Canada has options if U.S. fails to avert 'fiscal cliff'

Wed Nov 7, 2012 11:31pm EST
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OTTAWA (Reuters) - Canada will fall into recession if Washington does not reach a deal by year-end to avert the so-called fiscal cliff, but the Canadian government and central bank could provide extra stimulus if necessary, policymakers said on Wednesday.

Unless the White House and Congress agree on how to cut the U.S. budget deficit, a $600 billion package of tax increases and spending cuts kicks in automatically at the end of 2012 and would threaten U.S. economic growth.

"Were the entire fiscal cliff risk to become reality, the effect on U.S. GDP, according to the Americans themselves, would be 4 to 5 percent, which would put the U.S. economy into recession quite quickly and the Canadian would follow shortly thereafter," Finance Minister Jim Flaherty told reporters in Ottawa.

Flaherty later told a parliamentary committee that the Conservative government would inject money into the economy as it did during the 2008-09 downturn.

"We will take steps to stimulate the economy," Flaherty told lawmakers. "We're not going to stand by and have the Canadian economy slip deeply into recession.

Canada's economy recovered from the global recession faster than that of the United States, but it remains heavily reliant on trade with its neighbor, which buys three-quarters of its exports.

Bank of Canada Governor Mark Carney said policymakers would have several options to protect Canada from fiscal calamity south of the border.

"We can provide stimulus on the monetary side, the government could take measures, other things could happen, but we don't need to do that in anticipation of the Americans not coming to an agreement, an agreement that is in their own interest," Carney told the Canadian Broadcasting Corporation in an interview.

Carney said President Barack Obama has a "strong mandate" to engage his opponents on the fiscal cliff issue, helped by the Democrats holding onto a majority in the Senate.   Continued...

Canada's Finance Minister Jim Flaherty speaks during Question Period in the House of Commons on Parliament Hill in Ottawa October 31, 2012. REUTERS/Chris Wattie