The Canadian economy has performed well in recent years, but reforms are needed to deal with the current economic slowdown, longer-term demographic challenges, and environmental issues, according to an economic survey released today by the Organization for Economic Co-operation and Development.

The survey notes that Canada’s economic performance has been among the best in the OECD, and it says that the economy has adapted well to recent shocks. “More recently, though, activity has slowed sharply in response to the combination of the U.S. downturn and stresses from the high Canadian dollar, as declining net exports have nearly offset still-strong domestic demand. Significant challenges also lie ahead,” it says.

The OECD also warns that population ageing will put a premium on longer working lifetimes and faster productivity gains, which have been relatively weak. Sustainable growth will require successfully addressing the problem of climate change, it adds.

“Fiscal policy is constrained by declining surpluses in the short term and ageing liabilities in the longer term,” it notes. “Resolute fiscal policy — in particular through investing abroad more of the public revenue resulting from high oil prices — could help mitigate real exchange-rate appreciation.”

“Tax cuts have been a good use of budget surpluses, but there is plenty of scope left for efficiency-enhancing, revenue-neutral tax reform,” the OECD counsels. It says there are opportunities to broaden the tax base, that could lead to lower rates.

“Remaining provincial retail sales taxes, penalizing business inputs, should be converted to more efficient value added taxes, harmonized with the federal GST. Numerous tax breaks to traditional sectors and small firms should be phased out to unleash supply-side dynamism. To further improve capital allocation and build on recent initiatives, personal income should be taxed on a neutral consumption basis, with vertical equity achieved by targeting tax credits on vulnerable groups,” it suggests.

“Achieving post-Kyoto goals, while sustaining energy development, will require putting a price on all sources of carbon, as well as better technology. Market-based solutions – such as the planned permit trading – will be critical: by internalizing environmental costs they provide stronger incentives for energy efficiency and innovation. At the same time tax preferences to the oil and gas sector should continue to be reduced,” it says.

Also, it says that Canada has lost ground in the longer-term global trend toward liberalized farm sectors. It points out that dairy farmers in particular are protected at the expense of consumers, and other farmers have been supported by a steady stream of federal and provincial budgetary support “that is no doubt inducing dependency behaviour”. It stresses that farmers also need to be given the right incentives to produce in an environmentally friendly manner. “Most importantly, government support for bio-energy production needs to be reconsidered.”

It lauds efforts by the Bank of Canada and other regulators to improve transparency, flexibility and competition in Canadian financial markets. However, it reiterates the call for a single securities regulator, and for the government to allow bank mergers. “A single regulator would eliminate the inefficiencies created by the limited enforcement authority of individual provincial agencies,” it says. “Also, the impact on economic growth from reducing competition-restraining regulation in the banking sector could be significant. It is now time, ten years after the first merger proposals were blocked by government, to welcome competition in financial markets by allowing Canada’s leading financial institutions to become global players by lifting the ban.”