April 26, 2008 / 5:35 AM / 9 years ago

Flaherty says economy resilient, no budget gap

NEW YORK (Reuters) - Canada’s economy can withstand a deeper U.S. slowdown with only a minor impact on growth and can maintain a budget surplus in the current fiscal year, Finance Minister Jim Flaherty said on Wednesday.

<p>Finance Minister Jim Flaherty speaks during Question Period in the House of Commons on Parliament Hill in Ottawa April 17, 2008. REUTERS/Chris Wattie</p>

In an interview with Reuters, Flaherty said he did not anticipate additional tax cuts during this period, having already delivered a fiscal stimulus package that he said amounts to 1.4 percent of gross domestic product.

He said previous tax cuts, lower interest rates, and relatively low inflation have helped Canada’s economy weather the downturn in the neighboring United States, its biggest trading partner.

“I am still satisfied that we will have positive economic growth in Canada this year. Our economy is resilient,” he said, adding the economy may grow at a 1.6 percent rate this year instead of 1.7 percent as previously projected.

“We are in the right area for our growth, we have low interest rates and relatively low inflation. The fundamentals are fine, they have not changed,” Flaherty said.

The minority Conservative government has cut the goods and services tax twice since coming to office in 2006, but Flaherty said budget discipline should prevent additional cuts.

“I wouldn’t anticipate we would have the resources to do further major tax cuts this fiscal year,” he told Reuters in an interview. “I would not want to raise any expectations on that.”

Credit rating agency DBRS said this week Canada may face a small budget deficit this year in the order of 0.1 to 0.2 percent of gross domestic product for the first time since 1996-97.

But Flaherty told Reuters, “We are not going to run deficit budgets.”

Liberal and Conservative governments have run balanced budgets for 11 straight years, and the country’s strong fiscal footing compared to Canada’s G7 partners has become a source of national pride.

If the current Conservative government, which has billed itself as a prudent steward of taxpayers’ money, were to fall into deficit, it would likely take a beating in the polls.

But Flaherty said even with a slightly slower-than-expected economic growth rate, a budget shortfall this year was out of the question.

“We will be okay on the revenue side. We have built in a cushion with respect to debt repayment and we can restrain spending from time to time,” he said.

On Tuesday, the Bank of Canada lowered its 2008 growth forecast to 1.4 percent from 1.8 percent and said slower U.S. growth will exert a “significant drag” on the Canadian economy. It also revised down its growth estimate for next year to 2.4 percent from 2.8 percent.

“These assessments of economic growth are all within a range, and I‘m comfortable within that range,” he said.

FX INTERVENTION NOT DISCUSSED AT G7

While Canada’s reliance on the United States for trade had moderated, the U.S. dollar’s sharp depreciation and reduced U.S. demand stemming from the housing sector meltdown had hurt his country’s automotive and forestry sectors, Flaherty said.

The U.S. dollar depreciated by more than 14 percent last year against the Canadian currency and has hovered around parity this year despite 150 basis points worth of interest rate cuts by the Bank of Canada.

Flaherty said the recent Group of Seven meeting in Washington had not directly discussed intervention to prop up the U.S. dollar.

He said exchange rates should be set by market forces and said Canadian manufactures have complained mainly about sharp fluctuations in currencies rather than their level.

A stronger currency has helped Canada keep price pressures in check at a time when rising commodity costs have swelled inflation globally, he said.

Flaherty said the Canadian housing market remained sound and had not experienced the same stress as the United states, adding that he was unconcerned about the capitalization of the banks in his country, which had limited exposure to subprime mortgages.

“We did not have a bubble,” he said. “Three percent of our mortgage market is subprime, we have good employment numbers, interest rates are low, so the fundamentals are good with respect to the housing market.”

Major banks in the United States have been forced to seek capital injections after writing down non-performing assets following bad bets linked to the troubled housing sector.

The impact on Canadian banks has been more modest, with only two big banks reporting significant exposure to the U.S. subprime mortgage market.

These “have already taken substantial write-downs,” Flaherty said. “That doesn’t mean there might not be more there, but they have already taken the large write-downs,” he said.

Canadian Imperial Bank of Commerce and the Bank of Montreal have taken the biggest hit from mortgage-related write-downs so far.

Reporting by Steven C. Johnson, Lucia Mutikani, and Dan Bases;

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