UPDATE 4-Canada's veteran finance minister quits, budget surplus in sight

Tue Mar 18, 2014 10:01pm EDT

* Flaherty quits Cabinet, will return to private sector

* Natural Resources Minister Joe Oliver reported to be successor

* Flaherty says decision not related to his rare skin disease (Updates with report of new finance minister, details)

By Louise Egan and Randall Palmer

OTTAWA, March 18 (Reuters) - Canada's Jim Flaherty, the long-serving Conservative finance minister who helped steer the economy through the global financial crisis, resigned from the cabinet on Tuesday, leaving the country on track to balance its books by 2015.

Flaherty, 64, ends the third-longest stint as finance minister in the country's history. He has been suffering acutely from a rare skin disease, though he denied his resignation had anything to do with health.

"Yesterday, I informed the Prime Minister that I am resigning from Cabinet. This was a decision I made with my family earlier this year, as I will be returning to the private sector," he said in a statement accompanied by a picture of him standing at an office door waving goodbye.

Analysts said Canada's Conservative government was likely to stick with the plan to balance the budget next year, but there was less certainty about who would succeed Flaherty and how the government would spend surpluses projected for coming years.

Canada's public broadcaster CBC reported that Natural Resources Minister Joe Oliver would succeed Flaherty, without citing sources. Prime Minister Stephen Harper's chief spokesman, Jason Macdonald, declined to comment on the report.

Two government sources, who declined to speak publicly because of the sensitivity of the issues, told Reuters earlier on Tuesday that they believed Oliver was the best candidate for the job because of his extensive financial industry expertise and because he represents a district in the politically valuable Toronto area.

Oliver is currently the government's main proponent of TransCanada Corp's controversial Keystone XL pipeline to the United States.

Other leading contenders are believed to be Industry Minister James Moore, Treasury Board President Tony Clement, Foreign Minister John Baird and Employment Minister Jason Kenney, who all share a conservative fiscal policy in line with Flaherty's.

Moore has been deeply fiscally conservative at the cabinet table and Employment Minister Kenney is seen as an independent-minded social conservative.

A strike against Kenney is that he is from Alberta, the same province as Harper, who is thought to prefer a minister from Ontario to help him win votes there ahead of the 2015 election. Moore is from the Western province of British Columbia.

Foreign Minister Baird is deeply engaged in the Ukraine crisis. Treasury Board President Clement is believed to aspire to succeed Harper, which may make the current prime minister less likely to choose him.

Flaherty, a lawyer, is an outspoken man who was quick on his feet in parliamentary debates and was equally comfortable picking a fight or cracking a joke. He has been at the side of Prime Minister Stephen Harper ever since the Conservatives took power in 2006.

He cut business and sales taxes, raised spending to stimulate the economy and put through a record deficit in nominal dollar terms to counter the recession. But as the economy recovered, he cut government operations in a quest to drive that deficit to zero.

Amid speculation he might step aside to attend to his health, Flaherty stubbornly and repeatedly vowed to stay on the job until the budget was balanced. The budget plan he presented last month shows that will be achieved next year.

Flaherty said for the first time last month in an interview with Reuters that he might not run for re-election.

He will remain a member of Parliament for now.

NO POLICY CHANGE EXPECTED

Financial market players took the news in stride, as few expect any significant shift in fiscal policy by his successor.

"We know nothing that would suggest that there's any schism between himself and anybody else in the party on policy, so I would say that this is not policy related," said Mark Chandler, economist at the Royal Bank of Canada.

Doug Porter, deputy chief economist at BMO Capital Markets, said Flaherty's exit was expected, though not this soon.

He said markets were hoping for continuity.

"Whoever steps into the role, they don't have to be a carbon copy of Mr. Flaherty, nobody could be, but in terms of the broad policy thrust I think it was appropriate from a policy perspective, and most people would like to see that continue," he said.

Porter said there might be a "ripple" in the Canadian dollar, but that he saw no major implications.

EYEING THE EXIT

Flaherty presented his last budget on Feb. 11. It charted a path to surplus by cutting back spending on public sector health care plans, which came on top of other cutbacks and salary freezes introduced in previous years.

The deficit has gradually narrowed since the 2008-09 recession, helped by economic growth and lower-than-expected spending.

With the fiscal house in order, there were hints in recent months that Flaherty was eyeing the door.

He began to stray from the Conservative Party script in his public comments. The Conservatives pledged in 2011 that once the budget is balanced, they would let couples with children reduce taxes by sharing their income for tax purposes. Flaherty surprised political observers in February when he said he wasn't sure the measure would benefit society overall.

"If the Conservatives are to secure another victory once they balance the budget, the question that remains open is how is it going to be spent? So whoever's coming in will be, definitely, a big part of that discussion," said economist Chandler.

At a press conference following a meeting of G20 finance ministers in Sydney, Australia, Flaherty appeared disengaged from the broader international agenda and focused solely on Canadian fiscal issues.

Harper said he accepted Flaherty's resignation "with great reluctance" and praised him for having a steady hand throughout the crisis.

Flaherty kept a grueling schedule prior to 2013, crisscrossing the country and traveling abroad to promote the government's agenda and speaking to reporters once a week or more.

He revealed a year ago that he is battling a rare skin disease that causes painful blisters on the body. The condition is incurable but can be managed with powerful medication that has unpleasant side effects, including weight gain and mood swings.

He has dramatically scaled back his activities and often appeared red-faced and short of breath, walking very gingerly and wincing occasionally. During travel, his staff went to great lengths to minimize his walking and avoid stairs.

But he was uncomfortable talking about the issue, according to sources close to him, and on Tuesday denied that his health played a role in his resignation.

"I am happy to report that I am on the road to a full recovery and the decision to leave politics was not related in any way to my health," Flaherty said.

"This decision was made because it is the right one for me and my family at this time." (Additional reporting by Randall Palmer, Leah Schnurr, Andrea Hopkins, Allison Martell and Solarina Ho; Editing by Phil Berlowitz, Jeffrey Hodgson, Peter Henderson and Eric Walsh)

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