extra revenues and lower debt - servicing costs, in turn, led to an even better fiscal position. at the end of 2002, canada's total government surplus represented just over 1 per cent of gdp - not including the surplus in the 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. it also includes $ 1 billion in the upcoming budget year for additional economic prudence, and $ 2 billion in the following year, as further assurance that canada won't fall back into deficit. canada is expected to have one of the lowest debt burdens in the g - 7 this year. not only have we reduced the debt - to - gdp ratio, but we have paid down almost $ 50 billion of federal debt. this has led to the restoration of canada's triple - a credit rating and has freed up about $ 3 billion of resources every year for the federal government. the main point is that while the initial work of fiscal consolidation is certainly difficult, it is necessary in order to enjoy the dividends later on. the fourth principle : low and stable inflation the fourth principle relates to monetary policy - the responsibility of the bank of canada. this principle recognizes that, over the medium term, monetary policy should work to keep inflation low, stable, and predictable. let me explain how we do this. since 1991, following a joint agreement with the federal government, the bank of canada has operated with a system of inflation - control targets. i don't plan to spend a lot of time explaining our system to this audience, because the united kingdom adopted a system very similar to ours a couple of years after we did. we aim to keep consumer price inflation at the 2 per cent midpoint of a 1 to 3 per cent range. if the trend of inflation moves away from the target in either direction, the bank will take action so that inflation returns to the target within 18 to 24 months. canada's inflation - targeting framework works in a symmetrical way, minimizing the chances of both a sustained upward drift in inflation and the threat of deflation. indeed, through most of the past decade, we have managed to keep inflation around the 2 per cent target midpoint

a fairly long time to emerge. but these difficulties should not sway us from the task of reducing rigidities and increasing efficiency. canada has made some progress on a number of fronts. for example, governments have taken steps to reduce distortions in the personal income tax system, and have implemented a goods and services tax to replace the outdated tax on manufacturers. unemployment insurance benefits were also reduced and restructured to strengthen the incentive to work. another important structural reform was to our public pension system. in 1996, canadian federal and provincial governments agreed to changes that would put the canada and quebec pension plans on a sustainable footing. this meant some restructuring of benefits and a sharp increase in contributions moves that were as unpopular as they were necessary. the surpluses in the canada and quebec pension plans now represent almost 1 per cent of gdp. furthermore, these surpluses are set aside in special funds that cannot be touched by governments for general use. the assets of the public plan are now managed by the canada pension plan investment board, a body that is entirely independent of government. its sole mandate is to invest the contributions in markets, in order to generate the best possible returns, consistent with prudence, over the long term. the third principle : fiscal prudence this leads me to the next principle, which relates to fiscal policy and the need for a more disciplined approach to managing the public purse. fiscal policy must be guided by the principle of putting the ratio of public debt to gdp on a sustainable, downward track. in canada's experience, this was a difficult hurdle to overcome. to be sure, the fiscal consolidation of the 1990s was painful. i was federal deputy minister of finance at that time, and i can tell you that many difficult and unpopular decisions had to be taken. equally important, the provinces had to make tough 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. well, 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. 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 lower interest rates reduce debt - servicing costs, they also stimulated economic growth, which brought in more revenues to the government. the