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‘We have contingency plans. If we need to create more stimulus in the Canadian economy, we will,’ Finance Minister Jim Flaherty said Friday in Whitby, Ont.Kevin Van Paassen/The Globe and Mail

Exactly four years after the collapse of Lehman Brothers Holdings Inc. set the global economy on a downward spiral that is still reverberating around the globe, federal Finance Minister Jim Flaherty is grappling with a domestic economy stuck in low gear.

With Canada's growth hovering below the 2-per-cent mark, unemployment at 7.3 per cent, and an unresolved European crisis looming over the globe, Ottawa is walking a fine line between staying on course to reduce its deficit and spending enough to keep the economy bubbling.

Mr. Flaherty outlined some of his plans in an interview with Globe and Mail reporter Richard Blackwell at his constituency office in Whitby, Ont., just east of Toronto.

What will be done if the economy weakens further?

"We have contingency plans. If we need to create more stimulus in the Canadian economy, we will.

"We have tax measures that we can take to stimulate the economy, we have infrastructure spending and other measures that we can do. We know what kind of projects can be done quickly [to] create jobs immediately.

"I would much prefer to have continuing modest economic growth, [and] keep us on the path toward balanced budgets in the medium term. But if we have to take action, we will. We are not going to be ideological about it, and throw the baby out with the bathwater to get a balanced budget in a year or two. We have to be realistic about protecting Canada, protecting the Canadian people – especially young people who are unemployed."

How likely is it that Ottawa will have to take action?

"Things are slow, and growth is modest in North America, but it is not without growth, which means that we can manage. Now if we get a shock from Europe or a shock from the United States, then we will have to be pragmatic and flexible. We will have to do what we need to do."

On the high dollar and whether Ottawa should intervene.

"There is an agreement between the Bank of Canada and me as finance minister, about what we could do if we both agreed. There are a couple of steps we can take in order to affect the market and the dollar. But the reality is, whatever we did would have a short-term, moderate influence. These are temporary measures. They don't in the long term affect the value of a nation's currency, which to a large extent depends on the fundamentals of that nation's economy. Our fundamentals are relatively strong."

On the overheated housing market.

"We were concerned about the level of indebtedness related to residential housing, including condominiums, [so] four times we intervened in the mortgage insurance market in the last four years. And it is working. Even the Toronto and Vancouver markets have calmed. This is a good thing. There is a tranquillity in the market now that is desirable."

Where the big concerns remain internationally.

"We need the Europeans to recapitalize their banks. We need to know what is inside some of those black-box banks – where we actually don't know how bad they are. And we need the Europeans to take action with their own resources to recapitalize their banks and to deal with those countries that have severe issues of sovereign indebtedness. It has been quite disappointing that the Europeans have not been able to grapple with this. I understand that they don't have a central ministry of finance and it is difficult for them to accomplish expeditious decision-making. But we don't want to have the kind of resolution that comes out of a dire crisis.

"[In the United States] they need to have a medium-term plan to control deficits and start reducing their public debt. That will require some decisions that will not be that popular."

On a potential strike at the Big Three auto makers.

"I am very concerned about the labour dispute in the auto sector. This is very worrisome, because this is a sector that is massively important, not just for Ontario, but for other regions of the country.

"I know the presidents of the companies, and I know Ken Lewenza, the head of the union. I encourage all of them to come to an agreement as quickly as possible. This is not the time to have these kinds of disputes, because of the seriousness of the global economic situation."

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