10/28/2011 12:31 EDT | Updated 12/28/2011 05:12 EST

Ottawa posts $3.6B deficit in August, improvement over $5.8B shortfall in 2010

OTTAWA - The federal government's fiscal picture is continuing to brighten, with Ottawa reporting Friday that its deficit for August was more than $2 billion smaller than last year.

The Finance Department's latest report on revenues and expenditures shows a shortfall of $3.6 billion in August, an improvement from the $5.8-billion deficit in August 2010.

The department routinely cautions about timing issues in the monthly accounts that can create a misleading picture of the underlying situation, but the August number is in line with a general downward trend in the deficit.

For the first five months of the fiscal year that began in April, Ottawa's deficit is almost $3 billion to the good — $10.7 billion compared with $13.5 billion in the same period last year.

The latest numbers are in line with the government bettering its projected $32.3-billion deficit for the entire 2011-12 year, but analysts say the longer-term picture is less clear.

In a report earlier this week, TD Bank estimated this year's deficit would come in $1.4 billion below expectations, but that Ottawa would be unable to meet its four-year target for getting back to balance.

With slower growth in the forecast, TD economists estimated it would take Ottawa an extra two years to completely eliminate the red ink unless the economy improves more than expected or the government takes further action, such as new cost-cutting measures or higher taxes.

The latest numbers support the forecast that this year's deficit will be lower than budgeted for, said TD economist Sonya Gulati.

"However, lower economic growth assumptions relative to those in the budget over the medium term should erode any carry forward gains arising from the better starting point," she added in a note, sticking to the later target for returning to balance.

Finance Minister Jim Flaherty did not commit to the four-year target when asked, but insisted Ottawa remained on track to eliminate the deficit "in the medium term."

The two-year gap stems from the fact that expectations for the Canadian economy were relatively robust in March, when the budget was first introduced, and also in June, when it was retabled following the Harper government's successful re-election campaign.

But subsequent market turmoil and plunging business and consumer confidence over European debt issues and stubborn weakness in the U.S. labour and housing markets have lowered expectations for the economy.

Flaherty is expected to issue a fall fiscal update in the next two weeks that incorporates a new consensus among economists that shaves seven-tenths of a point off the previous assumptions for gross domestic product growth.

The new consensus is that the economy will only grow by 2.2 per cent this year and 2.1 next year, while the Bank of Canada has an even slower expansion path of 2.1 and 1.9 per cent respectively.

The TD Bank calculates government revenues will suffer by about $3 billion next year as a result and that annual revenues will be $8 billion below earlier estimates by 2015-16.

In August, Ottawa said revenues increased by about $700 million, more than half coming from corporate taxes.

Program expenditures were down $1.3 billion from the previous year, with payouts for unemployment insurance dropping by about $300 million, or 15.5 per cent. Interest charges to service the national debt were almost $200 million lower.

For the first five months of the fiscal year cumulative, Ottawa has taken in $3.1 billion more in revenues, most from individuals, and spent about $300 million less than it did for the same period last year.

Public debt charges are $636 million less, the government said, "reflecting consumer price index adjustments on real return bonds and a higher stock of interest-bearing debt."