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UNCLAS SECTION 01 OF 03 OTTAWA 001502 
 
WHITE HOUSE FOR COUNCIL OF ECONOMIC ADVISORS 
 
STATE FOR WHA, EEB 
 
STATE PASS USTR 
 
COMMERCE FOR ITA/MAC 
 
TREASURY FOR IA/NEPHEW 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EIND CA
SUBJECT: Harper Government Gives Snapshot of Canada's Economic 
Health 
 
Refs:  (A) Ottawa 1495 (B) Ottawa 1395 (C) Ottawa 1372 
 
Sensitive But Unclassified.  Protect accordingly. Not for internet 
distribution. 
 
¶1. (SBU) Summary:  The Conservative government's November 27 
Economic and Fiscal Statement stated that Canada is well positioned 
to weather the uncertainty and risks arising from the global 
financial crisis.  Finance Minister Flaherty said the health of 
Canadian banks and the financial positions of households, 
corporations, and government would mitigate the worst impacts of the 
international downturn.  The government expected the Canadian 
economy to grow 0.6 percent in 2008 and 0.3 percent in 2009, and it 
planned to run balanced budgets through FY2012-13 - but would not 
rule out future deficits.  Flaherty indicated that the government 
would likely wait until the New Year before unveiling a possible 
fiscal stimulus package as recommended at the G20 Summit in 
Washington last November.  Senior Bank of Canada officials privately 
stated that monetary policy remains effective in Canada.  As a 
result, the Harper government may look to the Bank to stimulate the 
economy - instead of using fiscal policy - in the coming months. 
End summary. 
 
Good Fiscal Position May Make Economic Challenges Less Daunting 
------------------------ 
 
¶2. (U) In a November 27 message that triggered a contentious 
political row over political party funding (ref a), the Conservative 
government's Economic and Fiscal Statement said Canada is well 
positioned to weather the uncertainty and risks arising from the 
global financial crisis.  (The Economic and Fiscal Statement is 
typically released in November and provides an update of Canada's 
economic and fiscal situation ahead of the federal budget, which is 
typically due in late February or early March.  The government has 
since said the budget would be tabled by January 27, the day after 
the House is scheduled to return from its year-end recess.) 
Delivering the Statement in the House of Commons, Finance Minister 
Jim Flaherty said that the sound footing of Canadian financial 
institutions (refs b, c) and the relatively strong financial 
positions of households, corporations, and government should 
mitigate the negative impacts of the international economic 
downturn. 
 
¶3. (SBU) Flaherty stated that private sector economic forecasters 
expect a "technical recession" in Canada with negative growth in the 
fourth quarter of 2008 and the first quarter of 2009, despite 
full-year real GDP growth of 0.6 per cent in 2008 and anticipated 
growth of 0.3 per cent for 2009.  (For its part, the Bank of Canada 
sees 0.6 percent GDP growth in both calendar 2008 and 2009 due to 
tighter credit flows, falling external demand - primarily from the 
United States - and a sharp fall in commodity prices.) 
 
¶4. (SBU) The government's Statement said Canada enjoyed a strong 
fiscal position when the global financial crisis started, with a 
budget surplus of C$9.6 billion in FY2007-08 - the best of any G7 
country.  (Note:  Canada's fiscal year runs April 1 to March 31.) 
The Statement was clear, however, that the surplus would shrink next 
QThe Statement was clear, however, that the surplus would shrink next 
year.  Canada had only a C$804 million budget surplus from April to 
September 2008, compared to C$6.63 billion for the same period in 
¶2007.  While the government said it expects to run balanced budgets 
and even small surpluses through FY 2012-13, global economic 
uncertainty made it impossible to rule out future deficits. 
Flaherty, however, promised no "structural deficits."  (Federal 
deficits are a highly sensitive political issue in Canada; in the 
early 1990s Canada faced an environment of rising debt and deficits 
and increasing uncertainty about its ability to continue to borrow 
money from domestic and international institutional investors, and 
the cost of this source of funds.  Subsequently, from roughly 1993 
to 1998, the Liberal government of Prime Minister Jean Chretien, 
with Finance Minister Paul Martin leading the way, erased the 
 
OTTAWA 00001502  002 OF 003 
 
 
deficit by slashing federal spending.  Since that time all Canadian 
political parties have subscribed to the shibboleth of "no budget 
deficits.") For their part, opposition political parties said the 
government's numbers were not credible and that the government was 
probably already in deficit. 
 
¶5. (SBU) The government's Statement said the sharp decline in world 
commodity prices in 2008 - primarily for energy and forestry 
products - will reduce the level of Canada's nominal GDP in 2009 and 
2010 compared to earlier estimates.  (The government uses nominal 
GDP as the broadest indicator of Canada's tax base.  The Bank of 
Canada has privately noted that as Canada's nominal GDP growth 
slows, government spending may come under further pressure.)  The 
Statement also said the sharp appreciation of the Canadian dollar in 
2007 and the 2008 U.S. economic slowdown hurt export-intensive 
sectors, particularly manufacturers and forestry-related products. 
The government noted that some 75 percent of Canadian manufacturing 
production is located in central Canada (Ontario and Quebec) and 
that more than 80 percent of central Canada's manufacturing exports 
are shipped to the United States. 
 
Canada's Economic Strengths 
--------------------------- 
 
¶6. (U) Despite the challenges noted above, Flaherty - and the 
government's Statement in more detail - stated that Canada may be 
well positioned to weather the global economic storm.  In 
particular, the Statement noted that: 
 
--The Canadian housing sector is sound, with subprime mortgages 
accounting for less than 5 percent of new mortgages.  Canadian 
lenders must also insure against default any mortgages with less 
than a 25 percent down payment; 
 
--Canada's banks and other financial institutions are liquid and 
well capitalized, and have lower leverage ratios than their 
international peers; and 
 
--Core Consumer Price Index (CPI) inflation has remained low, stable 
and predictable - and is within the Bank of Canada's targets. 
 
Strengths of the Canadian Financial System 
------------------------------------------ 
 
¶7. (U) The government's Statement also stressed the underlying 
strengths of the Canadian financial system: 
 
--Canadian capital requirements for financial institutions are well 
above minimum international standards. 
 
--At the start of the financial crisis, Canadian banks' capital 
buffers on risk-adjusted assets were 9.5 percent, while many global 
banks had capital ratios of only 6 or 7 percent. 
 
--Canadian banks are also less leveraged than many of their 
international financial institution counterparts.  Canadian banks' 
overall assets amounted to less than 20 times their capital, while 
major U.S. banks had 30 times more assets than capital and some 
European banks were leveraged up to 50 times. 
 
--Large Canadian investment houses are owned by banks, and are 
regulated on a consolidated basis by the Office of the 
Superintendent of Financial Institutions. 
 
No Stimulus Announced Yet - Other Measures in Meantime are Modest 
---------------------------- 
 
¶8. (SBU) Flaherty also announced plans focused on the federal 
Q8. (SBU) Flaherty also announced plans focused on the federal 
government's internal economy such as a limiting wage increases to 
public servants, limiting federal workers' right to strike (although 
 
OTTAWA 00001502  003 OF 003 
 
 
in the political firestorm of the weekend, they have backtracked 
from that stance), cutting federal spending on travel, hospitality, 
conferences, exchanges and political services, and most 
controversially, eliminating federal subsidies to support political 
parties that receive more than 2 percent of the national vote (See 
ref a; again something the government appeared to retreat from in 
the wake of the political reaction). 
 
¶9. (U) Minister Flaherty made it clear the government will likely 
wait until the actual budget (which, according to statements on the 
weekend from the Finance Minister will come, atypically, in late 
January 2009) before unveiling a possible fiscal stimulus package as 
recommended at the G20 Summit in Washington on November 14-15. 
Flaherty - and the government's Statement - said the Harper 
government's tax cuts since 2006 were in effect a pre-emptive 
stimulus package, with Canadian taxpayers paying C$31 billion less 
in taxes (almost 2 percent of GDP) in FY2009-10.  The government's 
Statement also noted the importance of infrastructure spending in 
providing fiscal stimulus and said budget programs supporting 
provincial, territorial and municipal infrastructure projects are 
scheduled for a large increase to C$6 billion in 2009.  The 
government also stated that it is looking to speed up the roll-out 
of anticipated infrastructure projects. 
 
¶10. (SBU) Comment:  The IMF has recommended that countries spend an 
average of 2 percent of GDP on fiscal stimulus actions.  Senior Bank 
of Canada officials privately tell us that each country faces 
differing circumstances, and that monetary policy is still effective 
in Canada.  As a result, the Canadian government may look to the 
Bank to use monetary policy in place of fiscal actions to stimulate 
the economy in the coming months.  The Bank expects to make further 
stimulus rate cuts - on top of the 75 basis points in October 
2008(and the 225 basis points since December 2007). Currently the 
Bank of Canada "key lending rate" to banks rate is 2.25 percent. The 
next Bank announcement on interest rates is scheduled for Tuesday, 
December 9.  Bank officials also state that cutting consumption 
taxes - as, in part, the Harper government has done - is an 
inefficient fiscal stimulus that does little to change spending 
behavior.  The officials say that more efficient spending - such as 
on infrastructure projects or direct transfers to individuals- has a 
greater domestic multiplier effect than cutting taxes. 
 
¶11. (SBU) Comment: Given the structure of the Canadian economy (see 
para 5) Embassy would not be surprised if the government's 
relatively rosy projections do not face at least some downward 
revision in coming months. End comment. 
 
Wilkins