Last week, Goldman Sachs and other industry experts predicted that the Canadian dollar would stay on par with the U.S. dollar throughout 2011. On Wednesday, Canadian Finance Minister Jim Flaherty agreed, citing Canada's strong economy, which he believes will continue to thrive in the New Year.
Delivering a speech at the Woodrow Wilson Center for International Scholars in Washington, D.C., Flaherty said that it was "unreasonable" for Canadians to "expect the Canadian dollar to go back to the days when it was significantly devalued vis-a-vis the U.S. dollar."
Flaherty's speech coincided with the loonie hitting a two-and-a-half year high on Wednesday, reaching U.S. $1.0154. However, the Canadian dollar dropped off significantly Thursday morning, prompting some speculation that claims about its value might have been premature.
The loonie is likely to bounce back, but remaining at or above parity could cause problems for Canadian exporters. Flaherty maintains that his plans to continue scaling back the corporate tax rate will help in this regard.
The falling corporate tax rate, which dropped from 18 percent to 16.5 percent in January and is slated to decrease to 15 percent in 2012, has been a point of contention across Canadian politics. The Conservative Party and Canadian Prime Minister Stephen Harper are adamant that the tax cuts will draw businesses to Canada and create jobs, while the Liberal Party and the New Democratic Party insist that the cuts will only result in driving up the national deficit.
Canadian Manufacturers & Exporters (CME), Canada's largest industry and trade association, released a report Wednesday in support of the tax cuts. According to CME, the federal government tax rate reductions, teamed with reductions by provincial governments over the next two years, will see Canada's average combined statutory corporate tax rate fall to 25 percent. CME estimates that the tax cuts will create approximately 98,800 jobs and increase profits 10 percent across all Canadian business sectors in 2011 and 2012.
"The numbers show that corporate tax cuts are critical drivers of the Canadian economy," said Jayson Myers, president & CEO of CME. "The question is not if we can afford corporate tax cuts; it's can we afford not to make tax rates in Canada competitive with the rest of the world."
But the Liberal Party argues that government spending is only adding to the national deficit, which it says will increase by $6 billion as a result of the tax cuts. Prior to Flaherty's speech in Washington, the Liberal Party issued a statement that the finance minister has "no business" giving advice to the United States on how to control spending.
"Minister Flaherty should tell his American audience that he is the biggest borrowing, biggest spending Finance Minister in Canadian history, and has missed every deficit target he has ever set," said Liberal finance critic Scott Brison. "Just last month he admitted he wouldn't meet his 2015 target to balance the budget."