MONTREAL — The "fiscal cliff" of potentially damaging U.S. tax hikes and spending cuts is the biggest issue facing the Canadian economy, Bank of Canada Governor Mark Carney said Thursday.
Carney, in Montreal for a Canadian Club speech, said the effects of the two competing U.S. policy decisions would have a ripple effect on Canada unless there's a deal by the end of the year.
If the combination of tax hikes on the middle class and deep spending cuts kick in, experts believe the United States would fall into recession and Canada would follow. Fears of the fiscal cliff already appear to have reduced business investment.
"It's a big risk, and it's almost an immediate risk," Carney told reporters following his speech. "The impact would begin on January 1st if there's no movement among American authorities."
The hardest-hit areas of the Canadian economy would be exports and business investments, said Carney.
Finance Minister Jim Flaherty flagged concerns Wednesday about the ability of U.S. legislators to address the issue.
Newly re-elected President Barack Obama and the Democrat-led Senate would have to make a deal with the Republican-controlled House of Representatives to avert a potential crisis.
Flaherty has also said his government would not allow Canada to fall into a recession and would introduce appropriate stimulus measures to combat any U.S. downturn.