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Executive summary.

Canada's inherent domestic strengths and timely policy actions ensured limited financial and economic damage from the global recession. The authorities responded aggressively to the onset of the crisis to keep credit flowing, which it did, particularly to households, making both consumer spending and housing investment remarkably resilient throughout the recession. However, the counterpart was a rapid rise in household debt. The initial rebound in activity has been very strong, helped by fiscal stimulus, but an increasing number of households may become vulnerable as interest rates increase. With the expected withdrawal of monetary stimulus, the tighter financial conditions resulting from the much stronger currency, the waning of fiscal policy measures and a likely further slowdown in household credit growth, the pace of recovery will ease somewhat in coming quarters. Once excess capacity has been worked off, the economy's trend growth rate is projected to be much lower over the medium term than it has been in the past as changing demographics slow the growth of the working-age population. Structural reforms to boost potential output growth should therefore remain at the top of the policy agenda.

The Canadian banking system weathered the crisis in exemplary fashion, thanks to effective prudential supervision and a conservative risk culture. The key global challenge, also relevant to Canada, is to deal with heightened moral hazard stemming from the henceforth more explicit promise to rescue systemically important financial institutions. Strengthened and internationally co-ordinated regulation should be balanced by market mechanisms (such as contingent capital) that provide incentives to internalise risk. Canada's banking efficiency, and hence economic productivity, would also benefit from greater contestability and a credible framework for winding down failed financial institutions. A move toward macro-prudential approaches to regulation is desirable, but policymakers should be mindful to maintain the important role of financial intermediation. The nation's capital markets should be more efficiently regulated, notably by establishing a single securities regulator.

Despite a mostly cyclically driven move into deficit, Canada's overall public finances still compare favourably with those in other OECD countries, but fiscal tightening should nevertheless begin in 2011 both at the federal level and in nearly all provinces and territories. The two largest provinces, Ontario and Quebec, face especially challenging fiscal situations. Many jurisdictions have relatively high debt levels, and their windows of opportunity to bring indebtedness down are closing as demographic pressures on public purses are set to intensify. Consolidation strategies should focus on curbing public expenditures, particularly in health care. The federal and almost all provincial and territorial governments have presented fiscal objectives and plans to return to budget balance over the medium term. They are broadly in line with the recommendations set forth in this Survey and need to be fully implemented in order to allow Canada to return to budget balance over the medium term. Transparency and public buy-in are important ingredients of a sustained fiscal effort, and these can be fostered by committing to deficit-elimination targets with detailed strategies as to how they will be met. Incentives to meet the targets are important too, calling for new or more stringent fiscal rules than in past consolidation episodes when market discipline facing Canada was intense. Rules might also help a number of jurisdictions implement more prudent approaches to saving and reduce the pro-cyclicality of their fiscal policies.

The health-care system achieves a reasonable balance of treatment quality, cost and health outcomes, but reforms are needed to contain expenditure pressures. Meeting the demographic and fiscal challenges requires bringing down trend growth in public health spending significantly, lest other public spending is squeezed and/or taxes rise. To this end, price incentives and bottom-up accountability measures must complement the current top-down resource-allocation process, which manages to control costs through waiting lists and expanding gaps in the coverage of services. Doctors' fees should be set at the regional or institutional levels where there is accountability for performance and include at least a share based on capitation. A better information base and provincial analytical capacity are needed to allow cost-benefit analysis and derive national efficient-treatment guidelines. Regulation prohibiting both private insurance for core services and mixed public-private contracts for doctors should be eased to spur more competitive service delivery, possibly requiring clarification of the Canada Health Act.
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Publication:OECD Economic Surveys - Canada
Geographic Code:1CANA
Date:Sep 1, 2010
Previous Article:Basic statistics of Canada, 2009.
Next Article:Assessment and recommendations.

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