Flaherty says U.S. budget crisis could push Canada into a recession

Finance Minister Jim Flaherty is urging U.S. politicians to get back to work quickly on resolving their budget crisis now that the election is over, warning that failure would plunge both America and Canada into recession.

The minister has voiced concern before about the so-called “fiscal cliff,” but the re-election of both Democrat President Barack Obama and a right-wing Republican House on Tuesday has led to new fears of the risk becoming reality.

“Of course we’re worried because it would mean, were the entire fiscal cliff risk to come to reality … (it) would put the U.S. economy into a recession quite quickly and the Canadian economy would follow shortly thereafter, and would have a significant effect on the global economy,” Flaherty told reporters Wednesday.

Flaherty said 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 threat 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.

Flaherty’s comments came amid warnings that gridlock in Washington could prevent a deal to extend about $600 billion in tax cuts and spending programs beyond Dec. 31. That would represent about a four percentage point hit to an economy only growing at two per cent.

Economists have considered the issue a no-brainer, but Obama and the Democrats have insisted that taxes on the rich rise as part of the deal, something Republicans have balked at the past two years.

Analysts have interpreted the re-election of Obama to the White House as having increased the odds against a deal before Jan. 1, in part because of the aggressive tactics employed by House Republicans in the past.

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.

The problem, said the Liberal’s Bob Rae, is that there is little Canada can do except root that U.S. policy-makers get their act together in time.

Flaherty said avoiding the crisis won’t be easy, given the gridlock in the Washington, but noted his Conservative government operated for five years as a minority.

“It’s not always easy but it can be done.”

The minister said he plans no course change in Canada, saying his eye is fixed on implementing the March budget and eliminating the deficit in the next few years.