Canadian economy resilient,no budget gap-finmin

By Steven C. Johnson and Lucia Mutikani

NEW YORK (Reuters) - Canada's economy can withstand a deeper U.S. slowdown with only a minor impact on growth and can maintain a budget surplus in the current fiscal year, Finance Minister Jim Flaherty said on Wednesday.

In an interview with Reuters, Flaherty said he did not anticipate additional tax cuts during this period, having already delivered a fiscal stimulus package that he said amounts to 1.4 percent of gross domestic product.

He said previous tax cuts, lower interest rates, and relatively low inflation have helped Canada's economy weather the downturn in the neighboring United States, its biggest trading partner.

"I am still satisfied that we will have positive economic growth in Canada this year. Our economy is resilient," he said, adding the economy may grow at a 1.6 percent rate this year instead of 1.7 percent as previously projected.

"We are in the right area for our growth, we have low interest rates and relatively low inflation. The fundamentals are fine, they have not changed," Flaherty said.

Canada's minority Conservative government has cut the goods and services tax twice since coming to office in 2006, but Flaherty said budget discipline should prevent additional cuts.

"I wouldn't anticipate we would have the resources to do further major tax cuts this fiscal year," he told Reuters in an interview. "I would not want to raise any expectations on that."

Credit rating agency DBRS said this week Canada may face a small budget deficit this year in the order of 0.1 to 0.2 percent of gross domestic product for the first time since 1996-97.

But Flaherty told Reuters, "We are not going to run deficit budgets."

Canadian Liberal and Conservative governments have run balanced budgets for 11 straight years, and the country's strong fiscal footing compared to its G7 partners has become a source of national pride.

If the current Conservative government, which has billed itself as a prudent steward of taxpayers' money, were to fall into deficit, it would likely take a beating in the polls.

But Flaherty said even with a slightly slower-than-expected economic growth rate, a budget shortfall this year was out of the question.

"We will be okay on the revenue side. We have built in a cushion with respect to debt repayment and we can restrain spending from time to time," he said.

On Tuesday, the Bank of Canada lowered its 2008 growth forecast to 1.4 percent from 1.8 percent and said slower U.S. growth will exert a "significant drag" on the Canadian economy. It also revised down its growth estimate for next year to 2.4 percent from 2.8 percent.

"These assessments of economic growth are all within a range, and I'm comfortable within that range," he said.