December 27, 2007 / 5:02 AM / in 10 years

Flaherty's wish: keep Canada out of trouble in 2008

<p>Canada's Finance Minister Jim Flaherty stands to speak in the House of Commons on Parliament Hill in Ottawa December 13, 2007.Chris Wattie</p>

OTTAWA (Reuters) - Cut taxes, pay off debt and then keep your head down until the bad times blow over.

That's Canadian Finance Minister Jim Flaherty's tip on surviving an economic slump in the United States, Canada's top trade partner and the world's biggest economy.

Flaherty chopped corporate, income and sales taxes in a C$60 billion swoop in October, as well as paying down C$10 billion in debt.

In an interview with Reuters, he said that had been his contribution to protecting Canada from economic disaster, and 2008 will be about sitting out the storm billowing out from the U.S. subprime mortgage meltdown.

"I expect that next year our efforts will be concentrating on stability, staying the course, sound fiscal management," he said in the interview, which was conducted on December 18 and released on Thursday at Flaherty's request.

"No grand new tax reductions," he added.

The Conservative government does have some special help in mind for the auto and forestry industries, which Flaherty said are "disproportionately affected" by the U.S. slowdown.

Canada's economy has proven resilient to the knock-off effects from the U.S. housing slump, with growth in 2007 topping forecasts so far. The housing market has outperformed the U.S. one and consumer spending remains robust.

Flaherty, who declined to comment on the chances of a U.S. recession, said most of the 90,000 factory workers laid off in the past year have landed decent jobs elsewhere.

"I can tell they're good-paying jobs because I can see the tax revenues that keep flowing into Ottawa and to the provinces," he said.

But even a stubborn optimist like Flaherty concedes that the future looks bleaker than in October when the Bank of Canada projected 2008 growth of 2.3 percent.

"I think the downside risks have increased this fall. Some effects on our economy by continuing weakness in the U.S. economy are to be expected," he said.

For those sectors short-listed for aid, he warned that his next budget -- expected by early March -- will not include bail-outs for sickly companies.

He envisions funding for auto sector research, or help to retrain workers or improve infrastructure in one-industry towns where lumber mills are closing.

"I'm not going to suggest to communities what they might want to do but certainly if they want to improve their roads or they want to build new transportation facilities or whatever ... that could create new opportunities, one would hope."

Editing by Janet Guttsman

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