Saturday, September 15, 2012

Canada’s Flaherty Remains Skeptical of Global Risks Despite Positive Economic Indicators

On Friday, August 31, 2012, Canada’s Finance Minister Jim Flaherty reported positive economic indicators and acknowledged global risks that threaten the Canadian economy. Flaherty announced the country’s second-quarter gross domestic product (GDP) growth rate of 1.8%, the best among the G7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States). Statistics Canada credits business investment for this growth, which grew by 2.3% compared to last quarter.

Flaherty also announced that the government’s budget deficit—a negative balance between government revenues (e.g. taxes) and government spending—is 1.14 billion Canadian dollars (C$), which is half of last year’s C$2.26 billion budget deficit. Canada slashed its budget deficit by increasing its tax revenues and decreasing its government spending. Tax revenues in June 2012 increased 4.2% to C$20.49 billion compared to June 2011 due to increases in the income tax rate and the Employment Insurance rate—a percentage of Canadians’ earnings paid to the Employment Insurance system in exchange for unemployment benefits. Government spending in June 2012 declined 1.3% to C$19.07 billion compared to June 2011, which was largely due to a 14% spending cut in the defense department.

Despite an increased GDP growth rate and a decreased budget deficit, Flaherty warned that the Canadian economy still faces the risk of an economic downturn. Because Canada competes on a global scale, it faces risks in the global economy. For instance, the on-going European debt crisis and the slow expansion of emerging economies caused the prices of commodities to fall, as investors fear that the demand for commodities will continue to decrease if Europe and emerging economies fail to stimulate their economies. These risks affected Canada as the prices of Canada’s commodities fell by 5.1% compared to last year.

Flaherty reassured Canadians that if these risks create a downturn in the economy, the government would resort to actions it took during the 2008 financial crisis. In 2008, the government boosted spending on infrastructure projects and decreased income tax rates to protect jobs and encourage consumer spending. These measures helped ease the recessionary blow. However, because the Canadian economy currently has positive growth rates and the government is on track to meet budget projections, these measures are not needed at this time.

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