01/17/2012 02:53 EST | Updated 03/18/2012 05:12 EDT

Canada Budget 2012: European Troubles May Cause Delay

OTTAWA - Finance Minister Jim Flaherty said Tuesday his upcoming budget will seek to address longer-term problems facing Canada, while protecting the country from external shocks in the current economic environment.

"This budget will relate not only to the upcoming year, it will relate to several years into the future," he told reporters.

"It's all part of the plan to ensure the Canadian brand, which is very strong in the world, stays strong and that we'll be in a position as we were a few years ago to withstand shocks that attack our economy from the outside."

The minister did not give specifics, but news reports suggest the government is looking to limit Old Age Security benefits to qualified people at least 67 years of age, rather than starting at 65, and to tackle pension plans for federal employees and elected members of Parliament.

The government is also putting its mind to the issue of how demographics — the aging population — will impact tax revenues and expenses in a slow-growth economy.

In December, Flaherty said Ottawa plans to continue increasing health transfer payments at six per cent annually for three years after the current deal expires in 2015 before tying the transfer dollars to economic growth and inflation

Flaherty said the upcoming budget will stick to its target of eliminating the $32 billion federal deficit in four or five years, but anything more aggressive is likely not in the cards given the challenges facing the economy.

While the Bank of Canada, and many economists, project Canada's economy will continue expanding — but at more modest rate of two per cent this year — the risks to that outlook continue to mount.

As well, job growth has ground to a standstill since July, with employment actually dropping by about 55,000 in the past three months.

In fact, Flaherty hinted the budget release may come a little later than the traditional late February-March date this year while he waits to see whether Canada will be impacted by the European debt crisis.

"We're in a difficult time economically in the world," he said.

"One of the things we've been watching is the situation in Europe because we always watch for external shocks and the potential affects of an external shocks on Canada."

That suggests Flaherty wants to wait as long as possible to see if European leaders can contain the crisis.

Analysts say a European meltdown is likely to have a similar impact on the global economy as the Lehman Brothers collapse of 2008, freezing credit and significantly slowing economic activity, possibly leading to a global recession.

As he did last week, Flaherty bristled at the suggestion he is preparing to table a so-called "austerity budget" that will slash departmental spending beyond the previously announced $4 billion.

Instead, Flaherty said he will seek to strike a balance between the need to restrain spending while at the same time supporting growth.

"The budget is about economic growth and jobs," he said. "If you want to see an austerity budget go to the United Kingdom ... with hundreds of thousands of people being laid off. That's not Canada. Our purpose is to ensure that we have a balanced budget in the medium term and that we have long-term stable, solid fiscal realities."

Flaherty said he is comforted that Canada's growth has been steady so far, if not spectacular, and that conditions appear to have improved in the United States. That's better than Europe, which is in recession, he pointed out.

"We're doing relatively well," he said, placing all the emphasis on relatively.

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