Reuters | October 12, 2010

Canada's federal budget deficit for the 2009-10 fiscal year totaled $55.6 billion, or 3.6 percent of gross domestic product, exceeding expectations due to special payments to two major provinces, Finance Minister Jim Flaherty said on Tuesday.

Ottawa had forecast a budget shortfall of $53.8 billion, or 3.5 percent of gross domestic product, as it poured cash into infrastructure projects and offered tax breaks in an effort to soften the impact of the global financial crisis.

Excluding the federal assistance payments to Ontario and British Columbia related to their decision to blend provincial and federal sales taxes, Ottawa said it would have reported a deficit in the fiscal year ended in March that was $3.8 billion lower than the original forecast.

In its annual fall fiscal and economic update, the government said it would return to a budget surplus in 2015-16. But it highlighted the uncertainty of the global economic outlook and factored in that uncertainty into its growth and fiscal forecasts. It predicted the deficit would narrow to $45.4 billion in the current fiscal year ending in March 2011, and shrink steadily until reaching $1.7 billion deficit in 2014-15 and a surplus of $2.6 billion in 2015-16.

Amid signs the economic recovery is losing steam, Flaherty has come under pressure from the political opposition to prolong stimulus spending, or at least be more flexible with a self-imposed deadline of March 31, 2011 for funding infrastructure projects. Flaherty said he would allow some wiggle room but that his priority now is wrestling down the deficit.

Based on the average forecast of 15 private sector economists surveyed in September, the government estimates the economy will grow 3.0 percent this year, compared with a previous estimate of 3.5 percent. The estimates show growth slowing to 2.5 percent next year.

The International Monetary Fund said last week it expects Canada's economic growth to be the second-fastest in the Group of Seven advanced economies, after Germany, this year and the fastest in 2011.

Canada's economy roared back after a mild 2009 recession to grow 4.9 percent at an annual rate in the final quarter of last year and 5.8 percent in the first quarter of this year. The rapid rebound, helped by a hot housing market and strong consumer spending, prompted the Bank of Canada to hike its benchmark interest rate before any of its G7 peers. It has raised rates three times since June to 1 percent.

But the pace of expansion slowed considerably in the second quarter to 2 percent. According to the forecasters consulted by the finance ministry, the economy will grow 1.8 percent in the third quarter and 2.5 percent in the fourth.

Growth will remain moderate through the first half of next year, it said.