Deficit shrinks to $353 million in December

The Finance Department says the federal deficit fell to $400 million in December, which is less than a third of the level a year earlier. A reporter holds a copy of the 2011 federal budget in Ottawa. THE CANADIAN PRESS/Adrian Wyld

OTTAWA - Finance Minister Jim Flaherty target for eliminating the deficit is getting closer, as Ottawa's finances continue to improve by the month.

The latest accounting from the Finance Department on Friday shows the monthly deficit fell to $353 million in December, from $1.35 billion a year earlier.

More critical to the government's longer-term fiscal projections, the December data puts Ottawa about $10 billion ahead of pace for the first nine months of the fiscal year compared to last year at this time.

The cumulated deficit so far this year now stands at $17.7 billion, compared to $27.4 billion for the same period in 2010.

TD Bank economist Sonya Gulati said the steady improvement in Ottawa's fiscal position could have long term implications — and lead to balancing the books earlier than expected.

"As a result and all else equal, it looks like the government could squeeze out a surplus in 2014-15, one year earlier than the current plan," she said in an analysis.

"To make this happen, we expect the upcoming budget to lay out the government's cards as to how and where expenditure restraint will be secured."

The major improvement would constitute somewhat of a political victory for the Harper government, which took considerable heat for promising a balanced budget by 2014-15 in the federal election campaign, then having to retract the pledge in November when Flaherty issued his mid-year economic update.

At the time of the update, Flaherty was anticipating a lower growth rate for the economy, which would depress personal and corporate tax revenues and increase costs.

But although the economy has been anything but robust, the third quarter produced a bigger bounceback than anticipated with a 3.5 per cent spurt .

The fourth quarter now appears to be headed for a 1.5- to two per cent growth tally, twice the Bank of Canada's earlier prediction.

The Western Canadian economy is growing faster than the national average, propped up by oil, mineral, potash and coal exports. That regional growth is helping offset weakness in Ontario's manufacturing sector.

Gulati said she expects this fiscal year's deficit to come in as low as $26 billion — or $5 billion below the fall update's estimate — which will give the government a better starting point for 2012-2013.

It is unclear how much impact the improved prospects will have on budget deliberations, which are entering their final stages.

In recent weeks, the government has faced a barrage of criticism for signalling its intends to tackle old age benefits because aging demographics will cause the program to escalate from the current $36 billion to $108 billion in 20 years.

As well, ministers have suggested that pre-announced spending cuts of at least $4 billion annually might be deeper than expected and could go as high as $8 billion.

Flaherty told reporters Thursday he would not categorize his budget as "draconian."

At the same time, he urged the provinces to get their fiscal books in order. Ontario faces an especially steep fiscal curve as the recent Don Drummond report noted, with the province's deficit slated to double in the next five years if spending is not curtailed.

Friday's federal fiscal monitor shows Ottawa's books are being helped by an economy that while not strong, is generating greater activity than the government had expected at this point in the recovery cycle.

Tax revenues rose 6.8 per cent, or $1.4 billion, in December, and for the first three quarters of the fiscal year that ends in March, revenues are up $7.1 billion, or 4.2 per cent.

Meanwhile, program expenses were up by $504 million for the month, but at the three-quarter pole were still down by $3 billion, 1.8 per cent or $3 billion.