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Finance Minister Jim Flaherty takes questions from reporters in Toronto on Feb. 23, 2012.Pawel Dwulit

Economists say there's no need for deep cuts in the coming federal budget now that numbers show Ottawa's deficit is shrinking more quickly than expected.

The federal deficit for December shrank to $353-million, down from $1.4-billion in December, 2010.

In the first nine months of the current fiscal year, the federal government ran a deficit of $17.7-billion, which means the total deficit for 2011-2012 is on pace to come in at about $24-billion.

That is lower than the $31-billion deficit Finance Minister Jim Flaherty projected in his November fiscal update, a figure that included a $3-billion "adjustment for risk" that now appears unnecessary.

As provinces including Ontario and Quebec prepare budgets that are expected to include deep spending cuts, there is concern among economists that an austerity budget from Ottawa piled on top of provincial cuts could put the country's economic recovery at risk.

Mr. Flaherty moved to assuage those concerns this week with a promise that his budget won't be "draconian." Economists hope he's right.

"There's no need to be extremely aggressive in Ottawa in the short term," said Stéfane Marion, chief economist of National Bank Financial Group.

"I think you have to be somewhat careful this time around, just because of the upcoming provincial budgets. You don't want the federal budget to amplify some of the fiscal drag we might see from some of the provinces."

Nonetheless, Mr. Marion is pleased that the federal government says it's planning a budget that will include a focus on long-term spending measures such as reducing the cost of Old Age Security. He said Canada should act now with a broad range of structural reforms that will ensure the federal debt-to-gross domestic product will be on a downward trend after the books are balanced around 2015.

An analysis of the latest deficit numbers by Toronto-Dominion Bank concluded Friday that the improving bottom line means Ottawa could "squeeze out a surplus" in 2014-2015. That is the year the Conservatives, during last year's election campaign, promised to balance the books. But last November, Mr. Flaherty pushed back that target by a year based on worse-than-expected economic conditions. The original target now seems to be back in play.

Improving fiscal fortunes at the federal level, however, are likely to create tensions with the provinces. Prime Minister Stephen Harper made no apologies this week for the fact that changes to several federal programs might impose higher costs on the provinces, adding that his majority government received a "clear mandate" from the electorate.

Possible federal moves such as increasing the qualifying age for Old Age Security from 65 to 67 will likely mean higher costs for the provinces, which will have to provide a wide range of social support for residents for an additional two years.

John Dowson, who runs an organization that provides financial advice to families with disabilities called LifeTrust Planning, estimates that raising the OAS age will cost the provinces billions. He noted that many provincial disability programs cut off payments once citizens qualify for OAS at 65. "I don't think anyone ever thought of that," he said of the potential burden on provinces.

The Finance Canada report provided a rough overview of spending trends, showing Ottawa is already cutting transfers to various groups.

Aboriginal Affairs transfers are down 3.9 per cent during the first seven months of the fiscal year, while agriculture transfers are down 13.2 per cent. Foreign Affairs and International Trade transfers are 7.5 per cent lower, Human Resources and Skills Development transfers are down 14.3 per cent and industry transfers are down 19.2 per cent. A transfer category called "other" – worth $6.2-billion so far this year – is down 42.1 per cent, largely due to the wind down of infrastructure stimulus programs.

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