The D Word

As reported by Julian Beltram of Canadian Press:

The federal government has started the new fiscal year in a rare deficit position, announcing yesterday it was $517 million in the red after two months as tax cuts and a slowing economy sliced into revenues. Finance Minister Jim Flaherty said revenues fell $1.6 billion combined in April and May, 4.1 per cent less than the same period last year. Ottawa’s take from the goods and services tax fell $876 million, or 20.9 per cent, with the GST’s percentage point cut in January. Last year, Ottawa took in $2.8 billion more than it spent during the April-May period.

No one knows what the end of year tally will be. Given the two-month deficit they will likely cut spending so as not to close the year in the red. This is not advisable in my opinion, given the weakening economic signs in the US and Canada. If the Conservatives have anyone to blame for the deficit – and recall their recent campaign to portray Stephane Dion as a leader that would return Canada to deficit – it is themselves and their indulgence in unneeded tax cuts last October. So if they want to keep the books balanced it would be a good time to revisit those tax cuts, with a focus on those of benefit to high earners and corporations (who, as Erin reported, face low relative tax levels).

I take some pride in having called this at the start of the year (not that a looming recession is something to celebrate). In a pre-budget Alternative Federal Budget technical paper I noted that if there was a slowdown (and not even necessarily an actual recession) it would push the federal budget into deficit. No fancy modeling, just using Finance’s own numbers and a range of economic forecasts.

Here is what the Finance Minister had to say in response:

Flaherty rejects think-tank’s deficit warning

Last Updated: Monday, January 14, 2008 | 2:50 PM ET

Finance Minister Jim Flaherty said Monday that there’s no substance to worries that the country will head back into a deficit situation if the economy slows. Flaherty was responding to a new report by the left-leaning Canadian Centre for Policy Alternatives (CCPA), which warned that the federal treasury could easily record a deficit if economic growth slows more than the government expects.

“If [the CCPA] had been paying attention they would have noticed that in the autumn we were anticipating some slowing in the Canadian economy, as a result of the quite significant slowing in the U.S. economy,” Flaherty told reporters at a Vancouver news conference. “For that reason, in the fall economic statement on Oct. 30, we made dramatic historic tax reductions — business tax reductions — in Canada,” he said.

“We will keep spending within the rate of growth of the economy, and quite frankly, I hope to do more than that,” he said. “I want to make sure we keep the budget in surplus.”

I’ll be waiting patiently by the phone for my official apology.