Ottawa starts new fiscal year $4.4 billion in hole, but says that's improvement
By Julian Beltrame

OTTAWA - The federal government has booked a $4.4-billion deficit during the first two months of the fiscal year, but that's a big improvement over last year, when the economy was still mired in recession

While preliminary, the new numbers reflect the government's improving fiscal position as the country emerges from a deep recession that saw Ottawa go from a decade-long surplus to record amounts of red ink.

The Finance Department's fiscal monitor, released Friday, notes that during the first two months of 2009, when the country was still in recession, the government spent $7.5 billion more than it took in during April and May.

That's because tax revenues were down and social and economic spending to offset the slump was higher.

But starting last July, the economy slowly began recovering and adding jobs at a rate greater than Finance Minister Jim Flaherty had budgeted from in 2009 and 2010.

"The data is reassuring that the deficit should continue to narrow," said Mary Webb, an economist with Scotia Capital.

"And it continues a trend we saw in the last quarter of fiscal 2009-2010, which is that revenues were coming back reflecting the strength of the Canadian recovery."

The improvement in the deficit year-over-year was most visible in revenues from personal income taxes and the goods and services tax.

Income tax receipts rose $2.4 billion, or seven per cent, from the same period last year, the Finance Department said.

Meanwhile, the GST took in $2 billion more during the two months, a whopping 87 per cent gain.

However, revenues from corporate taxes were down 13.5 per cent, which may reflect a timing factor in filing.

The government says the deficit includes about $1.8 billion in spending under the stimulus package introduced in January 2008.

In the March budget, Finance Minister Jim Flaherty projected the federal deficit would come in at $49.2 billion this fiscal year, which runs from April to March 2011.

But economic conditions in the first quarter of this year were far better than projected. The economy grew at a decade-high 6.1 per cent during the first three months of 2010, and employment growth has kept advancing.

In the last three months ending in June, the economy created a massive 227,000 jobs, adding to tax revenues and reducing the government's burden for unemployment insurance.

The jobless rate has gradually declined from last summer's high to the current 7.9 per cent.

Although final numbers are not in, Finance has so far calculated the deficit in the previous fiscal year at $47 billion, about $7 billion less than the projections in the budget.

Webb said she would not be surprised if the deficit for the current fiscal year also comes in well below estimate, even though the Bank of Canada and analysts see growth braking to about half the pace of the first quarter.

Webb notes that job creation is projected to slow, but not retreat, so income tax receipts should continue to grow.

"We could well have a deficit that's between $40 billion and $45 billion in this fiscal year," instead of the $49 billion in the budget estimate, she said.

According to the government's projections, deficits begin falling sharply after 2011, when the two-year $47-billion stimulus package introduced in January 2009 expires. -CP-