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Recession Digging Big Hole For Ottawa, As Budget Deficit Reaches $12.5 Billion

The recession is taking a heavy toll on the government’s finances with Ottawa reporting Friday the deficit had already reached $12.5 billion in the first quarter of the fiscal year.

Following a $7.5-billion shortfall in the first two months of the quarter, June saw the deficit grow another $5 billion, mostly due to falling tax revenues, bigger payouts to the swelling jobless ranks and the cost of bailing out the auto sector.

“It’s a bit of a sticker shock when the deficit balloons that much,” Scotiabank economist Mary Webb said.

Last year, the government stood on the good side of the balance sheet by $800 million in what it expected would be the 13th consecutive year of balancing the budget.

But the recession has reversed both the short-term and long prospects for Ottawa.

Finance Minister Jim Flaherty now projects that the deficit will total $50.2 billion in the fiscal year.

The Finance Department said in a note that the current shortfall is “consistent” with meeting the deficit target.

Under the government’s current projections, Canada will experience deficits for at least the next four years, adding over $100 billion to the country’s debt.

Economists view that a rosy outlook, however, and widely expect that this fall Flaherty will revise both the time it will take to return to a balanced position and the total hit to the national debt – possibly doubling both numbers.

In recent statements, Prime Minister Stephen Harper has conceded it may not be possible to balance the books in 2013-14 as the January budget predicted, although Flaherty has been less reluctant to back off his official forecast. Both have ruled out tax increases or major spending cuts to shorten the return to balanced budgets.

TD Bank chief economist Don Drummond said there was no need to panic over the deficit and agreed the government should not raise taxes.

“This is not the situation we had in 1995, when we had twice the debt to gross domestic product we have now. It think it’s serious, but it’s not a crisis like we had then,” he said.

Drummond recommended the government set down a program to control spending growth going forward once the stimulus is spent of about two per cent per annum, so that the deficit will be eliminated within a reasonable period of time. It will take longer than four years, however, he said.

“I don’t think it’s the right policy approach and I wouldn’t find it credible to say we’re going to target a balanced budget in 2013-14 … you would wind up doing some pretty perverse things to try and achieve it,” he argued.

Webb also noted that Canada remains in a far superior fiscal position than the United States, where government revenues are falling far faster and the debt to GDP ratio is headed toward 100 per cent, compared to Canada’s G-7 best 35 per cent.

The first-quarter numbers are illustrative of the impact of the recession on the economy and the government’s books.

Revenues have declined $5.3 billion, or 9.1 per cent, led by a 24.1 per cent plunge in corporate tax receipts.

Meanwhile, programs cost Ottawa $8.5 billion more – a 17.3 per cent increase – as employment insurance premium payouts jumped 47 per cent, $1.7 billion more than the corresponding period last year.

June saw an acceleration of the fiscal slide. Revenues fell $2.7 billion, or 13.1 per cent, and program expenses were up $4.2 billion, or 25.2 per cent. The auto bailout and other subsidies were the big ticket items at $3.2 billion.