TORONTO — Finance Minister Jim Flaherty flagged fiscal consolidation as one of the most crucial items on the agenda at this weekend's G20 summit, and is looking to G20 leaders to establish debt reduction targets.
“We have some economies that have quite dire fiscal situations that must act urgently to restore confidence,” Flaherty told reporters ahead of a presentation to the Toronto Board of Trade on Thursday.
The markets have noticed that some nations, particularly those in Europe, have reached excessive debt levels and need to deal with it, he said.
“So, we are going to urge those countries to deal with those fiscal situations quickly and implement the changes that need to be made.”
There are ongoing discussions about what the precise targets should be, he said, adding that he sees no divisions within the group on the matter.
Prime Minister Stephen Harper and U.S. President Barack Obama have both sent letters to G20 leaders ahead of the summit in Toronto outlining possible fiscal consolidation goals.
Harper suggested slashing deficits in half by 2013. Canada has pledged to balance the books completely by 2015 via spending restraint, though some critics have said that’s a tall order without tax hikes.
The key for G20 leaders, according to Flaherty, will be striking a balance between fostering economic growth and reining in debt.
“One size does not fit all, quite frankly,” he said.
Emerging economies, such as China, will need to boost domestic demand to fuel global growth while others will also need to reduce deficits, although on a less urgent basis, he said.
Flaherty again dug in his heels against a global bank tax, pledging no such levy would come out of the high-level talks.
“The primary issue in financial sector reform is not a bank tax. It’s a distraction, quite frankly, and it gets much more attention than it deserves,” he said. Contingent capital discussions, on the other hand, are still on the table, he said.
Instead, a more important issue facing financial institutions is the quantity and quality of capital. Canada’s financial system is a model when it comes to capital standards and caps on leverage, he said.
“It’s in everyone’s interest to listen to those who got it right.”
Flaherty said all leaders agree in principle that taxpayers should not be on the hook for bank troubles, but disagree on how this should be achieved. No Canadian bank received a government bailout in the fallout from the recession.
Germany, France and the U.K. announced plans for a bank tax earlier this week, choosing to go it alone following intense opposition to a global levy from Canada and Japan.
Most countries won’t impose “punitive” bank taxes, Flaherty said.
“There may be some market consequences for that, but that’s the nature of the global economy. These are choices some governments will make.”
The next meeting of G20 leaders in Seoul this fall is the deadline for more detailed financial sector reform.
