Canada beating deficit target, but risks looms

Fri May 25, 2012 3:13pm EDT
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By Louise Egan and Claire Sibonney

OTTAWA/TORONTO (Reuters) - Canada on Friday posted a smaller-than-expected budget deficit for 2011-12, giving Finance Minister Jim Flaherty some leeway to react if needed to what he called an "unstable" situation in Europe.

In addition to the jitters over the possible Greek exit from the euro, Flaherty faces a heated housing market at home and warned that new data on Friday showed no sign of moderation in Toronto, where a condo craze has spurred talk of a bubble.

The preliminary budget deficit came in at C$23.5 billion ($22.8 billion) for the fiscal year ending March 31, below the government's forecast of a C$24.9 billion shortfall, or about 1.5 percent of gross domestic product.

The deficit-to-GDP ratio is one of the lowest among major Western economies and is part of the reason Canada is among the shrinking number of countries to retain a top-notch triple-A debt rating.

The lower deficit came despite big spending in the final month to compensate the province of Quebec for a sales tax change and pay for buy outs for thousands of public service workers that will soon be laid off as part of Ottawa's cost-cutting plan.

After year-end adjustments are made, the final figure could be closer to the government's estimate. Flaherty said the report showed Ottawa on track to balance the budget by 2015-16 as planned.

Canada's strong record on public finances means the monthly budget updates barely register with market players. But as tensions rise over the European sovereign debt crisis, analysts said investors take some comfort in the country's fiscal advantage.

"The government, echoing some of the recent things Mr. Flaherty has said, is obviously still concerned about conditions in Europe and I think that stands as the first line of defense if things do get out of control there and that you do ultimately require more stimulus here at home," said David Tulk, chief Canada macro strategist at TD Securities.   Continued...