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IMF Concludes Article IV Consultation With Canada

by Mike Godfrey, Tax-News.com, Washington

15 February 2007


The Executive Board of the International Monetary Fund has this week published the conclusions of its Article IV consultation with Canada.

In its assessment, the Executive Board commended the Canadian authorities for their sound monetary and fiscal frameworks, which, it suggested, have delivered enviable macroeconomic and policy performance since the mid-1990s.

The IMF officials observed that:

"The strong recent performance of the Canadian economy is likely to continue, although growth risks are tilted to the downside given the possibility of a larger-than-expected US slowdown. Directors welcomed the envisaged policy measures, which build on the strength and flexibility of the macroeconomic framework, and seek to achieve durable improvements in productivity and competitiveness."

Directors commended the Bank of Canada for balancing competing concerns regarding growth and inflation, including by keeping policy rates on hold since May.

They stated that:

"With rates in the neutral range and inflationary pressures contained, the current stance appears appropriate moving forward. Directors considered that the current inflation targeting framework has served the economy very well, and welcomed the authorities' decision to renew it without change for a further five years. They noted the Bank's intention to continue to analyze the pros and cons of possible further refinements."

The assessment continued:

"Directors agreed that fiscal policy is appropriately focused on reducing debt, lowering taxes, and reforming the equalization system. However, long-term fiscal sustainability will require continued debt reduction as well as steps to contain public spending on health care. Directors welcomed the government's commitment to using interest savings from debt reduction to lower personal income taxes, and also to reduce effective marginal tax rates on investment."

"Most Directors viewed these steps as likely to provide larger efficiency gains than further cuts to the Goods and Services Tax (GST), although a few noted that the reduction of the GST could support a harmonization of provincial sales taxes with the GST, thus lowering marginal effective rates on investment. The reforms suggested by the O'Brien panel on reforming the equalization transfer system would appropriately make the system even more rules-based and predictable."

The report concluded by announcing that:

"Directors welcomed the emphasis on enhancing productivity growth and prosperity in the government's plans, published recently in Advantage Canada. In addition to cutting effective tax rates on capital (which would be helped by action by provinces) and improving financial market competition, they noted that the business environment could be enhanced by phasing out restrictions relating to foreign direct investment, eliminating interprovincial barriers to trade in goods and to labor mobility, and increasing the flexibility of the immigration system."

"Directors encouraged Canada to work towards increasing access to its markets for agricultural goods."


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