OTTAWA – The federal government is well ahead of schedule in reducing the size of the deficit, even as it is preparing to cut back on pensions and the size of the public service.
The Finance Department reported Friday that November’s shortfall totalled $1.9 billion, well shy of the $4.5 billion of red ink penned in the same month in 2010.
That puts the government about $9 billion ahead of the previous fiscal year’s pace for reducing the deficit. For the first eight months of the fiscal year that ends in March, Ottawa’s shortfall stood at $17.3 billion compared with $26 billion for the same period in 2010.
With only four months to go in the 2011-12 fiscal year, Ottawa is well on pace to come in under the $31-billion deficit it had projected in November’s fall update and well ahead of the $32.3-billion deficit target in the June budget.
The TD Bank estimates that the deficit this year could settle in the $27-billion to $28-billion range.
In separate speeches Thursday, Prime Minister Stephen Harper and Treasury Board President Tony Clement struck a harsh note of austerity about the government’s future plans.
Harper stressed his government’s desire to slash spending with cuts to Canada’s pension system, particularly the Old Age Security benefits and noted that he has already moved to reduce growth in health-care financing. Clement said the government is looking to achieve even more savings from cuts to the public service — perhaps as much as $8 billion, up from the previously announced $4 billion.
The government’s plans are aimed at reining in costs in preparation for the demographic squeeze down the road, when baby boomers move from taxpayers to receivers of social services.
TD economist Sonya Gulati said the government’s eye appears to be not on this year’s deficit, but on expected shortfalls down the road, when slow economic growth is expected to keep revenue gains modest.
“When you take a look at the medium-term profile, that’s where the hardest task is,” said Gulati.
“They’ve already said they are not going to be raising taxes, so (reducing the deficit) will have to come from expenditures.”
In November, Ottawa said its revenues were down slightly, but that expenses fell sharply, by $2.5 billion, partly due to the windup of stimulus projects.
For the year so far, a combination of higher tax revenues and reduced spending is contributing to the better fiscal picture.
Revenues for the first eight months were up $5.7 billion, or 3.9 per cent, primarily from higher income tax receipts. Meanwhile, expenses were down $3.5 billion, or 2.3 per cent.
Where the government books are not faring better is in charges to service the debt. Public debt charges are about $500 million more so far this year, reflecting the rising national debt burden recent deficits have created.
The government did not further explain why it appears to be doing better than anticipated in fighting the deficit.
The Canadian economy grew by an unexpectedly strong 3.5 per cent in the third quarter — the July-September period — but for the year as a whole, growth is below what Ottawa had calculated on in the June budget.
However, one of the reasons the deficit will likely come in substantially lower is that Finance Minister Jim Flaherty built in an “adjustment for risk” buffer in the fall update of $3 billion this year, Gulati said. At the time, the risk of a downturn stemming from the European debt crisis appeared elevated.
Now, with the economy looking more and more like it will not face a significant correction in the next few months, the rainy day set-aside is unlikely to come into play.