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U.S. Politics After election, Canada eager for U.S. to avoid fiscal cliff

Dusk sets in over the U.S. Capitol building hours before U.S. President Barack Obama is set to deliver his State of the Union address to a joint session of Congress on Capitol Hill in Washington, January 24, 2012.

JONATHAN ERNST/REUTERS

With the election over, the White House and the U.S. Congress can now get to work on preventing the country from hurtling over the "fiscal cliff" – and that is good news for Canada.

Hundreds of billions of dollars worth of tax cuts and spending programs are set to end automatically at the end of the year unless the two branches of government can reach a deal to avoid that. Withdrawing so much money from the economy, so suddenly, would likely throw the United States into serious recession, according to the International Monetary Fund and numerous economists. It would cut roughly four percentage points off annual economic growth at a time when the world's largest economy is growing at a rate of about 2 per cent.

A deal must be cut before the new Congress is installed in January . The entire world is watching, especially after last year's fiasco in which Democrats and Republicans fought until the 11th hour before reaching an agreement to raise the federal government's borrowing limit.

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The fiscal cliff matters a great deal to Canada, and not just because 70 per cent of the country's exports go to the United States and the two economies are so interwoven.

"A strong U.S. economy is very important for the world," said William Robson, president of the C.D. Howe Institute in Toronto. "We want the U.S. to be strong in every sense."

For months, the U.S. economy has been held back by an unusual wave of uncertainty, spreading nervousness among businesses and consumers everywhere, including Canada.

The end of the election campaign clears at least some of that anxiety. U.S. companies are sitting on nearly $6-billion worth of cash, delaying key investments because they're so worried the economy might slide back into recession.

"Economic uncertainty is choking the economy, simply because there is no clear path for monetary or fiscal policy," pointed out economist John Makin of the American Enterprise Institute in Washington. "Only when the Federal Reserve and lawmakers begin to take steps to reduce the uncertainty will the U.S. economy begin to show signs of growth."

A new Congress and a fresh mandate for the White House creates an opportunity to find a better route to reining in the country's $1.1-trillion budget deficit and slowing the growth of its debt, now $16-trillion (U.S.).

"There's a window that opens," the C.D. Howe's Mr. Robson said. "They can talk substance. The opening is there."

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But Doug Porter, deputy chief economist at the Bank of Montreal, pointed out that it will likely take months before a longer-term plan is in place to manage the debt. "The fiscal cliff will still be out there for a few more months," Mr. Porter said.

Even before Tuesday's election, there were signs that the U.S. economy was improving. The long housing slump south of the border appears to be over, the auto industry is doing better, job creation is picking up steam and consumer confidence has reached its highest level since the recession. In a recent forecast, Export Development Canada said the United States would likely grow 2.8 per cent next year, up from 2.3 per cent this year.

That's positive for Canada, where the economy has been steadily losing steam in recent months.

If history is any guide, Canada's economy typically does much better when a Democrat is in the White House. In a recent paper for the Canadian International Council, University of Montreal political scientist Pierre Martin argued that Canada grows faster, exports more, its factories crank out more products and unemployment is lower during Democratic administrations. That's based on tracking the economy as far back as the 1950s.

Prof. Martin said the evidence contradicts the conventional wisdom that the pro-free-trade policies of Republican administrations are better for Canada than the pro-growth policies of the Democrats.

Macroeconomic policies "ultimately matter much more for the health of Canada's economy as a whole," Prof. Martin said in the paper.

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