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The government claims that corporate tax cuts will create jobs by the tens of thousands, while the opposition parties say that CIT cuts don’t have a significant effect on employment. Both claims are beside the point.

Sean Kilpatrick

The federal government's fiscal position is improving dramatically and is on track to easily beat the deficit projection of $45.4-billion for this year.

The Finance Department reported Friday that it recorded a relatively small, $1.4-billion shortfall in December, less than half the $3.1-billion shortfall it had in December, 2009.

That means, with accounts in for the first nine months of the fiscal year that ends March 31, Ottawa's deficit stands at $27.4-billion.

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If the last three months of the year produce similar results, the deficit for the 2010-11 period be in the order of $36-billion.

However, there are significant seasonal factors that cause sizable variances from month-to-month.

Still, in recent testimony to a parliamentary committee, budget watchdog Kevin Page estimated the final deficit tally would be just under $40-billion.

Scotiabank economist Mary Webb, who tracks government budgets, said the difference this year has been that the economy has performed better than Finance Minister Jim Flaherty counted on in his budget last March.

With jobs recovering faster than projected, Ottawa has taken in more tax revenues than anticipated.

"It's not just that growth has been better than expected, it's that the nature of growth has been made up of strong job creation and consumer spending, which increases tax revenues," added economist Douglas Porter of BMO Capital Markets.

The levels of consumer spending throughout most of 2010 has surprised economists, as has growth in employment which has seen all and more of the 428,000 job lost during the recession recovered.

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The task of reining in the deficit may get harder in future years, however, suggested TD Bank economist Sonya Gulati, since many analysts see growth rates slowing as the economy satisfies pent-up demand. The consensus is that growth will be slower this year than last.

"Relatively strong economic growth has allowed the federal government to rein in its deficit numbers in the near-term," said Ms. Gulati. "But, with only moderate growth anticipated in 2012 and onwards, the government's planned return to budgetary balance will become increasingly dependent on its expenditure restraint efforts."

Ms. Gulati said markets would be encouraged that Ottawa has its fiscal affairs well in hand if Mr. Flaherty were to provide a more detailed account on how he plans to restrain spending in the next few years.

Friday's report showed revenues from personal, corporate and sales taxes were up across the board - $12-billion more than in the first nine months of last year.

Meanwhile, program expenses were down $1-billion.

The added borrowing needed to service the deficit has taken its toll, however, and public debt charges were $1-billion more than last year.

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Mr. Flaherty, who is expected to hand down his next budget on March 22, estimated in the fall that the 2011-12 deficit would shrink further to about $30-billion as stimulus spending is wound down.

The department said the government stimulus program was responsible for almost half the $27.4-billion deficit so far this year.



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