IMF Executive Board Concludes 2014 Article IV Consultation with Canada

Par Robert Robillard - 3 février 2015

RBRT Inc. Transfer pricing, tax treaties and other international tax matters

The IMF Executive Board assessment, released on January 30, 2015, suggests a continuation of the Canadian accomodative monetary policy and that the fiscal policy should not lead to excessive budgetary discipline in light of the recent oil price downfall:

« Executive Directors agreed with the thrust of the staff appraisal. They welcomed Canada’s continued solid growth performance, underpinned by the authorities’ sound macroeconomic policy management. Directors noted that while the outlook remains favorable and growth is expected to become more balanced with a cooling housing market, risks are tilted to the downside because of tighter global financial conditions, effects from substantially lower oil prices, and persisting vulnerabilities in housing market and household sector. Directors agreed that continued well-calibrated policies should facilitate the needed rebalancing and sustain the growth momentum. Structural reforms to boost productivity and business investment will also be important to support medium-term growth.

Directors agreed that monetary policy should remain accommodative given well-anchored inflation expectations, sluggish business investment, lower oil prices, and until there are firm signs of durable recovery with stronger business investment. They supported the Bank of Canada’s decision to lower the policy rate as it would help further support the economy in light of the likely adverse effects of the oil price shock. However, they encouraged the authorities to continue monitoring the impact of monetary policy on household debt and house prices.

Directors acknowledged that macro-prudential measures have been effective in containing growth of insured mortgage loans, but noted significant rise in uninsured mortgages alongside still-strong segments of housing markets. They generally agreed that additional macro-prudential policy action may be needed if household balance sheet and housing market vulnerabilities resume rising, in particular tighter standards for uninsured mortgages. Directors welcomed the authorities’ recent initiatives to limit the government’s exposure to the housing sector. They encouraged further action gradually to ensure appropriate risk retention by the private sector and, in the longer run, to re-examine the dimensions of extensive government-backed mortgage insurance.

Directors welcomed the authorities’ commitment to fiscal targets and that the federal government is essentially on track to achieve a balanced budget in 2015. They agreed that fiscal consolidation should continue at the general government level, but the composition of the fiscal adjustment would need to shift from the federal government to the provinces. Most Directors saw scope for the federal government to adopt a neutral stance going forward, given strong adjustment efforts in recent years. They encouraged using the available fiscal resources for growth-friendly measures and strengthening the medium-term fiscal frameworks.

Directors agreed that fiscal adjustment at the provincial level would need to proceed, including through sustained progress in containing aging-related spending and supported by regular spending reviews. They generally noted that long-term fiscal sustainability challenges call for extending long-term fiscal forecasts at the provincial level and publishing consolidated general government fiscal forecasts in consultation with provinces.

Directors noted that Canada’s financial sector continues to be sound and stable and commended the authorities for the progress on the international reform agenda. They welcomed the progress made in implementing several recommendations of the 2013 update of the Financial Sector Assessment Program (FSAP) and generally encouraged the authorities to move forward with the outstanding FSAP recommendations. In general, Directors noted that further enhancing supervisory cooperation across federal and provincial authorities, harmonized stress-testing of systemically-important depository institutions, and strengthening macro-prudential and crisis management frameworks would reinforce the resilience of Canada’s financial system. A few Directors observed that focusing more on outcomes with respect to financial sector performance and allowing greater flexibility as regards frameworks or structures to achieve them could be beneficial. »

See the full press release here.

See the IMF Selected Issues report on Canada here.

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard « at » localhost
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