Canada forecasts deficit will top $50 billion

Tue May 26, 2009 5:14pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canada will run a record high budget deficit of more than $50 billion this year, Finance Minister Jim Flaherty said on Tuesday as the minority Conservative government came under pressure to spend more on the jobless.

Flaherty raised his estimate from the $33.7 billion shortfall he forecast in the government's January budget. The deficit will be the country's first after more than a decade of budget surpluses.

"We are going through a deeper economic slowdown than anticipated," Flaherty said.

He blamed lower tax revenues and higher jobless benefits being paid out by Ottawa as "to be expected" in the downturn. But a bailout of General Motors and Chrysler will put even more pressure on the government's books.

"We are also seeing the substantial auto payments that are going to be required. As a result of all of that, we will run a substantial short-term deficit this year, which I would estimate at more than $50 billion," he told reporters.

Markets had anticipated a bigger deficit because the economic contraction has been sharper than expected. As a result, bond prices were little changed after Flaherty's remarks.

"The market, I think, was preparing for the fact that the deficit was probably going to be bigger than what the government initially projected, in part because their underlying growth assumptions ... had changed very rapidly," said Michael Gregory, senior economist at BMO Capital Markets.

"It's like we squeezed many quarters of downturn into a couple quarters, so it's thrown off all the estimates."   Continued...

<p>Canada's Finance Minister Jim Flaherty pauses while speaking to journalists in the foyer of the House of Commons on Parliament Hill in Ottawa May 26, 2009. REUTERS/Chris Wattie</p>