September 10, 2009 / 8:03 PM / 8 years ago

Budget deficit to linger after recovery

VICTORIA, British Columbia (Reuters) - The Canadian government pushed back its projected return to balanced budgets by at least two years on Thursday and pledged to stay the course in delivering economic stimulus and not raising taxes.

Amid heated speculation about an early election, the minority Conservative government released its fiscal update weeks earlier than usual in a bid to show it is serious about eventually eliminating the budget shortfall.

“One of the purposes of this was to show our way back to surpluses,” Finance Minister Jim Flaherty told Reuters following the surprise budget announcement at a business luncheon in Victoria.

Flaherty said the sharper-than-expected global recession would cause higher deficits for longer. The total shortfall for this year and the next five years will be C$164.4 billion ($152.2 billion), he said.

Previously, Flaherty said there would be a small surplus by 2013-14, but his latest projection shows a deficit of C$5.2 billion in 2014-15.

That would mean fiscal 2015-16 would be the earliest date for a return to balance, based on forecasts made in August. In a speech, Flaherty later said he hoped to “eliminate that last, small deficit five years from now.”

“It’s not obviously good news, but with a potential election looming I guess it’s probably good politics more than anything else,” said Steve Butler, director of foreign exchange trading at Scotia Capital.

LIBERALS BLAST NEWS

In the current fiscal year, ending March 31, the deficit will rise to C$55.9 billion from the C$50.2 billion forecast in June, the government said. The deficit for last year was C$5.8 billion. Before that, Canada had enjoyed a long spell of surpluses.

Flaherty said the global meltdown had hit Canada harder than the government had previously thought. Prospects for economic recovery are encouraging, but fragile, he said, so Ottawa will make stimulus its top priority through 2010-11.

The main opposition Liberal Party, accused the government of glossing over troubles in the economy as it slid into recession and said public spending had run out of control. In a statement it complained of “more huffing and puffing from (Prime Minister Stephen) Harper’s C$55 billion man.”

Flaherty rejected that, saying many countries had been forced to revise their estimates and it included stimulus aid that the Liberals had supported.

The government must also make a second report to Parliament in the weeks to come to show progress on implementing its two-year, C$46.6 billion stimulus plan. Flaherty said he still plans to give that update.

Markets took the news in stride. There was little change in the Canadian dollar or bond prices.

As a proportion of the economy, Canada’s federal debt will rise from 29 percent in March 2009 to 35.5 percent in March 2011, falling back to 32.1 percent in March 2015, the government said.

Prior to the financial crisis, the finance minister had promised to bring the debt-to-GDP ratio down to 25 percent.

Flaherty proposes to get rid of the deficit entirely by restraining growth in program spending, but officials in a briefing told reporters that cuts would not start until a recovery was assured.

“I am telling Canadians today that if a politician tries to tell you that getting back to surplus will be pain-free, they are simply not telling you the truth,” Flaherty said.

Private sector forecasts used by Flaherty see the economy shrinking by 2.3 percent in 2009, steeper than the 0.8 percent decline foreseen in January, and then rebounding by the same amount next year and by 3.2 percent in 2011.

The Bank of Canada said earlier on Thursday that the growth outlook for the second half of this year was rosier than it had previously forecast.

The government said the extreme degree of uncertainty among economists about the pace of the global economic recovery made it difficult to do budget planning.

“We’re at a record degree of uncertainty among economists,” Flaherty told reporters.

($1=$1.08 Canadian)

Reporting by Allan Dowd, Louise Egan and Randall Palmer; Editing by Jeffrey Hodgson and Rob Wilson

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