OTTAWA (Reuters) - Canada's government may post a small budget deficit this year for the first time since 1996-97, rating agency DBRS said on Monday while praising Ottawa's overall fiscal management and confirming its highest credit rating.
DBRS said the Conservative government's assumption of 1.7 percent economic growth this year "may turn out to be optimistic" and that more sluggish growth could lead to lower-than-expected revenue in the 2008-09 fiscal year.
"Given the short-term inflexibility inherent in expenditures, it is likely that the government would run its first budgetary deficit in over a decade," DBRS said in a release.
Finance Minister Jim Flaherty has forecast a surplus of C$2.3 billion. But if the economy grows one percentage point less than expected, he predicts the budgetary balance will fall by C$3.3 billion.
"Even so, any such deficit would be on the order of 0.1 percent to 0.2 percent of GDP, small relative to the surpluses of the past few years," DBRS said.
Canada is the only Group of Seven industrialized country to run consecutive budget surpluses. It posted a surplus in 2007-08 for the 11th straight year and paid down C$10 billion in debt.
DBRS confirmed the government of Canada's "AAA" rating for long-term Canadian and foreign currency debts and its "R-1" rating for short-term liabilities. Both categories reflect the highest credit quality and DBRS said the outlook on all the ratings is stable.
"Canada's credit profile is expected to remain outstanding over the medium term," it said.
Reporting by Louise Egan; Editing by Peter Galloway