Canada says loosening austerity a mistake, wary of bubbles

Thu May 9, 2013 12:54pm EDT
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By Mike Peacock and David Milliken

LONDON (Reuters) - Big countries' weakening resolve to cut debt is a mistake, and surplus capital coursing through the world economy risks inflating asset bubbles and causing fresh turmoil, Canada's finance minister said on Thursday.

Jim Flaherty, in Britain to attend a two-day meeting of G7 finance ministers, told Reuters that although it was possible to reduce national debt and foster growth, it was the former which was indispensable.

"I think the resolve has weakened and I think it's mistaken. We need to press for fiscal consolidation in the medium-term, to have a plan to get our debt/GDP ratios going down rather than up, and at the same time to have some incentives for economic growth," the veteran finance minister said in an interview.

"I would like to achieve a consensus that we need to do both ... fiscal consolidation and economic growth," he said of the Friday and Saturday meeting of finance ministers from the United States, Germany, Japan, Britain, Italy, France and Canada.

Flaherty's assessment chimes with that of Britain and Germany, which is cautious about calls within the euro zone to ease up on debt-cutting.

"(In 2007) there was too much capital sloshing around the world. We all agreed on that as finance ministers. Today we have too much capital sloshing around the world, so one always worries about bubbles," the 63-year-old said.

"All the more reason for all of us to make sure that we have sound fiscal policies and are moving in the medium-term to reduce our debt/GDP ratios."

Flaherty said he did not know where asset bubbles might be building, saying that in Canada he had already taken steps to tighten up the housing market.   Continued...

Canada's Finance Minister Jim Flaherty gestures as he takes part in a news conference announcing the appointment of Stephen Poloz as the incoming Bank of Canada governor in Ottawa May 2, 2013. REUTERS/Chris Wattie