Canada says on track for budget surplus this year

Canada's economy is slowing but the economic fundamentals here are still much better than the United States, says Finance Minister Jim Flaherty.

"We have a good housing market in this country, unlike the United States. Our car sales are good, unlike the United States," he told Canada AM on Wednesday from Levis, Que., where the Tories are holding their summer caucus meetings.

Canadian banks and households are both in better fiscal shape than their U.S. counterparts, he added. However, Flaherty admitted "there are challenges -- and we saw the challenges coming."

CIBC World Markets said Wednesday that it expects inflation in the U.S. to hit six per cent within the next six months, and that the U.S. Federal Reserve Board will react by raising interest rates by at least two percentage points.

Last week, Canada's inflation rate was reported to have hit 3.1 per cent in June, something driven largely by gas and food prices.

U.S. housing prices continue to fall, but economists there took some small comfort Tuesday in the fact that the rate of decline appears to be slowing. But a glut of housing on the market in the U.S. means less construction and less demand for Canadian forest products such as lumber. The high dollar also hurts forestry, along with other export-oriented sectors such as manufacturing.

"We're not an island, we're not immune to those effects," said Flaherty, who represents the Whitby-Oshawa riding east of Toronto. General Motors, located in Oshawa, announced Tuesday it would drop auto leasing incentives in Canada.

Canada's unemployment rate rose to 6.2 per cent in June, but there is a regional story in those numbers. The West is doing much better than Central Canada, which is bearing the brunt of job losses in the manufacturing sector.

Flaherty said the Conservative government acted properly in cutting taxes in its previous budgets to provide a stimulus to the Canadian economy. Tax rebates average about $200, and many families have saved $1,000 on their tax bill, he said.

The government intends to continue to reduce spending and debt, he said, but he shied away from making firm promises on ways to cut living costs for Canadians, who have been beset by high gas and food prices.

Flaherty accused the Liberals, led by Stephane Dion, of planning to run up government spending and debt if they take power in the next election.

On Friday, the federal Finance Department reported that the government slipped into a $500 million deficit in the first two months of the new fiscal year, which started on April 1.

It blamed a slowing economy and the effects of tax cuts on government revenues, although the department cautioned not to read too much into the numbers at this early stage.

"Our fiscal planning is on track for this year. I'm comfortable with where we are," Flaherty said.

The minister then returned to the stimulus effect of the tax cuts in the previous budget, saying it would permanently help the economy.

Election timing

As for a potential election, he said, "it's not up to us."

Peter Van Loan, the government's house leader, told CTV's Question Period on Sunday that the government has no plans to prorogue Parliament and come back with a new throne speech.

The significance of that is a throne speech vote is a vote of confidence in the government. If the government had presented a throne speech that was completely unpalatable to the opposition, it could have engineered its own demise.

Dion has recently hinted a fall election could be possible, but then told Question Period only that an election was possible sometime between now and the election date fixed in law for October 2009.

CTV's Ottawa Bureau Chief Robert Fife told Canada AM from Levis that the Conservatives are trying to draw a contrast between themselves and the Liberals, particularly Dion's proposed carbon tax.

"Every time they run into a reporter, they say 'the carbon tax will be terrible for the economy; it's going to increase peoples' taxes'," he said.

Most MPs have heard that their constituents want the cost of living to go down, he said.

The Tories will likely talk about ways to cut taxes on gas and home heating oil, but the government doesn't have a lot of fiscal room left in which to manoeuvre, he said.

Source:Yahoo Canada Top Stories