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OTTAWA (Reuters) - The Canadian economy has slipped into recession and the federal coffers are on the verge of running dry for the first time in 13 years, the government said on Thursday in a report that raised the prospect of an early election.
Even so, the government forecast that the budget would show a tiny surplus in the next fiscal year, a surprise after it prepared the country for the possibility of renewed deficits.
The grim economic outlook unveiled in the annual economic and fiscal update was almost overshadowed by the politically explosive news that Ottawa proposed ending subsidies to political parties.
All three opposition parties rejected the report, saying it contained no real plan to combat the economic crisis. Some slammed the minority Conservative government for postponing a fiscal stimulus package and emergency aid to the auto sector.
"We will vote against this plan. ... (It) does not address the economic slowdown," said Stephane Dion, leader of the Liberals, the official opposition party.
If all three opposition parties vote against the package, the government would be defeated only a few weeks after it was returned to power in an October 14 federal election.
A senior member of the left-leaning New Democrats said that although all three opposition were against the plan, there were other options they could explore before an election was called -- a clear reference to a possible three-party coalition government.
Such a coalition would be highly unstable, since the third opposition movement is the separatist Bloc Quebecois, which wants to break Canada apart.
None of the opposition parties has the money to fight an election now. That suggests they could either lean on the government to amend the update or arrange that not enough legislators turn up to defeat the Conservatives when a vote is held.
Liberal legislator Michael Ignatieff, a contender for the leadership of the party, called on Prime Minister Stephen Harper to come back with a better plan, saying his party would cooperate if it did so.
"This is no way to govern when you're on the edge of Niagara Falls. So go back and think about it again," he said.
The political fury overshadowed the statement, which also proposed expanded powers for the government to intervene in troubled banking sector, which has been hit by the global credit crisis, including capital injections if necessary.
It provided some temporary relief for pensioners and pension fund providers.
Contrary to expectations, the Conservative government said it would post a budget surplus in the 2008-09 fiscal year and the next five years as well. The surplus in the current year is seen at C$800 million, narrowing to C$100 million in the following two years.
However, even those numbers could quickly become obsolete as the government has promised new fiscal stimulus measures early next year that could push the budget balance into the red.
It also cautioned that its outlook was highly uncertain due to the fast-changing global economic crisis.
The Conservative government had prepared public opinion over the past few weeks for the prospect of the first budget deficit since 1996-97.
The government sees the economy contracting 1 percent in the fourth quarter and 0.4 percent in the first quarter of next year before returning to growth. The popular definition of a recession is two consecutive quarters of contraction.
The growth outlook, based on private sector forecasts, pegs 2008 economic growth at 0.6 percent, down from a 1.1 percent estimate made in August. For next year, growth is pegged at 0.3 percent, down from a 2.4 percent prediction in the last budget in February.
There were no fiscal stimulus measures in the statement.
Additional reporting by David Ljunggren and Randall Palmer; Editing by Frank McGurty