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• Overview of the Economic Survey of Canada

The economy withstood the global economic crisis thanks to a timely macroeconomic policy response and a solid banking sector. Although strong profits in the mining and oil sectors have supported business investment, employment growth slowed in the autumn and winter, and confidence weakened, largely reflecting temporary factors. The latest indicators suggest the economy is picking up, and the outlook is for continued moderate output growth and inflation in 2012-13. However, record low mortgage rates have pushed house prices up substantially in some cities, and boosted household indebtedness, which poses an increasing risk.

Monetary policy remains appropriately accommodative given persistent global headwinds and associated risks and the withdrawal of fiscal stimulus, but it should stand ready to react to signs of a pickup in inflation. Price pressures are evident in housing and sectors related to mineral extraction, while core inflation is running at about 2%. To moderate growth in house prices, macro-prudential measures such as stricter standards for government-backed mortgage insurance have been implemented and may have to go further. The 2012 federal budget features significant public spending cuts designed to achieve budget balance by 2015-16. Even larger efforts are being made in some provincial budgets, notably Ontario’s. This tightening is necessary to reduce the debt overhang resulting from the past recession and stimulus measures, but the authorities should slow the pace of consolidation if significant downside risks to growth materialise.

Boosting innovation can raise historically weak productivity growth to sustain living standards. Indeed, innovation is high on the government’s agenda. While Canada has made great strides in macroeconomic and structural policy settings, and its academic research is world class, the pay-off in terms of business innovation and productivity growth has not been large. Business R&D is particularly low, despite significant policy support, suggesting substantial scope for improvement. Competitive pressures, which spur innovation, have recently intensified because of the high exchange rate, but further market opening in sheltered sectors like network industries and professional services would be beneficial. Reforms are needed to improve knowledge flows to business and strengthen the process of commercialisation. Government support to R&D should focus more on sharpening incentives and raising performance; the higher current tax subsidy rate for small domestic firms should be unified at the lower large firm rate to encourage firms to attain the scale needed to adopt innovations. Savings could be used to keep capital costs in the eligible base to avoid creating distortions across different technologies.

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Improvements in tertiary education will also be critical to support socially inclusive growth in a knowledge-driven economy. While the tertiary system generally performs well, generating high attainment among the working-age population, participation at the tertiary level will need to continue growing to maintain the supply of highly skilled labour as the population ages. Further improving equity of access by reducing non-financial barriers and increasing targeted need-based financial assistance – funded by reduced education tax credits where public finances are constrained – and by fostering a more flexible system that facilitates lifelong learning along a diverse range of student pathways is a priority. Efforts should be increased to recruit foreign tertiary students and integrate them into the workforce upon graduation. Universities make strong contributions to research, but teaching relies increasingly on large class sizes and sessional lecturers. Governments should consider greater differentiation across institutions as regards research versus teaching. Greater integration of technical, business, communications and industry training within tertiary programmes could contribute to innovation and improving graduate skills.

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