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. 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. "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."
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