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Why the Conservatives might have trouble meeting their financial promises

Finance Minister Jim Flaherty speaks in Ottawa on Sept. 19, 2013.

DAVE CHAN/The Globe and Mail

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Riding a ripple of modest economic growth is at the heart of the Conservative government's plan to balance the books before the next election.

Every decision the government will make over the next two years must fit within that promise, which is sure to be repeated in Wednesday's Throne Speech.

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Finance Minister Jim Flaherty is so confident of this growth that he has become more and more assertive – stating the books will be balanced "without doubt" by 2015.

Yet there is an increasingly real possibility that the modest growth Ottawa is counting on could vanish by the end of the week. Even if the U.S. Congress avoids a default on its debt, the likely scenario of a short-term fix to the spending standoff in Washington risks curbing expectations for U.S. growth.

Mr. Flaherty's numbers are currently based on an assumption of 2.8 per cent growth in U.S. gross domestic product in 2014, followed by 2.9 per cent growth in 2015. Those estimates are now very much in question.

Doug Porter, BMO Capital Markets' chief economist, notes that there have been small downward revisions for growth expectations both for Canada and the U.S. recently.

"Nothing major yet. We're still hopeful something does get worked out without significant lasting damage to the North American economy, but I have to admit we're on edge," he said.

Even if the worst is avoided, Mr. Porter said he is "not 100 per cent convinced" that Ottawa's finances are on a solid path to balanced books by the 2015-16 fiscal year.

"Even without a disappointment on the U.S. front, I think it's going to be a bit of a challenge to get to their targets as they stand," he said. "If the U.S. runs into heavy weather thanks to our friends in Washington, it just makes the challenge that much taller."

In that context, there are no expectations that Wednesday's Throne Speech will signal new spending on the horizon. Ottawa's books are too tight and the economy is too uncertain.

That explains why signs point to a speech with an economic message that is heavy on low cost items like boosting trade and helping consumers. On trade, there is growing buzz that an agreement-in-principle between Canada and the European Union could be signed soon. The speech's language on the negotiations will be watched closely.

"My understanding is we're very, very close," said Brian Lee Crowley, who recently chaired a policy retreat for Mr. Flaherty and is the managing director of the MacDonald-Laurier Institute think tank.

For consumers, Industry Minister James Moore said over the weekend that Ottawa will force television service providers to let customers pick only the channels they want, rather than having to choose among bundles of channels. Commitments are also expected around reducing tariffs in order to shrink the price gap between goods sold in the U.S. and Canada.

An extensive study of the price discrepancies by the Senate's national finance committee found there were no easy answers as to why the same goods cost more in Canada. The committee's February report recommended a wide-ranging review of Canadian tariffs, a move the committee's chairman will be hoping to see announced on Wednesday.

"I'm not convinced we need this tariff system at all," said Liberal Senator Joseph Day, estimating that a major reduction in tariffs could give the economy a boost.

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"We need that stimulus right now," he said.

The downside is that a quick drop in tariffs to help consumers could come as a shock to Canadian manufacturers should they suddenly be faced with much cheaper competition from abroad.

"We'd want to make sure that as they look at specific sectors of tariff reduction that most Canadians are probably not going to be as affected by it," said Jayson Myers, president and CEO of the Canadian Manufacturers and Exporters.

"I think they'll probably take a look at some consumer products, especially like clothing, sports products, books, things like that," he said, listing products that are less likely to be manufactured in Canada.

Bill Curry covers finance in the Ottawa bureau.

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