Canada forecasts deficit will top $50 billion

OTTAWA (Reuters) - Canada will run a record high budget deficit of more than $50 billion this year, Finance Minister Jim Flaherty said on Tuesday as the minority Conservative government came under pressure to spend more on the jobless.

Canada's Finance Minister Jim Flaherty pauses while speaking to journalists in the foyer of the House of Commons on Parliament Hill in Ottawa May 26, 2009. REUTERS/Chris Wattie

Flaherty raised his estimate from the $33.7 billion shortfall he forecast in the government’s January budget. The deficit will be the country’s first after more than a decade of budget surpluses.

“We are going through a deeper economic slowdown than anticipated,” Flaherty said.

He blamed lower tax revenues and higher jobless benefits being paid out by Ottawa as “to be expected” in the downturn. But a bailout of General Motors and Chrysler will put even more pressure on the government’s books.

“We are also seeing the substantial auto payments that are going to be required. As a result of all of that, we will run a substantial short-term deficit this year, which I would estimate at more than $50 billion,” he told reporters.

Markets had anticipated a bigger deficit because the economic contraction has been sharper than expected. As a result, bond prices were little changed after Flaherty’s remarks.

“The market, I think, was preparing for the fact that the deficit was probably going to be bigger than what the government initially projected, in part because their underlying growth assumptions ... had changed very rapidly,” said Michael Gregory, senior economist at BMO Capital Markets.

“It’s like we squeezed many quarters of downturn into a couple quarters, so it’s thrown off all the estimates.”

The previous highest deficit, in nominal terms, was $39.0 billion in 1992-93, according to finance ministry data.

Opposition parties immediately disparaged the government’s economic performance, but the record deficit figure may make it easier for the government to rebuff their demands for even greater spending on employment insurance -- a potential election trigger.

“This is a shocking number. It is higher than I think anybody had predicted,” said Liberal legislator John McCallum.

But the Liberals refused to back down on their demand for looser eligibility rules for employment insurance benefits, which Prime Minister Stephen Harper has rejected. Harper needs the support of at least one of the three opposition parties to stay in power and all three are demanding more jobless benefits.

“We are pushing it hard. We shall see what happens. In a minority government, one never knows,” McCallum said.

Flaherty said he remains comfortable with the government’s projected $29.8 billion deficit for 2010-11, and said he still expects a return to surplus in the 2013-14 fiscal year.

As late as November 27 last year, the Conservative government was still projecting budget surpluses, but it conceded that if it took additional spending measures that status would change.

The subsequent $40 billion stimulus package, announced in January, tipped Ottawa into a shortfall.

Harper promised on Tuesday that the government’s deficits would be affordable and short term.

Additional reporting by Randall Palmer, David Ljunggren and Frank Pingue; editing by Peter Galloway