Budget 2009: “Temporary” deficit to reach $85 billion

Finance Minister Jim Flaherty says the federal government has no choice but to run a massive deficit over the next five years in an attempt to spend its way out of the current recession. And there’s no question the measures in this year’s budget are going to put a severe dent in the federal government’s coffers.

This year’s deficit will be a relatively small $1.1 billion, but is expected to jump to $33.7 billion in the next fiscal year and $29.8 billion in 2010–2011. The deficit is projected at $13 billion in 2011–2012 and $7.3 billion in 2012–2013, for a grand total of $84.9 billion. Ottawa doesn’t expect to be back in the black until 2013–2014, when it projects a modest surplus of $700 million.

“A temporary deficit cannot be avoided,” Flaherty said in the budget speech. “As a result of the global recession, we expect the Canadian economy to contract by 0.8% over the next year. This means tax revenues will be reduced.”

Personal income tax revenues are expected to be about $12 billion lower over the next five years, while corporate tax revenues will drop an estimated $13 billion.

Still, Flaherty insists the deficit won’t be permanent or long-running. “As the economy recovers, we fully expect to emerge from deficit and return to surplus within five years. We will use future surpluses first to pay off the debt incurred during the recession.”

However, there are some questions about the government’s budgetary projections. Although revenues are expected to drop nearly 5% in the current fiscal year, future numbers are more rosy: +6.7% in 2010–2011, +8.1% in 2011–2012, +6.6% in 2012–2013 and +6.5% in 2013–2014.

Dave Clarke, a principal with tax firm Collins Barrow in Ottawa, calls those predictions optimistic. “If these projections don’t pan out, we’ll be seeing deficits beyond 2014,” Clarke warns.

(01/27/09)

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