OTTAWA (Reuters) - The European debt crisis and the weak state of the U.S. economy are the biggest risks for Canada’s governing Conservatives, who are reasonably secure for the next four years after a convincing victory in the May 2011 election.
The government, which says it is determined to cut spending to eliminate its budget deficit, could face angry protests, however, as it tries to change the Old Age Security pension system, which it describes as unsustainable.
Politicians say they are very concerned about the economic problems facing Europe and the United States and fear they could become even more severe in future. Canada’s economy is heavily reliant on exports to the United States.
After a surprisingly robust performance through much of 2011, the economy is showing signs of a slowdown as international problems continue and recent data suggests fourth-quarter growth will be sluggish.
The growth of household debt is hitting levels approaching those seen in the United States before the 2008-09 crash, fueled in part by record low interest rates.
Finance Minister Jim Flaherty says Ottawa is watching the housing market closely and is ready to intervene if needed.
The right-of-center Conservative government says its next budget, expected in March, will accelerate plans to cut spending and bring the budget back into surplus by the 2015-16 fiscal year.
One target is the Old Age Security program, a public pension scheme that kicks in at age 65, which the government says is unsustainable and needs to be changed. The announcement triggered opposition accusations that the Conservatives were breaking a campaign promise not to cut seniors’ benefits.
Things to watch for:
* What effect would a European debt meltdown have?
* How strong is the U.S. recovery? The United States traditionally takes almost three-quarters of Canadian exports. How badly would a new U.S. recession hit Canada?
* How likely is a crash in the housing market? How much damage would that cause?
* Will the Conservatives suffer politically from public unhappiness over their attempts to change the pension system?
Canada, the largest single exporter of energy to the United States, was profoundly disappointed when the U.S. administration blocked the proposed Keystone XL pipeline from Alberta’s oil sands to the Gulf Coast of Texas.
Government ministers say they will now focus on selling oil to Asian markets, in particular China. Prime Minister Stephen Harper will travel to China in early February in a bid to boost energy exports.
The crude would come from the vast Alberta oil sands, which environmental activists say require excessively large amounts of energy and water to exploit.
Oil exports to China are unlikely to start until Enbridge Inc builds its planned Northern Gateway pipeline from Alberta to the Pacific Coast. Several aboriginal communities along the route have vowed to block the pipeline, and it could be a decade before it is built.
Despite the disagreements over Keystone XL, Canada and the United States underlined their close ties by extending a bilateral softwood lumber deal by two years to 2015.
The oil sands are also at the center of an argument between Canada and the European Union, where officials want to classify tar sands-derived crude as particularly dirty. Ottawa says this would be discriminatory and might launch a complaint against the EU at the World Trade Organization.
What to watch for:
* How successful will Harper be in his campaign to sell oil to China?
* How soon will regulators approve the Northern Gateway and will it ever in fact be built?
* Will the European Union vote to classify oil sands crude as dirty? Will this trigger a WTO challenge by Ottawa and how could that affect talks on a free trade deal with the EU?
Canada’s two main opposition parties are operating under interim leaders, raising questions both about their future and about their ability to challenge the Conservatives.
The left-leaning New Democrats, the main opposition party, will choose a new leader in March to replace the late Jack Layton, who was easily the most charismatic federal politician in Canada. He died in August 2011.
Layton’s death raises questions about whether the NDP might merge with the centrist Liberals, who have governed Canada for longer than any other party but fell to a distant third place in the May election.
Relations between the two parties soured when a New Democrat legislator unexpectedly defected to the Liberals.
The Conservatives are using their position of strength to press ahead with policies designed to crack down on crime and cut red tape, as well as boosting competition for services.
What to watch for:
* How well will a distracted opposition be able to fight the government’s agenda?
* Will the New Democrats manage to find a leader with anywhere near the same level of public appeal and political skill as Layton?
* Will the Liberals and New Democrats hold serious talks about merging? If there were a deal, could the new party beat the Conservatives in the next election, scheduled for 2015?
* Will there be increasing public unhappiness about the Conservatives’ moves to quickly implement their agenda?
Ontario, the most populous of Canada’s 10 provinces and the country’s economic hub, says it will eliminate its budget deficit by 2017-18. To do so, the provincial government says it will target the public sector, rather that impose cuts across all areas.
Reporting by David Ljunggren; editing by Rob Wilson