UPDATE 2-Canada may cut spending more to tackle deficit-Flaherty

Fri Mar 1, 2013 3:38pm EST

* Finance Minister: More gov't "sacrifice" may be needed

* Lower-than-forecast growth hitting revenues

* Expects forecasts used in budgeting to be downgraded

* Frustrated by U.S. fiscal failures; Europe a bigger threat

By Louise Egan and Randall Palmer

OTTAWA, March 1 (Reuters) - Slow Canadian economic growth means the government will have lower revenues than initially forecast in drawing up the next budget and some ministries may need to cut spending further, Finance Minister Jim Flaherty said on Friday.

He said he continues to plan to eliminate the federal government's relatively small deficit by 2015 in spite of the bigger obstacles.

"We also look at program spending, that's true too. And we can do some more tightening there if necessary," he told reporters when asked how he would adapt the budget to account for weaker-than-expected growth.

"But we start with a premise that we're going to balance the budget in 2015 and it may need some more sacrifice in budgeting among various ministries of the government," he said.

Canada said goodbye to over a decade of budget surpluses during the global financial crisis when it pumped stimulus cash into the economy and felt the effects of previously announced tax cuts. The ruling Conservatives expect a deficit of about C$25 billion in the 2012-13 fiscal year, or about 1.4 percent of the size of the economy, and have vowed to balance the books in time for the next election in 2015.

Flaherty, who said continued deficits are "not an option", expressed frustration at Washington's inability to come up with a credible fiscal plan, speaking as the White House and congressional leaders failed to reach a deal to avoid $85 billion in spending cuts, also known as the "sequester."

Ottawa says the cuts will shave 0.4 percentage point off U.S. growth. Flaherty could not say what the impact would be on Canada, but said it was unlikely to be huge as long as the U.S. economy is growing. The bigger threat to global stability right now is Europe, he said.

Flaherty was speaking after data on Friday showed sluggish Canadian economic growth in the fourth quarter for the weakest six months since the recession.

The deep discount on Western Canadian crude versus imported oil is also having a "significant" impact on corporate tax revenues, he said.

Flaherty said he expects private sector forecasters to lower their 2013 growth assumptions, on which the budget is based.

"Next Friday ... I will meet with the private sector economists here and I expect, and I'm sure you all expect too, that their projections will be lower than they were the last time we met in the autumn," he told reporters.

"(This) means I will have to account for that in our budget projections including the revenue projections, which I will do. And we will stay on track to a balanced budget in the medium-term," he said.

Another way of finding savings includes closing tax loopholes, he said.

Flaherty is widely expected to deliver the budget in late March.

OPPOSITION SAYS MORE CUTS A MISTAKE

The main opposition party, the New Democratic Party (NDP), immediately slammed the idea of additional spending cuts, saying it would harm the already stumbling economy.

NDP legislator Guy Caron urged Flaherty to invest in long-term infrastructure projects and restore funding to public services that were hit in the 2012 round of cutbacks, which he said could save as many as 120,000 jobs.

"They are compounding the mistakes they have done, with the cuts they have imposed, and if they go even further I think we'll see an impact on the Canadian economy," Caron said.

Ian Lee, at Carleton University's Sprott School of Business, rejected Caron's idea that the weak Canadian growth was partly because of the 2012 budget cuts, blaming instead the weak economies in the United States and Europe.

Small as Canada's fiscal shortfall may be compared to that of the United States or United Kingdom, it needs to be addressed now, he argued.

"For the last 40 years, western countries, all the OECD countries, have been borrowing, borrowing, borrowing, and we went from about 30 percent of GDP in the 1960s, we're now up to 80 or 90 percent," he said.

"And so that argument is I think a facile argument, because you continually kick the problem down the road and never confront the problem."

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