Canada's budget falls into deficit for April-May

OTTAWA (Reuters) - The Canadian government’s budget stumbled at the start of the 2008-09 fiscal year, posting a deficit of C$517 million ($507 million) for April and May as corporate and sales tax collection fell sharply.

The deficit compares with a surplus of C$2.78 billion in the same two months of 2007.

The weak results were due to a 17 percent decline in corporate income tax revenue as well as a 21 percent drop in intake from the goods and services sales tax, the Department of Finance said in a report on Friday.

As a result, overall revenues dropped 4.1 percent from the previous year. Expenditures rose 7 percent in the same period.

Ottawa warned against jumping to the conclusion that the government’s 11-year streak of budget surpluses might be coming to an end.

“The results for the first two months of the fiscal year are not indicative of the outcome for the year as a whole,” it said.

The Conservative government of Prime Minister Stephen Harper cut the national sales tax to 5 percent from 6 percent, effective January 1, as part of a tax-cutting package it says will help the economy as it takes a hit from the U.S. housing crisis.

It attributed the decline in corporate income tax revenues to month-on-month volatility that can be caused by things such as large refunds, settlement payments or reassessments being recorded in a month even if they relate to a previous period.

In April, the first month of the fiscal year, the budget was in the red for a total of C$864 million, compared with a surplus of C$2.02 billion in April 2007. The budget returned to surplus in May -- C$347 million --but that was down from C$764 million in the same month last year.

The government has estimated a surplus in 2008-09 of C$2.3 billion, down sharply from the expected surplus of C$10.2 billion for 2007-08.

The Department of Finance will update its budget projections in late August.

($1=$1.02 Canadian)

Reporting by Louise Egan; Editing by Peter Galloway