September 27, 2010 / 4:12 PM / in 7 years

Canada vows to protect recovery but end stimulus

MONTREAL (Reuters) - Canada’s government said on Monday it would take action as needed to protect the shaky economic recovery, but resisted pressure to prolong stimulus spending as its focus turns to tackling its budget deficit.

Finance Minister Jim Flaherty said the Conservative federal government has committed 98 percent of the C$22 billion ($21 billion) it had planned for the second year of its C$48 billion economic stimulus package, which was aimed at softening the blow of the recession that ended late last year.

But as the recovery loses steam and economists predict a slight economic contraction in July, the first monthly contraction in almost a year, the minority government of Prime Minister Stephen Harper has come under pressure to keep the stimulus tap running beyond the March 2011 end of the program.

Flaherty said the Canadian economy has recovered all the jobs lost during the recession and output has also returned to pre-recession levels. But he conceded it is a “very uncertain time” for the global economy.

“That’s why the next few months are so critical for our country as this government continues our efforts to create jobs, to boost investment and to make our nation even more competitive ....” he told reporters in Montreal.

“In the short term, the government is focused on finishing the job of implementing the economic action plan. We will also continue to monitor economic development closely and will take action as necessary to protect the economic recovery,” he told reporters in Montreal.

Flaherty noted signs the private sector would soon replace the government in stimulating growth.

“We’ve seen this year some increases in the investment in machinery and equipment by Canadian business, which is quite encouraging in terms of future private-sector demand,” he said.

Canada’s economy has fared better than that of the United States and some other major economies due to strong consumer spending and a robust housing market.

The Bank of Canada became the first central bank in the Group of Seven advanced economies to raise interest rates following the global financial crisis and has now hiked rates three times since June. In contrast, the U.S. Federal Reserve is considering possibly taking further action to boost the economy there.

In its report on Monday on the status of the stimulus funds, Ottawa said it has committed federal money to 23,000 projects. It said work on 97 percent of them has begun or has been completed.

OPPOSITION ATTACKS

But the main opposition party, the Liberals, kept up their attacks on Harper’s economic management on Monday. “They keep talking about the fact that Canada has replaced jobs. That’s great ... But the reality is that the jobs that came back are more temporary, and part time and more insecure than the jobs we lost,” said Liberal Party leader Michael Ignatieff.

Harper needs the support of at least one of the three opposition parties to stay in power. Polls show his Conservatives have a slight lead over his rivals in popular support, not enough to win a majority.

Flaherty did show some wiggle room on a Liberal demand that the government show more flexibility on its March 2011 cut-off date for finishing municipal infrastructure projects so that municipalities can get federal cash for them.

Municipal and provincial governments are expected to have contributed C$7 billion to the stimulus program in each of its two years, but they could get hit with an additional C$500 million bill if projects are not finished on time, the Parliamentary Budget Officer has estimated.

Flaherty said the government would be “fair and reasonable” about funding for projects that are nearly completed.

Ottawa expects its 2009-10 budget deficit to be just over C$50 billion, or about 3.5 percent of gross domestic product. It aims to reduce the deficit to a marginal 0.1 percent of GDP by 2015, a feat the International Monetary Fund says it can achieve and which would give Canada the best fiscal standing in the G7.

Ottawa will provide new growth and budget forecasts in its annual autumn fiscal update, which is usually presented to Parliament in late October.

Reporting by John McCrank, David Ljunggren and Louise Egan; writing by Louise Egan; editing by Peter Galloway

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