POLICY OPTIONS: Mr. Flaherty, thank you for doing this.

FINANCE MINISTER JIM FLAHERTY: My pleasure.

PO: There seemed to be a bit of a mixed message in the budget. On the one hand, it was transformational; on the other hand, to use your words, it was moderate. To quote from the budget speech, ”œcommon sense, moderate restraint” was one of the themes.

Couldn’t it have been both, like the old candy mint-breath mint, two mints in one?

JIM FLAHERTY: Oh, I think it was both in the sense that the larger picture is transformational. Looking 10 years ahead, looking at the next decade, the fiscal picture is moderate, as it only needed to be moderate in order to get to a balanced budget in the medium term. We didn’t need to be draconian, so we were not.

PO: Right. When you look at the numbers on the expenditure review, from the operating budget of $75 million, departmental spending cuts of $5.2 billion by 2017, representing a 6.9 percent departmental reduction and less than 2 percent overall, only 19,000 positions taken out of the public service mostly by attrition, that’s pretty moderate. Were the expectations perhaps overplayed in that sense, in terms of the expenditure review?

JIM FLAHERTY: Well, no. We had gone out and said that we were going to look at that spending, just the $75 billion, not the transfers to the provinces, not the transfers to individuals in Canada, which is another $175 billion. So we had made that commitment and we kept our commitment.

And then when we looked at this, we had asked departments to come forward with 5 percent. We ended up, and then a 10 percent scenario as well, and we ended up with, as you’ve said, 6.9 percent.

PO: Much is made in the budget and in your speech of Canada’s strong economic performance, the world’s strongest financial system, according to the World Economic Forum, best country in which to invest, according to Forbes, 610,000 new jobs since the end of the recession, the lowest debtto-GDP ratio in the G7.

Those are all good stories, but inside the Canadian numbers, do you worry a little bit about the deficits and the debt of Ontario and Quebec?

JIM FLAHERTY: Yes, I worry about the overall picture, because the international markets and the rating agencies have shown that they will look at subnational governments. They have done so in Spain, they have done so in other places.

We’ve already had some negative comments by a rating agency about Ontario. I’m concerned about the size of the public debt in Quebec, the size of the deficit, the accumulating public debt in Ontario, and a couple of the Atlantic provinces are in heavily indebted positions.

So we’re all in this together in Canada. We need them to row in the same direction as we are.

PO: So Canada’s AAA is carrying some of these provinces, in terms of credit ratings.

JIM FLAHERTY: Well, sure, I mean, the strength of the federal government is an international strength of Canada.

PO: Okay, the deficit numbers clearly indicate that this is a cyclical issue in Canada, not a structural one, in terms of balancing the books by 2015. When you look south to our largest trading partner and economic partner in the US, are you concerned about the structural nature of their debt and deficit and some of the systemic political gridlock in Washington?

JIM FLAHERTY: Especially the latter.

PO: Have you talked to Tim Geithner (Secretary of the US Treasury) about this?

JIM FLAHERTY: Oh, yes. We’re talking in the United States frequently. And Secretary Geithner looks with envy at Canada because we are in a relatively strong fiscal position and our fundamentals are strong economically, but also because we’re able to govern, which is something the Americans are struggling with right now.

PO: Let me put it this way. What keeps you up at night? Europe?

JIM FLAHERTY: Europe, for sure. What could happen if some of the weak European economies falter, particularly if they falter with respect to the implementation of their austerity programs, the commitments they have made, this is a real possibility. And this could then get us back into a difficult situation with the European banks and sovereign debt. And that would have an effect on American banks and globally.

So yes, I worry about that. I’m modestly encouraged by what’s happening in the United States. There are some signs of growth, but they are modest and tepid.

PO: Do you worry about youth unemployment in Canada and elsewhere, not just as an economic but also a social issue? Fourteen percent in Canada, 18 or 20 percent in America, 40 percent in places like Spain and Italy?

JIM FLAHERTY: I think it’s a very serious problem in places like Spain, very serious, because of the size. People should understand, though, that the youth unemployment rate in Canada is traditionally about double the overall unemployment rate. So this is not unusual. We have to fight to get our unemployment rate down from where it is overall, about 7.3 or 7.4 percent, down to somewhere between 5 and 6 percent, which would mean, in effect, full employment.

PO: So 14 percent is not out of line in terms of proportional norms with the larger unemployment picture?

JIM FLAHERTY: Proportionally, it’s not, but we are concerned about it, and we have some specific measures in the budget to try to connect young people to jobs, particularly internships.

PO: Right. This budget is much more than just a fiscal framework. There are a lot of political statements in it, and when you read it carefully, one of them is on immigration, for example. We have a labour shortage in this country, particularly in the oil patch. You have been to places like Ireland, where they have another wave of emigration to Canada and other countries for reasons other than food, which was in the time of our forebears " they came because they were starving. Now they are coming because there are no jobs.

I know you’ve played golf in Ireland and some of the young men caddying for you were college graduates or had skills such as electricians and plumbers that would be much in demand in places like Toronto and the west.

JIM FLAHERTY: Sure.

PO: What are we doing about that in terms of bringing more skilled labour into our workforce from abroad?

JIM FLAHERTY: Well certainly, in the case of Ireland, we’ve expedited the opportunities for young Irish people seeking employment to come to Canada. And I heard it myself in Ireland there that young people " well educated, engineers and so on " are looking at either Canada or Australia. Interestingly, they don’t have the United States in the first rank, because of the economic difficulties there.

PO: On innovation, you’ve essentially endorsed the Jenkins Report. There are six items dealing with the expert task force on innovation. How do you get from endorsement to implementation?

JIM FLAHERTY: Well, it’s going to be a challenge. One of the most important things we’ve done is set aside $500 million for venture capital; $100 million will go to the Business Development Bank, which was previously committed. But the $400 million will be structured, and we will have to talk about how we’re going to structure them.

We’ve looked at successful direct grant programs in Israel, in Germany, for example, and we’re going to try to devise a program that will have the kind of success that they have had with their programs.

PO: Right. On Old Age Security (OAS) program changes, moving it from age 65 to 67 in terms of eligibility starting in 2023 doesn’t seem like a very radical notion, especially since Stephen Harper kind of made the announcement already in his speech in Davos back in January. But the numbers are staggering when you look at them, from seven people for every retired person years ago in the workforce, to four to one that we’re looking at now, from a cost of $38 billion today to two to one down the road; $108 billion in 2030. Those are huge numbers.

JIM FLAHERTY: They’re huge numbers and if you look at the government of Canada and what our challenges are, our largest social program is OAS.

And in that you look at the life expectancy of people, when this program was initiated in 1969/70, the average male life expectancy was 69. Now it’s 79. For women it was in the 70s back then and it is in the 80s now. It’s just not realistic as people are going to receive OAS for a much longer period of time because, thank goodness, we have a healthier population that is living longer. This is something to celebrate rather than regret.

We also made a change in the budget that will come into effect next year, 2013, where if someone turning 65 wants to delay the receipt of OAS, they’ll be able to do so, and then they’ll get more when they choose to elect OAS later on. This is imitating the Canada Pension Plan.

And I think it’ll see some significant take-up, because there are many Canadians who want to keep working.

PO: Right. On health care funding, it seems to me that your announcement in December kind of put the health care consulting industry out of business.

JIM FLAHERTY: (laughs). Well, I’m sure they’ll find something else to do.

It’s interesting, you know, the push-back from the provinces did not last long, and one can see why. Their budgets now " in Ontario and New Brunswick, Saskatchewan and there are others that are out already, and some this spring " all of them have their own health care spending increases at less than 6 percent.

PO: And you are in fact increasing them at 6 percent until 2016. So, more than keeping your campaign promise.

JIM FLAHERTY: Right. It doesn’t really lie in the mouths of the provinces to say that we should be doing more, when they are not.

PO: Of course, that didn’t prevent Dalton McGuinty and Jean Charest in their joint news conference a few weeks ago from accusing Ottawa of balancing the books on the backs of the provinces.

JIM FLAHERTY: This is the old-fashioned ”œlet’s not deal with the facts, let’s just blame Ottawa” approach. I mean, these are two provinces that have serious deficits and public debt issues. And I don’t wish them ill. As I said the other day, I wish them good fortune. But I want them to deal with their issues. I don’t want them to let the problems fester and grow worse and then come to the federal government looking for some support.

PO: I want to come back to two issues that I skipped over before. One was the investment for Aboriginal peoples to fully participate in the economy.

JIM FLAHERTY: Right.

PO: This came out of the summit between the Prime Minister and the Aboriginal leadership.

JIM FLAHERTY: That and the national panel that had looked at this. This is a major investment in this budget in Aboriginal education, in bricks and mortar and in the educational system itself.

PO: Clearly Ottawa’s looking, for its $10 billion a year, for accountability and better outcomes, especially in education and health.

JIM FLAHERTY: Absolutely, and there’s a clear jobs and prosperity agenda here. One of the major groups in Canada that need to be more engaged in jobs is the Aboriginal youth population.

PO: Right. And on resource development, shutting down the National Roundtable on the Environment and the Economy, attaching some strings to the tax deductibility eligibility of certain environmental groups that accept, shall we say, money that’s offshore to fight the oil sands and the pipelines such as Keystone and Northern Gateway. But the one that struck me the most is not really a budgetary thing " better timelines in terms of reviews, right?

JIM FLAHERTY: Yes.

PO: Environmental reviews.

JIM FLAHERTY: One project, one review, with a deadline.

PO: That’s an unusual thing for a finance minister to be putting in the budget.

JIM FLAHERTY: Well, as you’ve known over the years, budgets aren’t just about numbers. They are about long-term government policy, and I think later on, in a year, two or three years, people will look back on this budget and say it laid out the road map for the Harper government well into the next decade.

PO: All right, and then there’s the humble penny, which is leaving us.

JIM FLAHERTY: Yes.

PO: And when you read in the budget papers that it cost 1.6 cents to produce every 1 cent, if you ran a business that way, you wouldn’t be in business for very long.

JIM FLAHERTY: Right.

PO: Those aren’t very good margins.

JIM FLAHERTY: Nope.

PO: Is there anything about the penny that you’ll miss?

JIM FLAHERTY: No. You know, the small business associations all wanted us to get rid of the penny, because there’s a handling cost to pennies. And we finally came around to the right way of doing it. We looked at other countries; you know, it’s like that advertisement that’s on television now. My bank fees are too high, my bank fees are too high. The woman on the side says so stop doing it.

So that’s what we’re doing. We’re just stopping doing it. There’ll be some pennies out there for a long time. There are billions. And I’d like to say there are billions in circulation, but they’re actually not. People hoard them, they put them in jars and on their dressers, so they’re not in circulation. We keep having to make more of them. So I hope this will bring all these pennies out of their prisons, and I hope the Boy Scouts and Girl Guides and all the other charities will go on penny drives and that they’ll make lots of money for charity out of retrieving pennies.

PO: In your budget speech, you quote Sir George Foster, Sir John A. Macdonald’s finance minister, to the following effect, ”œWe should not be thinking overmuch of what we are now, but more of what we may be in 50 or a hundred years hence.” And you also quoted Sir John A. himself saying, ”œLooking a little ahead.” How do you feel about this budget in both those regards, looking a little ahead and the longer term?

JIM FLAHERTY: I’m very proud of it because it’s our first opportunity to look significantly down the road. The other budgets were all in minority governments. We always had to, having prepared the budget, say okay, what is there in this budget that could cause an election? We didn’t have to do this this time.

It would have been very difficult to do the OAS reform and many of the other reforms in this budget were we in a minority government.

PO: And how do you feel yourself about, this is what, your seventh or eighth budget now, or seventh?

JIM FLAHERTY: Seventh.

PO: I think you’re the ranking finance minister in the G7 and the G20. How do you feel about your shelf life as Finance Minister?

JIM FLAHERTY: (laughs). I think all politicians have a shelf life, and I think it has a lot to do with television. We get so much television exposure that I think at some point people just get tired of looking at us.

PO: And you know, speaking about shelf life, this is the sixth time we’ve had this conversation, and it will be the last one. So thank you for these conversations and interviews over the years.

JIM FLAHERTY: My pleasure.