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Peace Tower on Parliament Hill, OttawaSean Kilpatrick

Canada's budget gap is shrinking in line with the government's projections, the Finance Department said Friday, while cautioning that "considerable uncertainty'' about the strength of the global recovery means it is too early to reach conclusions about where the deficit will be at the end of the fiscal year.

Through the first three months of the year that started April 1, Canada's deficit sits at $7.2-billion, compared with $12.5-billion in the same period of 2009 when the economy was still in recession. The three-month shortfall is ``broadly consistent'' with Finance Minister Jim Flaherty's projection that the $54-billion budget shortfall the government had at the end of the last fiscal year will shrink to just over $49-billion this year, Finance said in its monthly Fiscal Monitor.

The budget deficit for June was $2.8-billion, Finance said, compared with almost $5-billion in the same month a year earlier. The smaller discrepancy came as the government spent less on transfer payments such as employment insurance and aid that had been provided for the automotive industry during the downturn.

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For the three-month period, program spending was down 5.5-per-cent on a year-over-year basis, to $54.4-billion, partly reflecting a 6.4-per-cent drop in EI transfers to jobless workers.

The government took in $54.7-billion from April through, a 3.7-per-cent increase over the same three-month period in 2009, in part because of a 54-per-cent gain in sales-tax revenues and also because of higher personal income-tax revenues. However, the government's intake from corporate income taxes dropped by 10.5 per cent, according to the report.

More than $3-billion of the deficit so far this fiscal year is attributable to the Conservative government's stimulus measures - called the Economic Action Plan - which includes tax cuts and infrastructure spending, Finance said.

The government's debt charges fell by $100-million, due to lower average interest rates on its stock of interest-bearing debt. Record overseas demand for Canada's relatively safe government bonds has helped Ottawa fund its deficit spending without much fear of being crippled by interest payments.

Mr. Flaherty's March fiscal plan pledged to slash the budget deficit by two-thirds over the next three years, a goal that would exceed a target Canada pushed at the Group of 20 meeting in Toronto for nations to cut their shortfalls by half before 2013. Canada also pushed G20 leaders to agree to stabilize their debt-to-gross domestic product ratios by 2016.

However, the government suggested Friday that while faster-than-expected economic growth has led to rosier projections for tax revenue, the fizzling U.S. rebound and austerity measures in Europe mean the global rebound, and Canada's, are still less than solid.

``There remains considerable uncertainty with respect to the strength of the global economic recovery,'' the Finance Department said. ``Three months of fiscal information is not sufficient to draw any firm conclusions about the outlook for the year as a whole.''

Finance will publish a ``comprehensive'' fiscal update some time this fall.

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