Canada deficit will be much larger than expected

Mon May 25, 2009 5:48pm EDT
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By Louise Egan

MEECH LAKE, Quebec (Reuters) - Canada's budget deficit will be "substantially more" than the C$33.7 billion ($30.1 billion) forecast in January because the economic slowdown is sapping tax revenue, Finance Minister Jim Flaherty warned on Monday.

The acknowledgement, which had little impact the Canadian dollar and other markets, came after many economists and opposition figures complained the government's forecasts were hopelessly optimistic.

Flaherty said higher payments to the unemployed were also to blame for the shortfall and Ottawa will revise its economic growth forecasts.

"The deficit will be substantially more than was anticipated in the January budget and I will report in detail on that in June," Flaherty told reporters.

In January, the government unveiled a two-year C$40 billion stimulus program designed to kick-start the economy. It forecast a total C$83.1 billion deficit over five years starting in the current fiscal year.

Last week, the IMF predicted a deficit of C$120 billion over the same five years and a deficit of C$39.8 billion for the current year.

Because Ottawa's budget was introduced in January, much earlier than usual, the economic assumptions in it were quickly overtaken.

"We fully expected capitulation of this sort at the federal level," Eric Lascelles, chief economics and rates strategist at TD Securities, told Reuters.   Continued...

<p>Canada's Minister of Finance Jim Flaherty speaks to the media before attending a meeting with provincial and territorial finance ministers in Chelsea, Quebec May 25, 2009. The meeting will focus on the economy, pension plans and employment insurance. REUTERS/Blair Gable</p>