Flaherty says deficit will be bigger than projected

MEECH LAKE, Que. - The deep recession is wreaking havoc on the government treasury and will cause the deficit to balloon "substantially more" than projected in the budget this year, Finance Minister Jim Flaherty now says.

The finance minister said Monday the recession has hurt government revenues from personal and corporate taxes and raised spending requirements. That means the financial shortfall -- originally forecast at $34 billion for 2009-2010 -- will be much higher.

In its January budget, Ottawa estimated it would run deficits for five years and predicted a shortfall of $64 billion over the next two years, including $30 billion in 2010-2011.

"I expect we will have a larger deficit than anticipated in the federal budget . . . the deficit will be substantially more," Flaherty told a news conference after a meeting of federal-provincial finance ministers at Meech Lake.

The actual number will be released in a June update when the government reports to Parliament on how the fiscal stimulus is being spent.

Flaherty's announcement amounts to a catch up for the government to projections already made public by parliamentary budget officer Kevin Page, who in March estimated the deficit would be at least at least $9 billion more over the first two years.

TD Bank chief economist Don Drummond, a former senior finance official, went even further, saying the shortfall would be about $18 billion more.

Flaherty would not elaborate, but said the new reality does not change the picture about when the government will come out of deficit, in the 2013-14 fiscal year.

The minister's revision, after saying last month he was not changing his forecast, came after meeting with his provincial counterparts over the state of the economy, the issue of employment insurance and the adequacy of Canada's pension system.

After receiving a briefing from Bank of Canada governor Mark Carney, Flaherty said the economy remains in a "serious recession" despite some encouraging signals.

But he balked at increasing the size of Ottawa's $40-billion stimulus or expanding employment insurance benefits, as the opposition parties and Ontario have demanded.

Flaherty said once provincial stimulus spending is included, Canada has about $50 billion earmarked to boost the sagging economy.

Ontario Finance Minister Dwight Duncan, however, said he was not giving up on the issue. He complained that an unemployed person in Ontario makes about $4,000 less from the system than the Canadian average, and that only about 32 per cent of the jobless in Ontario are collecting EI.

"The bottom line is that the rules in place now were designed at a very different time and we need more flexibility," he said.

As well, he called EI the most effective form of economic stimulus because those receiving benefits will spend it, and likely quickly.

The ministers were able to agree on a study group to look at the Canadian private pension plan system. Ted Menzies, parliamentary secretary to Flaherty, will head the group, which will include provincial representation.

Ontario, British Columbia, Alberta and Nova Scotia have been pressing for a national approach on pensions with a view to expanding coverage and benefits of private sector plans.

Corporate pension plans have been in trouble in part because of last year's collapse of stock markets and other factors that have left many companies -- including General Motors Canada and Air Canada -- unable to deal with billions of dollars of obligations.

"This issue is going to take on greater and greater significance in the coming weeks and months and years," Duncan said.

"It does require more work to be done. Our preference is to take a pan-Canadian approach to this issue as we explore options that may be available."

Earlier, Flaherty agreed with Duncan that the issue needs a national approach.

Although only about 10 per cent of private pensions are under federal jurisdiction, "we're all Canadians, we're all in this together," he said.

Ottawa also announced technical changes to the Canada Pension Plan that would take effect in 2011. The changes would allow retirees under 65 more flexibility, permitting them to work more hours while receiving benefits. As well, the government proposes to exclude up to a year of low or no earnings without impacting benefits.