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Finance Minister Jim Flaherty could have ordered RBC and TD back into the fold of the existing Ombudsman for Banking Services and Investments. Instead, he’s letting banks choose their own mediators, a potential conflict of interest.SEAN KILPATRICK/The Canadian Press

The federal government's bottom line continues to improve even as major economies around the world struggle through hard times.

Ottawa posted a deficit of $832-million over the first two months of the current fiscal year, down from $2-billion during the same two-month period a year earlier. By month, there was a $19-million deficit in April and a $813-million deficit in May.

The Conservative government's March budget estimated that the size of the deficit would drop from about $24.9-billion in 2011-12, to $21.1-billion in the current fiscal year, then to $10.2-billion in 2013-14 and $1.3-billion in 2014-15 before returning to surplus the following year.

To accomplish this, the government is counting on economic growth and curbing federal expenses.

Friday's Fiscal Monitor report from Finance Canada covers April and May 2012 and shows positive signals for Ottawa on several fronts. Personal income tax revenues are up 2.6 per cent, corporate income tax revenues are up 9.3 per cent and GST revenues are up 9.3 per cent.

On the spending side, total program expenses including transfer payments are up 3.4 per cent, with transfer payments largely responsible for that increase.

Looking more closely at direct federal spending - an area Ottawa is aiming to restrain - spending on Crown corporations is up two per cent, defence spending is up 5.8 per cent and spending across all other departments and agencies is up two per cent.

Last December, Finance Minister Jim Flaherty announced long-term plans to move away from the current health-care transfer formula that had been increasing at six per cent a year. Instead, staring in 2017-18, the increase in transfers will be tied to growth in the economy.

Provincial premiers meeting this week in Halifax attacked the plan, saying they will lose out on $336-billion between 2014 and 2024. They also argue that it will mean federal spending on health as a percentage of overall spending will drop below 20 per cent.

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