IMF Praises Canadian Economic Efforts

by Mike Godfrey, Tax-News.com, Washington

04 November 2011

The International Monetary Fund (IMF) has offered a broadly positive response to Canada's economic progress in its yearly review, maintaining a positive outlook for the country.

Opening its review, the IMF notes that, thanks to a decisive policy response, a resilient financial sector, and high commodity prices, the economy expanded well above its potential growth rate in 2010. However, while Canada experienced a strong recovery from the economic crisis, growth is now moderating. The current account deficit remains comparatively high at around 3% - a significant shift from the pre-crisis surplus years. In addition, weak demand from trading partners and fiscal adjustment measures are likely to hold growth at around 2% in both 2011 and 2012.

Nonetheless, the IMF also acknowledges that fiscal policy is appropriately shifting toward consolidation in the aftermath of the effective stimulus programme. The federal government is leading the fiscal effort, with a significant reduction envisaged for the budget deficit in 2011 and 2012, including by unwinding the stimulus measures.

The consolidation plans of the federal government, which aim at budgetary balance by 2015/16, rely on the expiration of stimulus measures, a strict containment of current spending growth, as well as higher revenues as the economy expands. The IMF stresses that the ongoing Deficit Reduction Action Plan should identify further expenditure savings, helping to underpin medium-term objectives. The general government deficit is projected to drop by 1% this year.

The IMF expects a broadly stable deficit this year for provincial and local governments, along with some deficit reduction in 2012. The IMF notes that provincial governments have set ambitious plans to reach balanced budgets over the next several years, complementing those of the federal government. These plans rely heavily on expenditure restraint for broad programmes, meaning that further specificity on the measures to underpin these ambitious goals would enhance the transparency and credibility of the plans.

In addition, the IMF believes that the federal government and the provinces will need to move ahead in a concerted effort to deal with the longer-term fiscal challenges posed by rising health costs and the impact of aging. The review of transfers of the federal government to the provinces, which must be completed before 2014/15, could provide an opportunity in this regard. Regular and comprehensive fiscal sustainability reporting covering all levels of government would also help build consensus around the need for reforms. In this respect, the recent fiscal sustainability studies prepared by the PBO are an important first step forward.

Therefore, the IMF says, the baseline medium-term outlook is broadly favorable, but risks are tilted to the downside given the challenging external environment. As a result, three policy priorities are identified for Canada:

• Managing the transition to a neutral macroeconomic policy stance and pressing ahead with the reforms needed to address long-term fiscal challenges, while remaining flexible given the heightened risk of adverse international financial spillovers.
• Dealing with the challenges posed by elevated household debt in the context of buoyant house prices and an uncertain economic outlook.
• Continuing to move forward with the domestic and international reform agenda for financial regulation and supervision.

Commenting on the IMF's findings, Canadian Finance Minister Jim Flaherty said: “Thanks to our sound and stable economy and measures taken in the Next Phase of Canada’s Economic Action Plan, the IMF is maintaining its positive outlook for Canada. Given that global economic growth has weakened, the IMF continues to support our flexible and pragmatic approach to returning to balanced budgets in the medium term.”

Canada's latest economic figures reinforce the IMF's conclusions. According to the newly released fiscal monitor, there was a budgetary deficit of CAD3.6bn in August 2011, compared to a deficit of CAD5.8bn in the same month last year. Revenues increased by CAD0.7bn (4.1%), reflecting increases in most revenue streams. Programme expenses were down CAD1.3bn (6.2%) largely reflecting a decrease in transfer payments, and public debt charges fell by CAD0.2bn.

For the first five months of the 2011–12 fiscal year, the budgetary deficit stood at CAD10.7bn, in contrast to to a deficit of CAD13.5bn reported in the same period of 2010–11. Revenues were up CAD3.1bn (3.4%) primarily reflecting higher income tax revenues, which were partially offset by lower Goods and Services Tax revenues. Programme expenses were down CAD0.3bn (0.3%), with public debt charges up CAD0.6bn.

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