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IMF Publishes Conclusions Of Article IV Consultation With Canada

by Mike Godfrey, Tax-News.com, Washington

21 December 2007


The International Monetary Fund on Monday published the preliminary conclusions from its Article IV Consultation with Canada.

The IMF mission stated that Canada has enjoyed an enviable macroeconomic performance over the past decade, observing that:

"Reflecting prudent macroeconomic policies, structural reforms, and favorable external conditions, GDP has grown faster than in other G-7 countries, inflation has been low and stable, and fiscal balances have been in surplus. The sound policy framework will help policymakers in navigating the more challenging environment going forward and support macroeconomic and financial stability."

However, it suggested that: "After five years of strong growth, the economy is forecast to slow in the next few quarters."

The major macroeconomic challenges for the country over the coming period were outlined by the IMF as:

  • Managing conflicting risks from domestic demand and external/ financial conditions;
  • Adjusting to currency appreciation and promoting rapid productivity growth;
  • Safeguarding financial stability given financial strains while fostering innovation; and
  • Further improving the tax system's efficiency while maintaining a sound fiscal position.

On the topic of safeguarding financial stability while fostering innovation, the International Monetary Fund stated that:

"Overall, the financial system appears to be in a position to weather financial turbulence. Current capital positions allow Canadian banks to absorb substantial balance sheet losses, and the banks' exposure to the US subprime market and structured credit products is generally considered to be relatively limited. But as elsewhere, funding conditions have tightened with the global repricing of risk. Together with the rise in credit risk from a slowing domestic economy and banks' exposure to US markets, this is likely to curtail financing to corporates and households."

It continued:

"While bank regulation and supervision largely meets best practice, the mission continues to believe that securities markets would benefit from a single regulator. The fragmented, provincial system of securities market regulation imposes high costs on issuers and investors. The automatic interjurisdictional recognition of decisions of the home regulator under the passport system is a significant step forward. Nonetheless, as in past years, the mission believes that a single regulator is the most effective way to lower costs, ensure timely policy responses, and foster consistent enforcement. More broadly, the regulators should address new challenges from financial innovation, including establishing adequate transparency for new products."

Moving on to discuss ways to improve the tax system's efficiency, the IMF observed that:

"A sound fiscal framework policy has paid off in an enviably strong fiscal position that makes achieving zero general government net debt by 2021 feasible. Canada is closer to long-term budget sustainability than other industrial countries, given 10 consecutive years of budget surpluses. Noting that, under current policies, public health care spending by provinces is likely to increase rapidly, the mission welcomes the government's reaffirmation of its objective to eliminate general government net debt by 2021. This, together with health care reform, will help to alleviate long-term pressures from population aging."

"The mission shares the government's view that the budgetary overperformance provides room for tax relief while maintaining small budget surpluses. With higher-than-expected nominal GDP growth and corporate income tax revenue in the current fiscal year, the federal surplus was set to exceed the planned surplus by ¾ of a percentage point of GDP before the tax relief proposed in the 2007 Economic Statement. While recognizing the risk that some of the recent revenue gains may not be permanent, the mission welcomes this proposed tax relief as well as planned one-off additional debt reduction. While small in size, the related demand stimulus in 2008 will be welcome, given weaker growth prospects."

It concluded:

"As the mission observed last year, the fiscal room should be used to reduce high marginal effective tax rates on capital, saving, and labor to foster efficiency. Instead, the main tax relief measure in the Statement is a one percentage point cut in the federal GST rate to 5%."

"That said, the mission welcomes progress in reducing high marginal effective tax rates, including the proposed one percentage point cut in the federal corporate tax rate in 2008 and its subsequent gradual reduction to 15% by 2012, the cut in the lower personal income tax rate, and the introduction of a Working Income Tax Benefit."

"The mission agrees with the government that marginal effective tax rates on capital should be further reduced significantly through the harmonization of the sales tax base in some provinces with that of the federal GST, and it encourages the government to facilitate this by providing explicit budgetary incentives."


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