Fiscal Cliff: Canada Will Fall Into Recession If U.S. Doesn't Reach Agreement Soon, Jim Flaherty Says

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Finance Minister Jim Flaherty says U.S. politicians need to get to work quickly on putting together a fiscal compromise that will avoid an economic crisis. (THE CANADIAN PRESS/Adrian Wyld)
Finance Minister Jim Flaherty says U.S. politicians need to get to work quickly on putting together a fiscal compromise that will avoid an economic crisis. (THE CANADIAN PRESS/Adrian Wyld)

OTTAWA - Canada's top financial policy-makers say they are prepared to once again come to the rescue of the economy if a looming fiscal crisis in the United States triggers a recession.

Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney both pledged Wednesday to take action to support the economy if a shock from the U.S., or Europe, threatened to once again plunge the country into recession.

"We are a pragmatic, sensible government. If our economy goes into recession because of an external shock from the United States or the eurozone, or both, we will take steps to stimulate the economy," Flaherty told the Commons finance committee in an evening session.

"What we have done before we will do again. We will not do exactly the same thing again...but we are not going to stand by and have the Canadian economy slip deep into a recession with high unemployment."

Earlier, Carney said in a CBC interview that both the bank and the government will "react if necessary, but we're not going to react to a hypothetical."

The impetus of the statements was the split outcome of the U.S. presidential election that brought back Democratic President Barack Obama and a Republican lower house, elevating fears the U.S. may be heading for the so-called "fiscal cliff" in January.

Economists fear that unless the two sides co-operate on a new budget arrangement soon, about $600 billion in tax cuts and spending will end abruptly, robbing the U.S. economy of about four per centage points in growth.

That would push the U.S. into recession "quite quickly, and the Canadian economy would follow shortly thereafter," said Flaherty.

He added all his colleagues at the G20 meeting of leading economic powers last weekend in Mexico expressed concern about how U.S. policy-makers would deal with the threat.

North American markets also seemed to take the risk of failure seriously. The Dow Jones Industrials plunged more than 300 points at one point before recovering slightly. There as also a significant, but more modest, sell-off in Toronto.

Economists view avoiding the fiscal cliff as a no-brainer since its repercussions are so severe, but both sides have been unwilling to move off core positions — Democrats insist on tax hikes for the rich, which the Republicans have so far refused to consider.

Both Obama and the Congress need to be "more realistic," said Flaherty.

TD Bank deputy chief economist Derek Burleton said if policy-makers don't reach a compromise, Canada would likely be impacted through reduced exports to an America back in recession, and a loss of confidence that would likely depress business investment.

While Canada is broadening its exports markets, about 70 per cent of shipments still head south of the border.

"The risks that the U.S. economy will fall off the looming fiscal cliff and fall back into recession is one of the top risks facing Canada's economy as we head into 2013," Burleton said.

NDP and Liberal party leaders echoed the concerns, agreeing that Canada and the world would be negatively impacted by a sharp contraction in the U.S., still the world's largest economy.

Flaherty gave few details of what measures he might bring in to stimulate the economy, but he said he's learned a few lessons from the 2009-10 stimulus packages — one being that moving fast is good.

"One example that did work very well was colleges and universities...they have a lots of pent-up infrastructure to do," he explained. "It employs people and it employs people quickly and it doesn't take a long tendering process.

"At a time of economic crisis ... the quicker a project can go the better."

Flaherty said avoiding the crisis won't be easy, but said he had some hope both sides would be forced to put water in their wine by the enormity of risk.

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