May 27, 2011 / 3:11 PM / in 7 years

Government sees smaller 2010-11 deficit than forecast

OTTAWA (Reuters) - Canada is set to post a smaller 2010-11 budget deficit than the government had predicted, the Department of Finance said on Friday, possibly helping the Conservatives meet their goal of a quicker return to surplus.

<p>Canada's Prime Minister Stephen Harper speaks following a non-confidence vote in the House of Commons on Parliament Hill in Ottawa March 25, 2011. REUTERS/Blair Gable</p>

The preliminary budget shortfall for the fiscal year ended March 31 was C$34.4 billion ($35.1 billion). The March deficit came in at C$6.2 billion, compared with C$6.4 billion a year earlier.

The recently reelected Conservative government had forecast in March a deficit of C$40.5 billion, or about 2.5 percent of gross domestic product.

In its report, the government said that it expects end-of-year adjustments will push the final deficit number higher than C$34.4 billion.

“However, based on the results to date, the final 2010-11 deficit is expected to be lower than C$40.5 billion ..., largely due to lower program expenses,” it said.

Based on the performance so far, Ottawa will likely tweak its forecasts to show smaller deficits in coming years, when it introduces its new budget on June 6. It aims to eliminate the deficit by 2014-15.

But Stephen Gordon, an economics professor at Laval University, suggested the numbers are not as rosy as they appear. On a 12-month basis the deficit has flatlined since July last year and personal income tax revenues have not yet recovered to pre-recession levels, he said.

“When you track the monthly numbers we’re seeing a straight line here, we’re not seeing the deficit moving steadily back up to zero,” Gordon said.

Personal income tax revenues peaked at C$115.8 billion in the 12 months to December 2008, compared with just C$114 billion as of March this year, Gordon said.

Once the government starts bringing an end to its extraordinary stimulus spending over the next few months, the budget balance may improve more markedly.

However, the government has already committed to using some of that fiscal room in 2011-12 to pay more than C$2 billion to the province of Quebec as compensation for harmonizing its provincial sales tax with the federal government‘s.

In 2010-11 overall revenues increased 5.9 percent, driven by personal income tax and other revenues, including the government’s sale of shares in General Motors.

Program expenses fell 0.4 percent in the year, mainly reflecting Ottawa’s bailout of the auto sector a year earlier.

Reporting by Louise Egan; editing by Rob Wilson and Peter Galloway

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