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Canada needs tax reform to boost competitiveness, OECD says

Canada should reform its tax system to boost competitiveness, the Paris-based Organisation for Economic Co-operation and Development said.
Canada should reform its tax system to boost competitiveness, the Paris-based Organisation for Economic Co-operation and Development said. THE CANADIAN PRESS/Adrien Veczan

Canada’s economic growth is strong and some housing market vulnerabilities have improved, but trade policy is a big risk to the outlook and the government should reform taxes to boost corporate competitiveness, the OECD said on Monday.

The Paris-based Organisation for Economic Co-operation and Development said while GDP growth is projected to remain robust, with exports underpinned by strong global demand, rising rates will sap some consumer strength.

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On the whole, the OECD sees Canada’s economy growing 2.1 percent this year and 2.2 percent in 2019, down from 3.0 percent in 2017, while exports and employment continue to improve and CPI inflation rises to 2.3 percent in 2018 and 2.2 percent in 2019.

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The greatest risk in the outlook is trade protectionism, the OECD said, noting that uncertainty around the future of U.S. trade policy may be dampening investment.

It said the termination of the North American Free Trade Agreement would have “a small but material effect” on gross domestic product, with potential losses around 0.5 percent of GDP in the short term and 0.2 percent of GDP in the long term.

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The OECD said U.S. corporate tax cuts have hurt Canadian competitiveness, reinforcing the negative hit from NAFTA uncertainty.

“The government should review the tax system to ensure that it remains efficient – raising sufficient revenues to fund public spending without imposing excessive costs on the economy – equitable and supports the competitiveness of the Canadian economy,” the OECD said.

It also said that while income inequality is close to the OECD mean, working-age poverty is well above the OECD average, immigrant labor market integration lags, and there remains a sizeable gender earnings gap.

Still, a series of changes to mortgage rules and other macro-prudential measures have mitigated the risks around a long housing boom, the OECD said.

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