Finance Minister Jim Flaherty is suggesting tax cuts and measures to revive the commercial paper market may be included in the federal budget when it's tabled in three weeks.

"We need to take some steps in the short term to provide stimulus in the economy, but we also have to, during this time of economic turbulence, take steps to build capacity in the economy so we come out of the slowness in a position of strength," Flaherty said Tuesday.

"This is very important. And tax reductions are one way of encouraging investment, leaving more money in people's pockets so that they spend it, so that they help strengthen the economy."

Flaherty made the comments in Montreal, where he stopped Tuesday as part of cross-country pre-budget consultations that have so far included Saskatchewan and parts of Atlantic Canada.

The Jan. 27 budget is expected to focus mainly on stimulating Canada's economy during the worldwide financial downturn.

The pressure to introduce tax cuts could be high if U.S. president-elect Barack Obama proceeds with a proposed $775-billion economic stimulus package that includes about $300 billion in tax cuts or credits after he's sworn in on Jan. 20.

But a western Canadian public policy research group said tax cuts will do little to stimulate the economy in the short term.

"They don't have that stimulative punch. They don't shake up consumer behaviour," said Roger Gibbons, CEO of the Canada West Foundation.

"The fear is that for most Canadians who are becoming very anxious about their own situation, what they would tend to do is pocket a tax cut, use it to pay down debt. And that in itself would not be a stimulus."

Gibbons said there is no silver bullet to fix the economy, but noted that he supports some deficit spending by the federal government on infrastructure projects. He also said the government needs to encourage banks to increase lending.

Working group looking at credit

On Monday, Flaherty met with representatives of Canada's big banks about access to credit for consumers and businesses.

The government is pushing for banks to make credit more available, while the financial institutions said they have increased lending and argue they shouldn't be held solely responsible for credit shortages, pointing to other sources of business financing.

Banks cited resuscitating the commercial paper markets as a way to increase lending to small and medium-sized businesses, a suggestion Flaherty seemed open to.

"We've had discussions about ways in which we accomplish the goal of making sure the commercial paper market works, and those discussions are ongoing. There are a number of policy options there," said Flaherty, who did not state specifics.

Commercial paper refers to a financial instrument issued by major banks to help meet short-term financing needs. It is not backed by collateral and can be in the form of unsecured promissory notes, bills of exchange and warehouse receipts.

As a result of Monday's meeting, Flaherty said the banks agreed to form a working group to look at ways of ensuring adequate credit is available. The group will begin meeting immediately, he said.

"We all have responsibilities to ensure that the financial system functions properly in support of the Canadian economy and certainly the government has a role to play in that," said Flaherty.

"I encourage the heads of banks, the CEOs, to work with the government."

No decisions yet

Flaherty said no budget decisions have been made as officials continue criss-crossing the country for consultations. The next stops include the Greater Toronto Area on Friday and Vancouver on Monday.

So far, infrastructure and employment insurance are some of the issues that have figured high on priority lists during consultations, said Flaherty.

"You know what I've been hearing across Canada and also from my council of economic advisors has been that we need to invest more in infrastructure, and that is one way, of course, of supporting the economy."

Flaherty also noted that it will be increasingly important to retrain workers who lose their jobs for industries that will grow in the future.

"We're going to have people losing jobs in Canada, and we have to take steps to cushion that blow for people," said Flaherty.

Statistics Canada is set to release the latest employment figures for December on Wednesday. The number of jobs lost is expected to be around 20,000 to 30,000.