Government of Canada

Canada's economy

Interview with James M. Flaherty, Minister of Finance, Government of Canada

OECD Observer: As the world emerges from a protracted crisis, how would you characterise the current state of the Canadian economy?
Mr Flaherty:
The Canadian economy weathered the global recession better than most industrialised countries, and the economic recovery is well underway with six consecutive quarters of growth through the end of 2010. Growth over the recovery has been underpinned by a strong rebound in consumer and business expenditures, reflecting the significant stimulus provided by Canada’s Economic Action Plan. The improving global economic environment has also lifted commodity prices significantly since early 2009, boosting Canada’s terms of trade, incomes and investment.

The rebound in real output in Canada has been mirrored by a solid recovery in the labour market. More Canadians are working today than before the recession began, and the unemployment rate has declined to 7.6% in April 2011 from a peak of 8.7% in August 2009. Moreover, almost 90% of these new jobs have been in relatively high-wage industries, with close to 85% being full-time jobs.

The Canadian unemployment rate is currently more than 1 percentage point below that of the US, and has been below it since October 2008–the first time this has occurred since the early 1980s. Canada’s strong labour market performance is, in turn, translating into solid income growth, fuelling a self-sustaining recovery in private demand and allowing an orderly unwinding of stimulus measures.

Looking ahead, the most recent survey of private sector economists showed they expect the recovery to continue in 2011 with growth moderating somewhat over the medium term. The OECD’s latest Economic Outlook indicates that Canada will perform well compared with other G7 countries in 2011, and the IMF expects growth in Canada to be among the strongest in the G7 this year and next. Nevertheless, risks to the outlook remain, primarily related to issues originating outside Canada’s borders.

What would you highlight as being Canada’s underlying economic strengths?
Canada’s growth in real income per capita was one of the highest in the OECD over the last decade. Furthermore, Canada has one of the highest employment rates in the OECD. Strong economic growth reflects strong macroeconomic fundamentals, including sound fiscal and monetary policy, a prudent financial framework, trade openness, and a competitive tax system as well as a highly skilled and educated workforce, with Canada having the highest proportion of the adult population with post-secondary education in the OECD.

And its weaknesses?
A key challenge that remains is to improve productivity performance. With population ageing, boosting productivity growth will be crucial to continue to increase living standards. Measures taken by the government of Canada since 2006 to promote long-term economic growth include lower taxes on business investment, the elimination of import tariffs on manufacturing inputs and machinery and equipment, historic investment in infrastructure, and increased support for research. Going forward, the first priority should be to return to balanced budgets, which is critical to prevent backsliding and will allow further progress on the government’s policy framework.

The OECD’s 2010 Economic Survey of Canada highlighted healthcare costs as an issue of concern for long-term public finances. Canada also faces other cost pressures, not least from ageing societies. What do you think should be done to address these concerns?
In Canada, the responsibility for funding, coverage and organisation of healthcare services largely rests with provincial governments. There will nevertheless be a need for the federal and provincial governments to work together to control healthcare costs and secure stable long-term funding arrangements that create the right incentives for cost-containment. In this context, the OECD will have a critical role to play in helping its members meet this important challenge through providing analysis on the international experience in this area.

In addition to returning to balanced budgets over the medium term, the best way for Canada to address the economic and fiscal challenges posed by an ageing population is to focus on policies that foster productivity growth and promote the efficient allocation of resources. In this respect, significant progress has been made since 2006 which should help improve both Canada’s productivity and labour market performance in the future. Moreover, the next phase of Canada’s Economic Action Plan will continue to promote long- term, sustainable growth by supporting key drivers of economic growth: innovation, education and training, and investment.

The global economy is transforming, with the emergence of new, powerful markets. At the same time there are social, resource and environmental challenges to confront. As a major player on the world stage, how is Canada addressing these issues and what priorities would you underline?
It is clear that emerging market and developing economies have become a more significant force in the global economy, and that the dynamics on the international stage are changing.

Canada is an active participant in forums that promote global economic co-operation, such as the OECD and G20. One of Canada’s top priorities is working with its international partners to find cooperative solutions to address large, persistent imbalances, which continue to threaten prospects for strong, sustainable and balanced global growth. Canada plays an important role in facilitating these discussions, particularly with its work on the G20 Framework for Strong, Sustainable and Balanced Growth, and the recent agreement on a series of indicative guidelines. Helping to foster a common understanding of the problems facing the global economy will provide more structure in global efforts to address these issues.

How important is OECD membership to Canada?
Canada views the OECD as an important source of ideas, standards and norms that shape policies and strengthen the functioning of the global economy, particularly their analysis of the impact and importance of structural reforms to enhance potential output. OECD instruments such as the Model Tax Convention, the Export Credit Arrangement and Freedom of Investment work have also helped create a level playing field.

Canada appreciates the technical expertise and analytical work of the OECD. For 50 years the OECD has provided useful policy advice on how to sustain Canadian economic prosperity. Of particular interest to Canada is the OECD’s work on the development of statistical sources that allow for international comparisons. OECD benchmarking helps us rate our economic performance against our peers and learn from the experiences of others.

Visit www.fin.gc.ca


©OECD Observer No 284, Q1 2011




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