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Expect no major tax cuts or spending initiatives in the coming year from the federal Conservative government, Finance Minister Jim Flaherty said Wednesday.

He told reporters in Levis, Que. that federal finances look tight in this current fiscal year.

Last Friday, the federal Finance Department reported that the government slipped into a $500 million deficit in the first two months of the new fiscal year, which started on April 1.

It blamed a slowing economy and the effects of tax cuts on government revenues, although the department cautioned not to read too much into the numbers at this early stage. Economists have noted the Tories came into a $4.25-billion windfall recently over its wireless spectrum auction, which should prevent a deficit at the fiscal year's end.

"Our fiscal planning is on track for this year. I'm comfortable with where we are," Flaherty told Canada AM earlier on Wednesday.

Canada's economy is slowing. But Flaherty said the economic fundamentals here are still much better than the United States.

"We have a good housing market in this country, unlike the United States. Our car sales are good, unlike the United States," he said from Levis, where the Tories are holding their summer caucus meetings.

Canadian banks and households are both in better fiscal shape than their U.S. counterparts, he added. However, Flaherty admitted "there are challenges -- and we saw the challenges coming."

CIBC World Markets said Wednesday that it expects inflation in the U.S. to hit six per cent within the next six months, and that the U.S. Federal Reserve Board will react by raising interest rates by at least two percentage points.

Last week, Canada's inflation rate was reported to have hit 3.1 per cent in June, something driven largely by gas and food prices.

U.S. housing prices continue to fall, but economists there took some small comfort Tuesday in the fact that the rate of decline appears to be slowing.

But a glut of housing on the market in the U.S. means less construction and less demand for Canadian forest products such as lumber. The high dollar also hurts forestry, along with other export-oriented sectors such as manufacturing.

"We're not an island, we're not immune to those effects," said Flaherty, who represents the Whitby-Oshawa riding east of Toronto. General Motors, located in Oshawa, announced Tuesday it would drop auto leasing incentives in Canada.

Canada's unemployment rate rose to 6.2 per cent in June, but there is a regional story in those numbers. The West is doing much better than Central Canada, which is bearing the brunt of job losses in the manufacturing sector.

Flaherty said the Conservative government acted properly in cutting taxes in its previous budgets to provide a stimulus to the Canadian economy. Tax rebates average about $200, and many families have saved $1,000 on their tax bill, he said.

The government intends to continue to reduce spending and debt, he said, but he shied away from making firm promises on ways to cut living costs for Canadians, who have been beset by high gas and food prices.

Flaherty accused the Liberals, led by Stephane Dion, of planning to run up government spending and debt if they take power in the next election.

CTV's Ottawa Bureau Chief Robert Fife told Canada AM from Levis that the Conservatives are trying to draw a contrast between themselves and the Liberals, particularly Dion's proposed carbon tax.

"Every time they run into a reporter, they say 'the carbon tax will be terrible for the economy; it's going to increase peoples' taxes'," he said.

Most MPs have heard that their constituents want the cost of living to go down, he said.

The Tories will likely talk about ways to cut taxes on gas and home heating oil, but the government doesn't have a lot of fiscal room left in which to manoeuvre, he said.

In terms of election planning, campaign chief Doug Finley isn't even making a presentation at the retreat, but he doesn't have to -- the Conservatives are ready to go at any time, Fife said.

Bernier speaks

Maxime Bernier, who resigned as foreign minister after misplacing some sensitive documents at a former girlfriend Julie Couillard's home, told reporters in Levis that his fellow Conservative MPs are happy to see him.

"I'm part of the team, and I'm going to work with the team ... to make sure we're ready for the next session," he said in the first time he's faced the media directly since stepping down on May 26.

Bernier didn't directly answer whether he'd like back into cabinet at some future point.

"I'm going to work hard. I'm going to do what I have to do. For me, it's a privilege to be part of this government," he said.

Returning to caucus "is not difficult because I did what I had to do -- I resigned," Bernier said.

While it was very hard in the beginning, Bernier said he's comfortable with his situation now and looked at the caucus retreat as a new start.

Bernier represents the riding of Beauce, which is adjacent to Levis-Bellechase, won by fellow Conservative Stephen Blaney in 2006.

Quebec is seen as strategically important by the Conservative Party in its quest to form a majority government. The Conservatives won a cluster of ridings in the wider Quebec City area in 2006, and Levis sits on the south bank of the St. Lawrence River across from Quebec City.