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(Sean Kilpatrick)
(Sean Kilpatrick)

Deficit swells to $50-billion Add to ...

Finance Minister Jim Flaherty offered an impromptu fiscal update Tuesday, announcing that this year's budget deficit will balloon to more than $50-billion - a new record for red ink in Canada as the costs of the economic downturn mount.

He said the rising deficit - which amounts to more than 3 per cent of the economy - reflects a triple whammy of extra costs, including auto-sector bailouts, rising Employment Insurance claims and a drop-off in tax revenue.

Mr. Flaherty released the number the same day new statistics showed the number of Canadians collecting jobless benefits soared 10.6 per cent in March, the biggest monthly increase since the labour market started to weaken last fall.

"We will run a substantial short-term deficit this year which I would estimate at more than $50-billion," Mr. Flaherty told reporters after the House of Common's Question Period.

"We are going through a deeper economic slowdown than anticipated … we also have the substantial auto payments that are going to be required."

The Finance Minister's new estimate is $16.3-billion - or nearly 50 per cent - higher than what he forecast just four months ago.

Tories say they released the deficit figure Tuesday to avoid "inaccurate" speculation on the shortfall that could confuse markets.

Mr. Flaherty sparked a flurry of interest in the size of the shortfall one day earlier when he divulged the deficit was soaring but said he'd withhold the actual figure until a June report card on stimulus spending progress.

Sources say about half the deficit increase is due to higher EI payouts and sagging tax revenue. The other half is the cost of auto aid and other economic stimulus measures.

Ottawa has not yet divulged its final bill for auto aid, but calculations based on publicly available information suggest it could exceed $10-billion.

The rising budget shortfall comes amid growing concern that the federal government could end up mired in a structural deficit, one that requires tax hikes or spending cuts to eliminate. Economists, however, are divided on this. The International Monetary Fund has sounded a different note, saying Canada has plenty of room to run a deficit.

Analysts note that a $50-billion deficit - while numerically bigger than past shortfalls - is relatively smaller than the ones that plagued Ottawa in the 1980s and early 1990s.

That's because the economy has grown significantly since then and Ottawa is therefore better equipped to shoulder bigger deficits and debt.

A $50-billion deficit equals more than 3 per cent of Canada's economy but, as Parliamentary Budget Officer Kevin Page noted, past shortfalls exceeded 8 per cent of the economy in the mid-1980s and 5 per cent in the early 1990s. By comparison, the U.S. deficit this year is expected to exceed 12 per cent of the economy.

Still, Mr. Page said he's concerned about whether changes in Canada's economy during the recession are pushing Ottawa into a structural deficit. In other words, one that persists over the long term even when the economy is healthy and growing.

In Mr. Page's opinion it's not a temporary spike in government spending that's the culprit but a possible erosion of capital investment in areas such as manufacturing and the resource sector. He fears this could ultimately yield a smaller economic engine - one that would generate less tax revenue even after a recovery.

"The big issue is we're going through a really difficult recession right now and what's behind the auto bailout is potentially some big structural adjustments to the economy that could lower the potential growth rate."

The Harper Tories say they're still confident their plan will enable Ottawa to climb out of deficit by the 2013-14 fiscal year, as they pledged in the January budget.

But Toronto Dominion Bank chief economist Don Drummond, a former federal Finance official, said he's been worried for some time about Canada being mired in a structural deficit as a result of a decade of budget decisions.

Mr. Drummond said in his opinion a structural deficit facing Ottawa was caused by 10 years of rapid program spending growth and tax cuts - starting with the 2000 budget and including, more recently, the 2-percentage point cut to the Goods and Services Tax.

He said that early this decade Ottawa was in a structural surplus position so for a time rapid spending growth and tax cuts just ate into this cushion.

"But that was gone by the time the economy got wounded," Mr. Drummond said.

Dale Orr of Dale Orr Economic Insight doesn't believe Ottawa is in structural deficit, saying in his opinion the federal government has not made ongoing spending commitments that exceed the tax revenue it will collect when the economy recovers. He noted the reasons for the deeper deficit announced Tuesday are also temporary, including EI payouts that should fall as the economy rebounds and a tax revenue shortfall he predicts would also be reversed.

Mr. Orr said a key to eliminating the deficit over the period the Tories promise will be the political will to keep a tight rein on new spending.

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