Soft economy hitting Ottawa's revenues, but deficit goal still on track

OTTAWA – The federal deficit expanded beyond last year’s pace in November as revenues dropped outright for the second time in three months amid a slowing economy, the Department of Finance reported Friday.

The weaker than expected results added $1.85 billion to the overall deficit, compared to $1.6 billion at this time last year.

That lifted Ottawa’s fiscal deficit for the year so far — eight months in — to $12.4 billion.

Still, the government is doing better than it was at this point last year, when the red ink had reached $15.5 billion on route to a final $26.2 billion deficit.

In the fall economic update, the department had predicted the final shortfall for this year, the 2012-2013 period, would come in at $26 billion.

In comments from Davos, Switzerland, Finance Minister Jim Flaherty said he still believes the budget will be balanced by 2015.

“We’re on track. We have some growth challenges, particularly with regards to commodities prices, but we’ve built a lot of that into our fiscal track,” he said in a television interview. “So we’re OK for a balanced budget in this Parliament, which means 2015.”

Earlier in the week, Prime Minister Stephen Harper cautioned that the weak global economy in the second half of the year was having a “fiscal impact” on the government.

Still, Flaherty has built a sizable buffer for slower growth in his budget projections that can absorb $3 billion a year in reduced revenues or higher costs while staying on course.

The major take-away from the November numbers was the $56 million fall-off in tax revenues to $19.9 billion, the second decline in three months. The previous dip was $25 million in September, but before that, Ottawa had seen nothing but positive increases in tax revenues dating back to November 2011.

TD Bank economist Sonya Gulati said it is still too early to say whether the September and November numbers are part of a trend. December’s data will be important for the government deficit expectations, she said.

At the moment, the government is doing better with its fiscal balance than the economy would suggest, she admitted.

“It’s a head scratcher because usually the fiscal monitor is quite good as a predictor, but the numbers just aren’t in line with the (fall) fiscal update,” she said.

“We could face a huge surprise come budget time.”

Gulati said the current data point to a final deficit of about $22 billion, or $4 billion lower than the fall update prediction. However, that is closer to what Flaherty had originally anticipated in the March 2012 budget, when the deficit was expected to fall to $21.1 billion.

“If the federal government manages to post an improved fiscal picture vis-a-vis the current estimate, it will be among only a handful of Canadian governments to do so,” she said.

“This is because we have seen many resource-reliant provinces slip further in the red on the heels of lower commodity prices.”

One area of improvement comes from continuing low borrowing costs due to favourable interest rates. For the year to date, interest on the debt cost the government $1.3 billion less than for the same period last year.

Overall, Finance said revenues for the first eight months were up $4.8 billion to $161.7 billion, or 3.1 per cent, including a 3.6 per cent increase in personal taxes and 5.4 per cent gain in corporate taxes.

Meanwhile, program spending rose by $3 billion to $154.4 billion, or two per cent, including a 6.2 per cent increase in elderly benefits which the department attributed to the introduction of the Guaranteed Income Supplement top-up benefit in July 2011 and the aging population.