12/30/2011 04:30 EST | Updated 02/28/2012 05:12 EST

Manitoba premier predicts 'tough' 2012 budget after posting record deficit

WINNIPEG - The new year is going to be a tough one for Manitoba's number-crunchers as they struggle with a near $1-billion deficit and the unwavering goal of balancing the books by 2014 without making deep cuts or raising taxes.

Premier Greg Selinger says the province's finances are, without a doubt, the No. 1 challenge going into 2012. Some election promises won't get rolled out as quickly and some civil service job vacancies won't get filled.

"It will be tough," the premier said during a year-end interview with The Canadian Press. "I don't think anyone's saying it will be easy. It's not a surprise it's going to be challenging."

Following re-election in October, the NDP government hinted that Manitoba's financial outlook was far from rosy. Finance Minister Stan Struthers talked about a growing bill from last spring's flooding. Selinger told a business audience during his annual state-of-the-province address that Manitoba's deficit was going to be far larger than predicted.

The stark numbers released Dec. 16 in a quarterly fiscal update told the tale. The deficit forecast had climbed to $989 million — double the $438 million the government had anticipated.

The NDP quickly blamed hundreds of millions in unbudgeted expenses due to flooding. The government said flood-related costs are likely to hit $815 million by the end of the fiscal year, although Manitoba will be left to cover a little over half that once Ottawa picks up its share of the tab.

The province is also spending more on public safety and child welfare, Selinger said. Although critics have said the NDP cannot balance the books in two years without significantly increasing taxes, he suggested the government is just going to have to "prioritize" to bring the books back into the black.

"It will not be easy. Moderation is the watch-word on these things. It's about making sure that we are reasonable in the way we do things."

Rather than cutting services, Selinger said, the NDP will look for "overhead efficiencies" within the bureaucracy that supports front-line programs. In past years, the province reduced the number of school divisions and senior officials, for instance.

But that has left Manitoba with a little less fat to trim, the premier admitted.

"Manitoba's per-capita expenditures are the fourth-lowest in the country and have been for a long time," he said. "It's tight ... We don't normally have major expansions in government bureaucracy that are unnecessary."

Conservative Leader Hugh McFadyen said the NDP's action has to go well beyond finding minor efficiencies. The government isn't left with many options given what he characterized as a disastrous financial state.

"There are three options: one is deep spending cuts, another is tax increases and the other is just to run massive deficits and kick the problem down the road.

"I'm not sure which of those options they're going to choose but the longer you defer tackling the deficit, the larger that problem becomes."

The NDP should undertake an immediate spending review and put some pressure on public sector unions to help bring down costs, McFadyen suggested.

The province could be bailed out, in part, if Ottawa comes through with more disaster compensation for the spring flood. But Selinger said provincial officials are continuing to wrangle with their federal counterparts over what flood expenses are eligible for reimbursement.

For example, Manitoba spent $100 million to dig an emergency channel to lower the level of swollen Lake Manitoba without waiting to see if the bill would be footed by the federal government.

"It's pretty clearly an emergency project," said Selinger. "We haven't been given that assurance yet."