I also believe provincial governments should set clear target dates, perhaps longer in some cases, but ones which could be credibly realized.
Canada is in quite a different position than other countries. Our government did not have to bail out its banks. Our consumers didn't see their home equity value collapse. Indeed consumer spending proved to be far more resilient than in the US. That, in turn, provided us with the stimulus that the US had to incur through massive government deficits. We are exiting the recession in good fiscal shape.
So my point is we can and should do better. Indeed, as we have learned, a critical element to a recovery is a credible economic plan. For people to invest, and grow the economy, they need to have confidence that the country is heading in the right direction. This requires Canada to put its fiscal house in order sooner than those countries still grappling with the downturn.
The time line for a balanced budget is important. But even more important is the way in which we achieve it. We must not let our relative better performance leave us complacent about the longer term issues. And there are still big issues confronting Canada.
First is productivity -- perhaps an overused term -- but still a vital one. It all boils down to this: how do we increase the well-being of the average Canadian? Our governments have done many things right to improve productivity. Yet we still seem to be laggards. As we debate our recovery program, we should assess it through its contributions to our long-term growth by improving our productivity growth rate.
Secondly we face structural imbalances in government spending. TD Economics has talked about the effect of demographic pressures in the health field. Simply put rising health costs are squeezing out all other government expenditures; and eventually our future growth by undermining critical public infrastructure. No Canadian wants to move away from a universal system. But there has to be a way where the burden of growing health care costs does not always fall on governments.
Third, the shape of the economic recovery will not leave Canadians equally well-off. There is a clear risk that lower income Canadians will bear the brunt of the slow recovery, as well as the industry shifts involved in a higher value Canadian dollar. But we know that lower income Canadians already face much higher effective marginal tax rates than higher income Canadians, and various employment taxes are too high.
We should encourage people to work -- not discourage them. We should not always assume that fiscal stimulus means more government spending. It could also mean lower taxes for lower income Canadians. If the level of fiscal stimulus required needs to be sustained for longer than now anticipated, let's look to solving this structural issue, not extend or increase government spending.
So taking a step back, I believe policy must be aimed at creating the most productive, innovative, competitive and equitable country possible.
All of this means tough choices must be made. The good news is we have risen to the challenge before. In the 1990s, the Bank of Canada slew inflation; Ottawa eliminated its deficit; and our national pension plan was put on a sound financial footing. These policies were not easy to accomplish, but they were done.
The starting point is to raise awareness of the core issues and encourage an open and frank national dialogue. We should take advantage of our privileged position to build momentum for Canada: addressing our slower than average productivity growth; our structural imbalances in government spending; and our tax system that is both inequitable and discourages people from participating in the work force.
Similarly Canadian business should look for ways to build momentum. TD holds the view you can grow a business consistently -- year over year -- without taking on unnecessary risks; activities that can't be managed properly or fully understood. It's a philosophy that has been at the centre of our success over the past eight years.
Since then, TD's retail footprint has doubled. Our workforce is almost twice the size. Our assets and deposits have more than doubled. TD's market cap has more than tripled in size. Our stock price is two and a half times higher. Dividends per share have more than doubled. And we came out of the downturn with our Triple A rating from Moody's intact.
Indeed, back in 2007, when we saw where the world was going, we decided not to pull back from our growth path. Instead, we said let's use this time to strengthen our competitive advantage and emerge in stronger shape than ever before.
That turned out to be a good decision for our customers, in both Canada and the US, and our business. We solidified our unique leadership position in North America. TD now has a larger retail footprint in the US than Canada. On both sides of the border, we took market share by growing our lending business.
Our recent move to introduce seven day banking in Canada extends our leadership position in customer service and convenience. We also made the principled decision to stand by our customers who, through no fault of their own, found themselves in some pretty tough spots. We helped more than 65,000 Canadians regain financial control by making their debt load more manageable; restructuring their mortgage payments and providing customized financial advice. We're now rolling out our TD Helps program across Canada to assist any customer whose been impacted unexpectedly through a life event.
And finally our substantial investments in creating a unique and inclusive work environment have reinforced our reputation as an employee brand of choice on both sides of the border.
Like TD, Canada finds itself in a position to extend its advantage over countries still reeling from the downturn. The real risk is not making the choices, when our country clearly has the capability to move onwards and upwards. The way we see it, if you are standing still, you are falling behind.
The global economy is recovering. But big structural problems remain, and they're not only acting as a direct drag on the recovery, but also a drag on our confidence about future economic prospects.
What's assuring is world leaders do get it. Hopefully they will now find the collective political will to resolve these issues.
Canada is in a better position than many other countries. But we should not let our relative strength lull us into complacency. We have to be proactive. The external environment will not make it easier for us to grow and prosper.
Our challenges are profound but so are the opportunities. We are entering a period of slower economic growth. And that means government revenues will grow at a slower pace, just as our aging population will place greater demand on more public programs.
Tough choices are required about what we expect from government, and ourselves. But at the end of the day, leadership is about building a better future. Good leaders don't let today's challenges distract them from tomorrow's goals.
When it counts, Canada always pulls together. We find solutions that work and that are fair. That's our national character in action. And that's our advantage moving forward.