May 25, 2009 / 7:31 PM / in 8 years

Canada deficit will be much larger than expected

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.

<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>

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.

“At the time they were reasonable (forecasts), but fairly quickly it became clear that the economy was turning down more sharply than those initial estimates.”

TD is forecasting a deficit of about C$40 billion this year, Lascelles said.

Flaherty said the larger deficit would not change the size of Ottawa’s stimulus package and would not affect government plans return to surplus in the 2013-14 financial year.

“These are extraordinary times requiring extraordinary measures. We will do what we have to do to protect the Canadian economy and to cushion the impact on Canadians of this recession,” he said after a day of talks with his counterparts from Canada’s 10 provinces.

“What we need to do now is get through the storm, which continues ... There are some encouraging signs in the economy but this is still a serious recession that we’re in.”

The Canadian dollar weakened slightly to around C$1.1250, or 88.88 U.S. cents, from around C$1.1225, or 89.09 U.S. cents, before the news. But volumes were light with the U.S. market closed for a holiday.

“It’s a little bit disappointing, but it’s not altogether surprising. It’s a bit of a moving target,” said Steve Butler, director of foreign exchange trading at Scotia Capital.

“There’s been so much optimism coming into the market lately that even if we see the deficit maybe come in slightly higher, as Mr. Flaherty is indicating, than we originally hoped for it’s not too much of a shocker at this point,” he said.

The news on the deficit overshadowed a growing political conflict over benefits for the unemployed and an agreement among federal and provincial finance ministers to tweak the public pension plan starting in 2011.

The minority Conservative government has rejected demands from opposition parties to relax current eligibility rules or risk facing an election over the issue.

($1=$1.12 Canadian)

Additional reporting by David Ljunggren, Ka Yan Ng and Jennifer Kwan; Editing by Jeffrey Hodgson

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