OTTAWA (Reuters) - Canada will take whatever fiscal and monetary measures are needed to combat the effects of the global financial crisis, Prime Minister Stephen Harper said yesterday, predicting more economic gloom to come.

Harper also told Parliament that the Conservative government would not balance the budget by raising taxes or cutting essential services in a time of upheaval.

"World governments have resolved that they will undertake whatever financial, monetary and budgetary measures are necessary to cope with the crisis, and let me be clear — this is also the position of the government of Canada," he said.

Harper, whose Conservatives won a strengthened minority in the October 14 election, also promised short-term stimulus for the economy but gave no details.

"We have been affected and we will be further affected, particularly given that our closest neighbour and largest trading partner is the epicentre of the financial earthquake and global slowdown," he said.

The US buys more than 75 percent of all Canada's exports and the slowdown south of the border is hitting Canadian manufacturers particularly hard. The two countries share the world's largest trading relationship.

Ottawa has made it increasingly clear in recent weeks that it is likely to run a budget deficit in the 2009-10 fiscal year, which begins April 1, and quite possibly beyond that. Canada last ran a deficit in 1996-97.

During the campaign, both harper and Finance Minister Jim Flaherty promised not to go into the red. Now they say circumstances have changed so quickly that they are forced to consider what until recently was unthinkable.

"Balancing the budget by raising taxes, by cutting essential government activity or by refusing necessary intervention in the midst of a global economic crisis would be a cure worse than the disease," said Harper.

Opposition politicians, who blame Harper's policies, seized on a report by the new parliamentary budget officer, which predicted deficits for the next two years and criticised the government for cutting taxes.

Based on the average forecast of private sector economists, the budget officer, Kevin Page, forecast a deficit of C$3.9 billion ($3.0 billion) in the 2009-10 fiscal year and a deficit of C$1.4 billion in 2010-11.

The "low" forecast, which Page sees as more likely, called for deficits of between C$12 billion and C$14 billion in each of the next four years.

Harper created the budget officer's post in the name of transparency and appointed Page to the job in March. By law, Page's mandate is to provide independent analysis to parliament on the nation's finances, governemnt estimates and trends in the economy.

"The Conservatives have shown once again they are bad managers of Canadians' hard-earned dollars.... Mr. Harper and Mr. Flaherty must take full responsibility for this fiasco," said Liberal Party leader Stephane Dion. Harper dismissed the criticism, saying "There are of course numerous prognostications of the future".

Ottawa, he added, had foreseen the crisis last year and therefore cut taxes and boosted infrastructure spending as stimulus measures.

"Those actions — I make no apologies for them — deliberately reduced the size of the surplus," he said.

"At a time of economic downturn the government puts activity into the economy. It does not hoard it in the government itself."

Flaherty is due to deliver a fiscal update next week with more detailed predictions about the economy. He said on Wednesday that the statement would not be a mini-budget.

Harper said Ottawa could conduct a thorough review of all spending and would require all ministries and agencies to produce detailed quarterly financial statements.