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SASKATOON, Saskatchewan (Reuters) - The Canadian government predicted for the first time on Wednesday that the nation's economy would contract and Ottawa would run a budget deficit next year -- its first in more than a decade.
Finance Minister Jim Flaherty issued the downbeat forecast just three weeks after delivering a fiscal report that was widely criticized for being unrealistically rosy and smacking of political partisanship.
His remarks appeared to be an olive branch to the opposition Liberals, who threatened last month to topple the minority Conservative government over the report. They later asked Flaherty to produce "honest" fiscal numbers in exchange for their co-operation on an economic recovery plan.
"There's nothing like a hanging in the morning to concentrate the mind, and I think Mr. Flaherty is saying everything he thinks we want to hear," Liberal legislator John McCallum told CBC television.
Flaherty said the economy would shrink 0.4 percent next year, instead of posting 0.3 percent growth as it estimated in its report on November 27.
He did not give exact numbers for the deficit but provided a chart that suggested a 2009-10 deficit of about $5 billion, and a slightly larger shortfall the following year. Last month, he laid out plans for small surpluses.
The numbers do not take into account any stimulus package that may be announced.
Flaherty emerged from a day-long huddle with finance ministers from Canada's provinces and territories with a promise to speed up and possibly expand infrastructure spending to lessen the impact of the recession. Ottawa already plans $6 billion in infrastructure spending in 2009.
"Will there be even more infrastructure spending by the government of Canada? The answer is probably yes ... that is likely," he said.
Under an existing infrastructure plan, provincial policy makers say they approve their own projects to build highways or bridges but have to wait too long for Ottawa to follow up with its financial contribution. Both sides agreed to streamline the process to get the money flowing faster.
Ottawa is also looking at a bailout plan for the Canadian auto industry, contingent on a U.S. rescue package, as well as ways to help the forestry industry. More money may go to social housing and worker training as well, Flaherty said.
Following a meeting of the G20 leading economies in Washington last month, the International Monetary Fund recommended fiscal stimulus equivalent to 2 percent of the global economy. In Canada's case, that would amount to approximately $30 billion. But Flaherty said on Wednesday his would be a "conservative budget" and he would not comment on the size of any additional spending.
"We haven't determined a number," he said.
While Flaherty pledged to do his part on stimulus, he suggested the Bank of Canada could still do more by cutting rates again in January.
"The Bank of Canada has more scope to move in the future if the governor chooses to," Flaherty said during an interview on CBC television.
His comments came just over a week after the central bank cuts its key overnight rate by 75 basis points to 1.25 percent.
The opposition Liberals have shown some flexibility in their demands of the government in the past few days after threatening to team up with the two other opposition parties last month to topple the minority Conservative government.
Prime Minister Stephen Harper managed to defuse the political crisis, and avoid a non-confidence vote the Conservatives were certain to lose, by winning a rare suspension of Parliament, until late January. The request was granted by the governor general, the representative of the Canada's head of state, Queen Elizabeth.
The Liberals have since met with Flaherty and Harper and, while not withdrawing their threat to bring down the government if they don't like the January 27 budget, they have sounded more conciliatory.
A vote of non-confidence on the budget would either trigger a snap election or prompt the opposition to try to take over as a coalition government.
Editing by Rob Wilson