MONTREAL – Bank of Canada governor Mark Carney says the so-called fiscal cliff looming over U.S. lawmakers is the most imminent threat facing the Canadian economy.
Carney, speaking in Montreal, said the potential fallout from political gridlock on a solution that would extend U.S. tax cuts and spending beyond the new year is a “great risk” and “almost immediate risk” to the domestic economy.
“It could well have implications for policy here in Canada, but the good news is that Canadian authorities have flexibility as both the minister of finance and I outlined.”
Finance Minister Jim Flaherty and Carney both pledged Wednesday to take action to support the economy if a shock from the U.S., or Europe, threatened to once again plunge the country into recession.
Discussion surrounding the all-important fiscal precipice has heightened since Tuesday’s U.S. election resulted in a second term for Democratic President Barack Obama, as well as a Republican-dominated lower house.
The ideological split among lawmakers already threatened to wreak havoc on the American economy last year when the president and Congress could not agree on a deal to raise the country’s debt ceiling, which resulted in a debt rating downgrade and a market sell off.
Economists fear that unless the two sides co-operate on a new budget arrangement soon, about $600 billion in tax cuts and spending will end abruptly, robbing the U.S. economy of about four percentage points in growth.
Flaherty has said that would push the U.S. into recession quickly and the Canadian economy would be sure to follow.
He added Wednesday that all his colleagues at the G20 meeting of leading economic powers last weekend in Mexico expressed concern about how U.S. policy-makers would deal with the threat.
Economists view avoiding the fiscal cliff as a no-brainer since its repercussions are so severe, but both sides have been unwilling to move off core positions — Democrats insist on tax hikes for the rich, which the Republicans have so far refused to consider.