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High oil prices and output stressing Canada's economy: OECD
By Michel Comte
AFP
OTTAWA
Petroleumworld.com 06 27 06
Booming oil sands production pushed Canada's economy to new heights in 2005, but now threatens businesses elsewhere in the country hurt by worker shortages and a high currency, the OECD warned Monday.
The Organisation for Economic Co-operation and Development in its annual report praised Canada's 2005 economic performance, saying it was "excellent in nearly all respects."
Canada's economy had shown a "remarkable capacity to cope (with) ... significant structural changes in response to soaring commodity prices, expanding oil and gas production and exchange rate appreciation," the economic watchdog said.
However, these pressures may boil over unless Canada increases its nation-wide productivity and revamps its provincial equalization program to offset oil-rich Alberta's gains -- thanks to energy royalties -- that led to wide disparities in provincial finances and a "damping effect" on other sectors, particularly manufacturing in Ontario.
Canada's gross domestic product (GDP) was 1.371 trillion Canadian dollars (1.221 trillion US dollars) in 2005 or 42,500 Canadian dollars (37,900 US dollars) per person.
Output and employment growth were "robust" while the unemployment rate fell to its lowest level since 1974.
Inflation remains "comfortably under control" and Canada is the only G7 country to have posted a budget surplus in recent years.
But, high commodity prices in 2005 drove the Canadian dollar up to 1.211 per US dollar and its productivity growth has slowed in recent years.
Meanwhile, Canada's energy exports grew to 19.2 percent of total exports in 2005 and oil sands production is expected to continue climbing to 3.5 million barrels per day by 2015, the OECD said. This will entail "significant economic adjustments."
"In the near term, the priority should be on revamping the equalisation system. This is especially critical given that continued high oil prices will likely lead to significant further regional and industrial adjustments in Canada," the OECD said.
In the long term, the federal government should lower taxes to allow provinces, which provide most social services, to hike their own taxes for better accountability.
The OECD also recommended abolishing capital taxes "as rapidly as possible", eliminating subsidies and special corporate tax breaks that target certain sectors and regions, and leveling tax rates that favor smaller firms over big corporations.
The international group was notably critical of Prime Minister Stephen Harper's Conservative government for lowering the GST (value added tax) from seven percent to six percent this year.
Value added taxes are more efficient than personal or corporate taxes, it argued, and Canada's GST is already among the lowest of OECD countries.
The OECD also recommended:
-- The liberalization of provincial electricity markets for more efficient power generation and use.
-- Fewer restrictions on foreign investment in airlines, telecommunications and broadcasting to boost competition and infuse new technologies and management.
-- The dismantling of remaining obstacles to inter-provincial trade in services.
-- The winding up of agricultural supply management schemes to allow market prices to balance supply and demand to create more opportunities for farmers and lower food prices.
-- Eliminating bank ownership restrictions and allow bank mergers.
-- Creating Canada-wide securities regulations "as quickly as possible." The provinces have so far been unable to agree on a model.
The OECD also warned that a so-called "Made in Canada" climate change programme, expected in September, should not hinder further oil sands development.
AFP 26 1727 GMT 06 06
Copyright ©2006 AFP. All Rights Reserved.
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