This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Canada were reviewed by the Committee on 2 May 2012. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 24 May 2012.The Secretariat’s draft report was prepared for the Committee by Alexandra Bibbee, Calista Cheung and Shahrzad Mobasher-Fard under the supervision of Peter Jarrett. Research assistance was provided by Françoise Correia.The previous Survey of Canada was issued in September 2010.

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.

Canada weathered the global economic crisis well, mainly reflecting sustained growth in domestic pending, and the economy is continuing to grow despite the persistence of international turbulence, most recently stemming from the euro zone sovereign debt crisis. In Canada’s case, several factors are acting in its favour. Federal fiscal plans are seen by markets as credible, favouring low borrowing costs. The banking system is sound and required no taxpayer bailouts during the 2008-09 crisis. Comparatively strong growth among emerging market economies has shifted global purchasing power to commodity exporters like Canada via both higher export prices and stronger currencies. Nevertheless, uncertainty regarding the global situation and risk-averse financial markets are a drag on business confidence and investment, while prolonged low interest rates could push mortgage-debt and house prices higher from already elevated levels, at least in some large cities.

This chapter discusses how to improve Canada’s business innovation in order to boost labour productivity and output growth. Many general framework conditions are highly favourable to business risk-taking and innovation, including macro stability, openness, strong human capital, low corporate tax rates, low barriers to firm entry and flexible labour markets. However, they can be improved further by reduced external and interprovincial barriers in network and professional service sectors, more efficient capital markets, fewer capital tax distortions and improved patent protection. A second focus should be on ensuring that incentives arising from government subsidies are targeted on actual market failures. The very high level of support to business R&D via the federal Scientific Research and Experimental Development (SR&ED) tax credit and provincial top-ups may weaken the incentives of small firms to grow and should be redesigned. A plethora of small, fragmented granting programmes, mainly geared to SMEs, should be streamlined for better academic-business collaboration. The large public share in venture capital should be wound down, as it may crowd out more productive private finance. A final focus should be on boosting manager and worker skills that are intrinsic to all forms of innovation, by filling gaps in training, mentoring and education.

The tertiary education system in Canada performs well in fostering a skilled workforce with generally good labour-market outcomes and is internationally recognised for its research contributions. Tertiary educational attainment is high, but participation rates will need to continue expanding to maintain the supply of highly skilled labour as the population ages and the needs of the knowledge-based economy rapidly evolve. This should be achieved by encouraging access to higher education for disadvantaged socio-economic groups, while enhancing the flexibility of the system to allow students with diverse needs to move between institutions more easily to meet their learning objectives. Immigration is another important source of skills that could be better utilised. The development of skills for innovation can be improved by increasing the integration of technical, business and communications skills training with practical industry experience within tertiary education programmes. In an environment of government spending restraint, the quality of tertiary education could be strengthened by increasing the distinction between institutions that target research and those that emphasise teaching and re-evaluating tuition policies in provinces where public finances are stretched.