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Flaherty May Flag U.S. Risks in Canada Budget Update

Nov. 13 (Bloomberg) -- Canadian Finance Minister Jim Flaherty may warn of risks posed by the U.S. and project higher deficits than he budgeted earlier this year because of lower commodity prices and slower growth, in an update of the government’s fiscal plan to be released later today.

Flaherty, 62, will update his projections during a speech to the chamber of commerce in Fredericton, New Brunswick at about 12 p.m. New York time, according to a person familiar with the matter, who spoke on condition he not be identified because the plan isn’t public.

The update “may start raising concerns about the external environment” with the U.S. potentially facing a sharp fiscal contraction, said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto.

“Flaherty may take the opportunity to make clear that if the risk of the U.S. economy falling over the so-called fiscal cliff is realized, it would have significant downward impact on growth in Canada, and certainly the chance of returning to balance,” he said.

Flaherty said Oct. 29 that lower than expected prices for the country’s commodities are damping government revenue growth and will affect the country’s fiscal outlook. He has since declined to say whether the government still plans to balance the budget in 2015 as forecast in his March fiscal blueprint.

“I’m not obsessed with this year or that year for the balancing of the Canadian budget,” Flaherty told reporters on Nov. 4 in Mexico City, where he was attending a meeting of finance ministers from Group of 20 countries. “I am obsessed with balancing in the medium term.”

Lower Expectations

Weak global demand and a strong Canadian dollar, boosted in part by the country’s reputation as a haven for investors, prompted Bank of Canada Governor Mark Carney in recent weeks to damp expectations for rate increases.

Carney said last month that interest-rate increases are “less imminent” due to risks to economic growth, including moderate global demand and record domestic debt burdens. The central bank forecast that growth slowed to an annualized 1 percent rate in the third quarter of this year, following two consecutive quarters with an expansion rate below 2 percent.

Quarterly annualized growth averaged 3 percent between the end of the recession in 2009 and the end of last year.

Flaherty’s March 29 budget, which forecast surpluses beginning in 2015, projects the deficit for the fiscal year that began in April will drop to C$21.1 billion ($21.1 billion) from C$26.2 billion in the previous fiscal year. Flaherty’s balanced-budget goal hinges on his government firing 12,000 workers and deferring defense spending.

Pretty Close

“You’ll see the numbers and we’re pretty close to balancing,” Flaherty said in Mexico City, referring to the fiscal update. “When you are looking at a budget of C$275 billion and you are looking at a few billion dollars of deficit you are pretty close.”

Flaherty last month lowered the forecast for growth in nominal gross domestic product to 3.4 percent in 2012 from 4.6 percent in March, and cut the 2013 outlook to 4.0 percent from 4.4 percent. The forecast of the average growth rate for nominal GDP in the 2012-16 period was reduced to 4.2 percent from 4.4 percent. Changes in nominal GDP more accurately reflect swings in the government’s tax base.

“We know the revenues are off, they are not dramatically but they are off a bit, and we’ll have to adjust for that,” Flaherty said on Oct. 29. “They are not off enough that I need to worry about the fiscal track.”

External Environment

Flaherty has also said the Canadian government would be pragmatic and respond further if an external shock triggers another recession.

The country’s economy grew by 5.9 percent in 2011 in nominal terms. The slowdown in 2012 reflects in part falling prices for the country’s commodities. The Bank of Canada Commodity Average Price Index has averaged 637.94 this year, 5.1 percent lower than the 2011 average.

Real GDP, which measures volumes and excludes the impact of falling commodity prices, will average 2.3 percent between 2012 and 2016, the same as the March budget, Flaherty said last month. He lowered his estimate for 2013 growth to 2 percent from 2.4 percent, while raising it over the following three years.

Helping offset the impact of any revenue slowdown are lower borrowing costs. Ten-year government bond yields have averaged 1.89 percent this year, compared with budget forecasts for an average 2.2 percent in 2012. A one percentage-point increase in interest rates would raise debt charges by about C$1.7 billion and boost the deficit by C$600 million, the 2012 budget estimated. It didn’t say if lower interest rates would yield similar-sized savings.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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