Federal deficit could exceed $27B next year, Ottawa think-tank says

An Ottawa research group thinks the government is heading even deeper into the red than Canada's parliamentary budget officer, who shook things up last week with talk of a $14-billion deficit in the next bookkeeping year.

In a report to be issued Tuesday, the Canadian Centre for Policy Alternatives says the deficit could hit $27.9 billion in 2009-10 and $46.8 billion in 2010-11 if there is a major recession and slow recovery. The federal fiscal year begins April 1.

The government's formal targets call for balanced budgets in the next few years, but Prime Minister Stephen Harper, speaking at an economic summit in Peru, said Saturday that deficits may be an inevitable reality for countries intending to use financial stimulus packages to revive their economies.

The parliamentary budget officer, Kevin Page, issued a report Nov. 20 saying Ottawa's surplus for the first five months of 2008-09 was the lowest in recent years. A slumping economy combined with tax cuts introduced last fall, including a one-point GST reduction, has ended the era of large federal surpluses, he told reporters.

In the report, he said the government could stay in the black in the next two years under the most optimistic assumptions but faces double-digit deficits in the event of a protracted slowdown and commodity price drop. "Over all, given that the economic risks remain on the downside, our judgment is that the lower range of the budget projections represents a more likely range of possible outcomes," the report said.

The Canadian Centre for Policy Alternatives, which calls itself "one of Canada’s leading progressive voices in public policy debates," is not against running deficits.

"The real underlying question now is not whether the federal government should run a deficit but how large the planning deficit for 2009-10 should be," Marc Lee, a CCPA economist, argues in a statement accompanying the report. "The federal government has a lead role to play in cushioning the impact of a recession both through federal programs and in partnership with the provinces."

The report re-estimates the federal fiscal picture for four economic scenarios — each more pessimistic than the last — under existing tax and spending policies.

The first scenario, in which the economy slows but avoids a recession, yields a deficit of $7 billion in 2009-10 and $5.4 billion in 2010-11.The second, involving a mild recession in 2009, yields deficits of $12.6 billion in 2009-10 and $20.5 billion in 2010-11.The third, involving a deeper recession, yields a deficit of $19 billion in 2009-10 and $31.3 billion in 2010-11.The fourth, involving a major recession and slower recovery, yields a deficit of $27.9 billion in 2009-10 and $46.8 billion in 2010-11.

"As events unfold," the report says, "it may come to pass that Scenario 4 is not pessimistic enough."