Flaherty says U.S. needs credible fiscal plan to reduce deficit over time

Time is of the essence for U.S. lawmakers to agree on a credible plan to reduce its government deficit over time, Finance Minister Jim Flaherty said Friday.

Flaherty told a New York audience of the Foreign Policy Association that a short-term political agreement is also necessary so investors can be confident the U.S. economic recovery will continue.

The U.S. faces what is being called a fiscal cliff — a combination of tax and spending measures that will take effect if lawmakers are unable to reach a budget deal before the end of the year and could tip the struggling economy back into recession — bringing Canada down with it.

"This is a very serious risk and it is not to be taken lightly, it will have rather rapid effects on other economies including Canada's" Flaherty told reporters after the speech on a conference call from New York.

Flaherty said he made the visit to encourage U.S. leaders to "act decisively" so that a deal is reached as soon as possible before the clock ticks further toward a Jan. 1 deadline to avoid "slippage" in economic output both in the U.S. and Canada.

Bank of Canada governor Mark Carney has called the fiscal cliff the most imminent threat facing the Canadian economy.

Flaherty said allowing the planned measures to take place in the New Year, thereby allowing a potential recession is not a viable option.

In meetings with economic leaders over the past two days, "not one of them suggested to me that it would be a good idea to go beyond January first without some temporary agreement between the administration and Congress," he said.

But he also expressed faith in U.S. lawmakers that they would be able to figure out a solution palatable to both sides. The sticking point is the president's plan to let Bush-era tax cuts for the highest income Americans expire, a move Republicans oppose.

"We all know the U.S. is facing challenges on the fiscal front, but as with previous challenges, including two world wars, I might add, I have every confidence they will overcome these in a way that continues to inspire," he said.

He wasn't the only politician in an optimistic mood Friday, with congressional leaders from both U.S. parties voicing fresh hope after meeting with newly re-elected President Barack Obama about avoiding the fiscal cliff.

The goal of the high-pressure talks to come is to produce a multitrillion-dollar deficit-reduction plan that can take the place of the across-the-board tax increases and spending cuts on both the civilian and military side.

Flaherty said Canada's recovery from its own dire debt troubles in the 1990s and resilience in the face of the most recent recession can serve as inspiration for countries facing their own fiscal crises.

Earlier this week, the Harper government pushed back the target date for eliminating Canada's own deficit by one year due to global economic weakness that has cut into commodity prices and tax revenues.

The update showed a bottom line worse than many expected, with the deficit at $26 billion, up $5 billion from the March budget forecast. The new calculation is that Ottawa will finally show a surplus of $1.7 billion in 2016-17.

On Friday, Harper said the government still intends to balance the budget before the next election.