Canada: strengthen productivity to boost living standards and prioritise the low-carbon transition, says OECD

The latest OECD Economic Survey of Canada says faster growth in living standards will require strengthening the business environment, to bring Canada’s weak productivity and investment growth back in line with leading OECD economies. Reforms to improve tax and spending efficiency would help federal and provincial governments to keep financing key commitments without putting pressure on budgets.

Canada’s economic output recovered to pre-pandemic levels by early 2022. Global price pressures have since driven up inflation, albeit by less than in many other OECD countries. As an open economy, Canada will be vulnerable going forward to any sudden slowing in global demand and to volatility in commodity and financial markets from the war in Ukraine.

“Like many economies, Canada faces the difficult challenge of tackling inflation without undermining economic activity,” OECD Acting Chief Economist Alvaro Pereira said, presenting the Survey at an event in Ottawa hosted by the Canadian Association of Business Economics and the Ottawa Economics Association. “Fiscal and monetary policy need to work in tandem to ease inflation pressures while governments shore up public finances. Meanwhile more needs to be done to strengthen productivity through removing barriers to internal trade and competition.”

The Survey welcomes action taken by the federal government to ease cost-of-living pressures, including through increased access to affordable childcare and reduced housing costs for low-income households. In the short term, as cost-of-living increases erode real incomes, it will also be vital to continue targeted support to vulnerable households, favouring use of income support over across-the-board energy cost measures.

The Survey presents updated projections of GDP growth of 1.3% for 2023 and 1.5% for 2024. Tight monetary policy over the past year will help drive down inflation towards 2% by the end of 2024. Public finances are also expected to have strengthened in 2022, helped in part by revenue boosts from higher commodity prices. The consolidated fiscal deficit across all levels of government is estimated to have shrunk to 0.6% of GDP in 2022 after peaking at 11.4% in 2020.

An ongoing review of competition legislation is a positive step towards bolstering the business climate. The Survey recommends prioritising the lightening of restrictions on foreign ownershipin relevant sectors and adapting competition law to handle challenges related to Big Tech. These include barriers to firm entry linked to data access, abusive and exclusionary practices, and lock-in of consumers and businesses to service providers. More can also be done to lower inter-provincial trade barriers and to ease regulatory burdens on businesses.

The Survey also underscores the challenges Canada faces in reaching its climate policy goals. As a major producer of heavy crude oil and natural gas, Canada emits more greenhouse gas emissions per person than most other OECD countries. Its weather and geography contribute to large energy requirements to heat homes, and transport people and goods across large distances, which also drives up the emission-intensity of its economic activity.

The government has put in place multiple policies to decarbonise the economy, but achieving its climate targets and reaching net zero by 2050 will require deep energy savings and widespread action to replace fossil fuels with clean energy. Federal and sub-national governments will need to work together to ensure complementary climate policies create strong incentives for greener production, without a large toll on the economy.

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