Remarks by Angel Gurría, OECD Secretary-General

 

Ottawa, 11 June 2008

 

It is a pleasure to be in Ottawa on my first official visit to Canada to present the 2008 OECD Economic Survey and OECD’s new report on Jobs for Youth.

Canada is in the middle of its 17th consecutive year of economic growth, a great run indeed! Strong worldwide economic expansion  has produced high demand for Canada’s many resources and talents. But as the philosopher Seneca said: “luck is what happens when preparation meets opportunity.” Canada could take advantage of favourable external economic developments because it had been busily improving an already-good policy environment.

Its macroeconomic framework has resulted in low and stable inflation,  a budget surplus for the overall government – unique among G7 countries - , and a series of structural reforms, from freer trade through NAFTA and between provinces, to lower and less burdensome taxes through reforms to the GST and lower taxes on business investment. The result is that yearly average growth has picked up to around 3 ¼ per cent since 1993, more than half a percentage point stronger than in the previous decade. But that is not all: inflation has fallen by half and the government’s net debt has shrunk by nearly 50 percentage points of GDP between 1995 and 2007. This is saving governments 5 ½ per cent of GDP in debt service  every year, which is being used for more capital spending and lower taxes for all Canadians. Despite its many successes, there are still policy areas where Canada can learn from international best practice and where further reforms can improve the well-being of its citizens.

Les changements structurels provoqués par la hausse du prix des matières premières sont d’une magnitude sans précédent dans l’histoire canadienne moderne. Les prix du pétrole, des denrées alimentaires et d’autres ressources continuent d’augmenter pratiquement sans répit depuis 5 ans, une tendance qui reflète surtout une croissance de la demande mondiale pour ces biens plutôt que des obstacles à la production comme dans les années 70. La montée fulgurante du dollar canadien qui a naturellement suivie, force des ajustements rapides dans la composition industrielle et de l’emploi de différentes régions. Ces ajustements, bien que difficiles pour certaines localités et familles affectées, constituent la réponse appropriée et nécessaire aux changements globaux qui s’opèrent en réponse à l’industrialisation rapide de pays comme la Chine. Ces ajustements peuvent être facilités, par exemple en s’assurant que le marché du travail est le plus flexible possible et que les politiques publiques ne favorisent pas certains secteurs aux dépens d’autres. En même temps, l’économie canadienne est en train de réagir à la correction du marché immobilier aux États-Unis. Et nous prévoyons une croissance au ralenti de l’économie en 2008 suivie d’un rebond au courant 2009. Les marchés du crédit reviendront à la normale et l’assouplissement substantiel de la politique monétaire, accompagné du stimulus fiscal des baisses d’impôts, feront sentir leur impact.

Yes, respond to short-term macroeconomic shocks, but look too at long-term structural issues.

Like the rest of us, Canadians are getting older. Population ageing will put a premium on longer working lifetimes and faster productivity growth to sustain rising living standards. The  ratio of older to working-age people will double over the next 50 years,  putting significant pressure on public spending,  mainly through rising health care expenditures. Policies that could help alleviate the pressures include: more rigorous government spending controls; programmes and financing reforms to make public expenditures more efficient; faster debt reduction; and, above all, growth-friendly policies to help future generations afford the rising costs of aging-related government spending. Tax policy, the special in-depth chapter in the Economic Survey of Canada, is a powerful tool to encourage faster economic growth. Canada has made laudable changes to its tax system in the past decade or so. Eliminating capital taxes is a prime example.

But Canada could do more to broaden tax bases and shift to less economically distorting taxes, particularly at the provincial level. Remaining provincial retail sales taxes, which penalise business inputs, should be converted to more efficient value added taxes, and should be harmonised with the federal GST. Numerous tax breaks to traditional sectors and small firms should be phased out to unleash supply-side dynamism. And high effective marginal tax rates on both lower- and upper-income workers should be reduced to further improve their incentives to work, study and innovate.

Already Canada’s employment rates, including those for young people, are enviably high. This book – Jobs for Youth: Canada – says Canada’s youth labour market is doing better than many OECD countries. And we know because Canada is the 7th country we’ve reviewed.

The employment rate among 15 – 24 year olds in Canada rose to almost 60% in 2007, up from 52% in 1997, and well above the OECD average of 44% for both years. During the same period, the youth unemployment rate dropped from 16% to 11% - below the OECD average of 13%. However, there are still wide variations across provinces and sub-populations with Canada. The long-term youth unemployment rate is particularly low in Canada, at 2% in 2007, compared with an OECD average of 20% - ten times higher!

Canada’s high youth employment rate is the result of the country’s high enrolment in education.  Canada has the highest proportion in the OECD of young people attending university or college. Its secondary school drop-out rate, at 9% in 2005, is well below the 13% OECD average. The OECD report also notes that students in Canada are more likely to work than those in other countries, but warns that too many hours on the job can encourage teenagers to drop out of school. Increasing the high-school leaving age to 18, more high-school vocational programmes, and a better balance of paid work and study would help.

Though Canada’s response to the education and labour challenges faced by young people is well ahead of most other OECD countries, it could still do better. The transition from school to work is smooth for most young Canadians, though it varies from province to province. People living in remote and rural areas, and most aboriginal youth on reserves, still have a harder time finding jobs and are more likely to suffer from different types of exclusion. Aboriginal youths are over-represented among early school leavers as well as low school achievers, particularly in booming provinces such as Alberta.  Our Jobs for Youth book recommends geographic mobility – getting the kids to where jobs are available. And it suggests ‘mutual obligations’ which ask repeat users of Employment Insurance benefits to report on their job search efforts and, after 3 months on EI, get help finding work.

Coming back to the Economic Survey, another key structural challenge is climate change.  Canada committed to joint global action in fighting it, but successive Canadian governments have struggled to find the best  way to move the economy onto a more sustainable development path. We are pleased that a plan is now on the table and that work is underway to implement it. The country needs less energy-intensive consumption and production patterns, notably in the energy sector itself. Achieving post-Kyoto goals, while sustaining energy development, will require better technology as well as putting a price on all sources of carbon. Market-based solutions, such as the recently-announced permit trading, will be critical. By forcing firms and consumers alike to take into account the environmental costs of their actions, they provide stronger incentives for energy efficiency and innovation.

The federal government must work closely with its provincial and territorial counterparts to ensure the consistency of their actions. At the same time, they should continue reducing tax preferences to the oil and gas sector. Un des champs d’activité où le Canada ne s’est jusqu’à maintenant pas illustré comme leader en politiques publiques est l’agriculture.  Dans les années 80 et 90, le soutien gouvernemental aux producteurs agricoles a été réduit considérablement. Le Canada semblait être sur la voie de rejoindre l’Australie et la Nouvelle-Zélande comme pays avec des marchés agricoles ouverts à la concurrence mondiale.

Au cours des dernières années, cependant, il fait pratiquement cavalier seul en revenant en arrière sur les progrès accomplis. Les producteurs laitiers, entre autres, profitent d’un système de quotas qui résulte en d’énormes transferts de richesses des consommateurs vers les producteurs. D’autres types de productions agricoles sont soutenus par d’importantes aides budgétaires.

Étant donné les prix record actuels pour divers produits agricoles, c’est maintenant le moment idéal de libéraliser les marchés et permettre à tous les producteurs agricoles de tester leurs capacités sur les marchés mondiaux. Les producteurs agricoles doivent aussi recevoir des signaux qui les incitent à agir en faveur de l’environnement. A ce titre, les promesses d’aide budgétaire substantielle pour la production de biocarburants devraient être revues. We are confident that Canada will remain a policy leader and extend its already impressive run of economic growth for many more years. The OECD is here to help Canada make it happen.