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  Assessment and Recommendations

  Canada’s recent economic performance has been stronger than in most other OECD countries. In particular, and despite close trade integration, the 2001 slowdown was shorter and the subsequent recovery stronger than in the United States. Canada’s job creation performance, exceptionally robust in 2002 after only a pause the previous year, was also significantly more favourable. It has benefited from a less pronounced ICT investment cycle and a smaller impact of stock price declines, as well as from having a proportionately larger automotive sector, which enjoyed booming demand in 2002 thanks to the earlier monetary policy easings in both countries. But recent performance also indicates an increased resilience to external shocks. This is partly the result of past structural reforms that increased flexibility, but it is also due to fiscal consolidation and the establishment of a credible monetary framework in the 1990s, which together lowered sustainable real interest rates and increased the scope for, and the effectiveness of, counter-cyclical monetary policy...

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  Recent Developments and Key Challenges

  In the two years since the publication of the last Economic Survey, the Canadian economy has recorded a remarkably strong performance, its output growth outpacing that of all other major developed economies, including the United States. The latest OECD projections (which were finalised at the beginning of April and released in Economic Outlook 73) indicate that Canada’s relative performance should remain favourable this year, before its growth rate is overtaken by that of the United States in 2004. The key question, however, is whether the rate of growth can be sustained over the medium term. Canada still has a substantial gap in terms of income per capita relative to the United States, due mainly to lower productivity levels. The income gap had been widening during most of the past 20 years, and only in the last five has it started to narrow reflecting mainly more favourable developments in employment rates, in turn largely the result of past structural reforms and an improved macroeconomic policy framework. There is some scope for getting more people into work if the causes of Canada’s higher structural unemployment are addressed. But over the longer term the income gap can be further narrowed only through stronger productivity growth.

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  Raising Living Standards

  Canada has undertaken wide-ranging and impressive economic reforms over the past 15 years. The regulatory environment and the incentives facing firms and individuals have been substantially improved through measures such as tax reform, the North American Free Trade Agreement, reducing and simplifying tariffs, clearing away barriers to internal trade, privatising public enterprises, shaking up the public sector, and revamping labour market programmes to promote job attachment. Macroeconomic policies are also now on a sound footing. The payoff is clear: the sustainable growth rate has risen, and unemployment has been reduced. When measured against the OECD as a whole, Canada is now performing well in most areas. However, it has the advantage of being closely integrated with the dynamic US economy and so tends to grade itself not against the OECD or even the G7 average but against its southern neighbour. By setting a higher benchmark, the comparisons are often less flattering. Most conspicuously, and as noted in Chapter I, per-capita incomes in Canada are around 15 per cent below those in the United States. This chapter looks at ways to close the gap in living standards. Over the long term, the most important requirement by far is to increase productivity. To do so, Canada must focus on boosting innovation, competition and skills. Income levels can also be raised by further boosting employment rates, and several policy options for improving the labour market are discussed. However, living standards ultimately depend on more than just percapita incomes, and the chapter touches on several environmental aspects of sustainable development: water quality, air pollution, and climate change.

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  International Migration

  During most of its history Canada has received large numbers of immigrants, and a policy of encouraging immigration has been an important element of the country’s growth strategy. The foreign-born share of the population reached 18.4 per cent in 2001 (up from 14.7 per cent 50 years earlier) and is higher than in nearly all other OECD countries. Canada traditionally receives mainly permanent immigrants: on average in 2000-02, 235 000 of them were admitted each year, about ¾ per cent of the population. There is also some temporary immigration, but the net flow is relatively small. Emigration, directed mainly to the United States, has risen in the 1990s, but – at about 0.2 per cent of the population – remains much smaller than immigration (Figure 21). Thus, net migration is positive, as it has been almost continuously during the past century, and now represents about 70 per cent of annual population increase, a proportion that is set to rise further, assuming unchanged fertility rates.

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  Managing Fiscal Pressures in the Medium and Long Term

  The 1990s was a decade of enormous fiscal consolidation, with the general government balance swinging from a deficit of 9 per cent of GDP in 1992-93 to a surplus of 3 per cent in 2000-01. The federal government achieved a balanced budget in 1997-98, with the provinces in aggregate following two years later (Table 26). As a consequence, general government net debt has fallen from a peak of 68 per cent of GDP in 1995 to around 40 per cent in 2002, compared with an (unweighted) OECD average of around 30 per cent.85 This retrenchment was achieved through a combination of expenditure and revenue measures, but aggressive cutting of programme spending was a key factor (Figure 38). Significant reforms to federal and provincial income support programmes in the mid-1990s also played a major role. While expenditure cuts occurred in almost all areas, they were not indiscriminate: a Programme Review process ensured that the lowest priority areas were hit hardest.

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  Annexes
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