Flaherty changes tune on economy

Wed Dec 17, 2008 6:21pm EST
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By Louise Egan

SASKATOON, Saskatchewan (Reuters) - The Canadian government predicted for the first time on Wednesday that the nation's economy would contract and Ottawa would run a budget deficit next year -- its first in more than a decade.

Finance Minister Jim Flaherty issued the downbeat forecast just three weeks after delivering a fiscal report that was widely criticized for being unrealistically rosy and smacking of political partisanship.

His remarks appeared to be an olive branch to the opposition Liberals, who threatened last month to topple the minority Conservative government over the report. They later asked Flaherty to produce "honest" fiscal numbers in exchange for their co-operation on an economic recovery plan.

"There's nothing like a hanging in the morning to concentrate the mind, and I think Mr. Flaherty is saying everything he thinks we want to hear," Liberal legislator John McCallum told CBC television.

Flaherty said the economy would shrink 0.4 percent next year, instead of posting 0.3 percent growth as it estimated in its report on November 27.

He did not give exact numbers for the deficit but provided a chart that suggested a 2009-10 deficit of about $5 billion, and a slightly larger shortfall the following year. Last month, he laid out plans for small surpluses.

The numbers do not take into account any stimulus package that may be announced.

Flaherty emerged from a day-long huddle with finance ministers from Canada's provinces and territories with a promise to speed up and possibly expand infrastructure spending to lessen the impact of the recession. Ottawa already plans $6 billion in infrastructure spending in 2009.   Continued...

<p>Canada's Finance Minister Jim Flaherty speaks during Question Period in the House of Commons on Parliament Hill in Ottawa December 3, 2008. REUTERS/Chris Wattie</p>