. but with an appropriate reduction in the amount of monetary stimulus, we see the level of output remaining close to capacity during this year and into 2004. so, in making our interest rate decision on 4 march, we weighed the following considerations : domestic inflation pressures ; the expectation that canadian economic activity will remain near potential in 2003 despite geopolitical uncertainties ; the stimulative stance of monetary policy ; and improved conditions in capital markets. taking all of these factors into account, the bank raised its key policy rate by one - quarter of a percentage point to 3 per cent. even with this increase, the stance of monetary policy remains stimulative. thus, over time, further reductions in monetary stimulus will be required to return inflation to the target over the medium term. but, as we have said, the timing and pace of increases in policy interest rates will continue to depend on a number of considerations. these include the strength of demand pressures ; the evolution of inflation expectations ; the impact on confidence of geopolitical and global economic uncertainties ; and the way in which developments in the middle east affect demand and inflation, both globally and in canada. the bank will continue to closely monitor all of these factors. * * * so, to conclude, these are certainly challenging economic times. but we in canada remain convinced of the merits of the economic policy consensus reached at the oecd. to reiterate, these policies are : a monetary policy aimed at medium - term price stability ; a fiscal policy aimed at reducing public debt - to - gdp ratios ; trade liberalization ; and meaningful structural reform. canada's positive economic experience over the past couple of years, in the face of stressful times for the global economy, is strong evidence that this framework is the right one. in canada, there is a determination to stick with these policies which, especially during these uncertain times, are demonstrating their value.

the even more daunting challenge of conducting monetary policy for an entire continent! but the important point i want to make here is that both the ecb and the bank of canada are determined to keep price stability as the medium - term policy goal. that is the first of the four legs. the second leg of the consensus has to do with fiscal policy. in the years leading up to the mid - 1990s, provincial and federal governments in canada were in the habit of running budget deficits. these deficits built up as governments continued to borrow, primarily to finance current consumption. it was an unsustainable situation, made more serious by our aging population. clearly, social spending had to be put on a viable long - term course. and so fiscal policy needed to be based on a plan for putting the ratio of public debt to gdp on a steady downward track. in canada's experience, this was a difficult hurdle to overcome. the fiscal consolidation of the 1990s was painful. i was the federal deputy minister of finance at the time, and i can tell you that many difficult and unpopular decisions had to be taken. equally important, the provinces had to make hard choices as they reduced their public spending and restored their fiscal health. but as difficult as those years were, waiting would only have made matters worse. now, here's the good news : the vicious circle of rising deficits and debt has become a virtuous circle of balanced budgets and falling debt. reducing the deficit in the 1990s helped canada's international credibility. and this led to a reduction in the risk premium demanded by international investors. the fiscal improvement meant that the bank of canada was able to lower interest rates more easily when economic circumstances warranted. not only did the lower interest rates reduce debt - servicing costs, they also stimulated economic growth, which brought in more revenues for the government. the extra revenue and lower debt - servicing costs, in turn, led to an even better fiscal position. canada's total government surplus at the end of 2002 represented just over 1 per cent of gdp, which does not include the surpluses in public pension plans. last month, finance minister john manley announced a fifth consecutive surplus in the federal budget and projected that the budget will continue to be in a balanced position or better for the next three years. the budget maintained the fiscal planning framework of previous years. that framework includes a $ 3 billion contingency reserve, which is used to reduce debt if it is not needed