MISSISSAUGA, Ontario/OTTAWA (Reuters) - Canada predicted on Tuesday it will balance its budget by the 2015-16 fiscal year after posting a record deficit for 2009-10, but warned that the shaky global recovery could spill into Canada and erode tax revenues.
Canada's federal budget deficit for the 2009-10 fiscal year totaled C$55.6 billion ($55.5 billion), or 3.6 percent of gross domestic product, exceeding expectations due to special payments to two major provinces, the finance ministry said in its annual fall update of fiscal and economic projections.
The Conservative government of Prime Minister Stephen Harper had forecast a budget shortfall of C$53.8 billion, or 3.5 percent of gross domestic product, as it poured cash into infrastructure projects and offered tax breaks in an effort to soften the impact of the global financial crisis.
Excluding federal assistance payments to Ontario and British Columbia related to their decision to blend provincial and federal sales taxes, Ottawa said it would have reported a deficit in the fiscal year ended in March that was C$3.8 billion lower than its original forecast.
The government said it would return to a budget surplus in 2015-16. But it highlighted the uncertainty of the global economic outlook and in particular weak demand in the United States, Canada's top export market, and factored these risks into its fiscal and growth numbers.
"These global challenges, particularly the uncertainty surrounding the strength of the U.S. recovery, pose a risk to the Canadian economic and fiscal outlook, particularly over the near term," the report said.
It forecast the deficit would narrow to C$45.4 billion in the current fiscal year, ending in March 2011, and shrink steadily until reaching C$1.7 billion in 2014-15 and a surplus of C$2.6 billion in 2015-16.
Amid signs that economic recovery is losing steam, Finance Minister Jim Flaherty has come under pressure from the political opposition to prolong stimulus spending, or at least be more flexible with a self-imposed deadline of March 31, 2011 for funding infrastructure projects.
Flaherty has said he would allow some wiggle room but that his priority now is wrestling down the deficit.
Based on the average forecast of 15 private sector economists surveyed in September, the government estimates the economy will grow by 3.0 percent this year, compared with a previous estimate of 3.5 percent.
It sees growth slowing to 2.5 percent next year.
Because of the "elevated uncertainty" in the world economy, the government adjusted downward its forecast for nominal GDP, a broad measure of the tax base.
As a result, economic growth forecasts are about 0.5 percentage points lower, at annual rates, for four quarters starting in the third quarter of this year. This "adjustment for risk" lessens in subsequent years.
The International Monetary Fund said last week it expects Canada's economic growth to be the second fastest in the Group of Seven advanced economies, after Germany, this year, and the fastest in 2011.
Canada's economy roared back after a mild 2009 recession to grow by 4.9 percent at an annual rate in the final quarter of last year and by 5.8 percent in the first quarter of this year.
The rapid rebound, helped by a hot housing market and strong consumer spending, prompted the Bank of Canada to hike its benchmark interest rate before any of its G7 peers. It has raised rates three times since the end of May to 1 percent.
But the pace of expansion slowed considerably in the second quarter to 2 percent. According to the forecasters consulted by the finance ministry, the economy will grow 1.8 percent in the third quarter of this year and 2.5 percent in the fourth.
Growth will remain moderate through the first half of next year, it said.
Additional reporting by John McCrank; editing by Peter Galloway