By John Valorzi And Maria Babbage, The Canadian Press.

Mr Harper, waves goodby to another $7.5 billion, Canadian tax dollars

TORONTO - Canada’s economic horizons are brightening even though the federal government sunk $7.5 billion deeper into its gaping fiscal hole in April and May, Finance Minister Jim Flaherty said Friday.

Stimulus spending, larger unemployment benefits, the auto bailout and shrinking corporate tax revenues ballooned the deficit more than eightfold from the same period last year, when it stood at $900 million, he noted in his latest report on spending and revenue.

Revenues were down $2.6 billion in the first two months of its fiscal year, or 6.9 per cent, largely due to lower tax revenues from companies squeezed by the recession and the reduced goods-and-services tax.

Program expenses were up $4.4 billion, or 13.4 per cent, largely due to higher Employment Insurance benefits and the impact of its $10-billion contribution to the bailout of General Motors and Chrysler, the report noted.

But the economy is starting to turn around as the impact of low interest rates, government stimulus policies designed to spur job growth, and other factors boost growth, Flaherty said.

“What we’re seeing is stabilization in the economy and some encouraging signs in terms of consumer confidence, retail sales, and certainly home improvement activities,” he said after announcing federal funds to refurbish Union Station in downtown Toronto.

“The home renovation tax credit is working as we thought it would, which is really important in terms of individuals exercising their right to work with their own infrastructure, their own homes, cottages and so on. That stabilization is important.”

Ottawa’s forecasts for future deficits for the next four years has led to debates about how long it will take for the federal government to rebalance the books. Until it eliminates the shortfall, it’s unlikely the government will cut taxes further for consumers or embark on any new social programs.

TD Bank said last month it expects Canada will be more than $172 billion in the hole over the next five years - double the government’s last budget projection of an $85-billion deficit.

And last week, Toronto-based economist Dale Orr said Ottawa will need a full decade of economic growth to eliminate the deficit, six years longer than the government projects.

With the latest forecasts on the expected recovery rosier than expected, the deficit may shrink faster than believed earlier.

Bank of Canada governor Mark Carney declared the recession technically over on Thursday, saying Canada’s economy will begin growing this summer after nine months of stagnation and lead most of the industrialized world next year.

Flaherty vowed in his January budget to eliminate the deficit within four years, a prospect that became less likely as economic conditions worsened.

Pinpointing when the deficit might disappear is far from an exact science, said Avery Shenfeld, chief economist at CIBC World Markets.

“People who come out with doomsday predictions of where we might be four or five years from now need to eat a little dose of humble pie, because economists haven’t been particularly good at forecasting deficits one or two years ahead, let alone four or five,” he said.

“We don’t know with any accuracy where (the deficit) will be. But in all likelihood, even if Canada does have a small deficit four or five years out, that’s not particularly critical.”

That’s because years of debt reduction has left Canada in a strong position to swallow deficits relative to other countries, Shenfeld said.

Even if the Conservatives don’t meet their four-year target, the deficit will be small enough to that the debt-to-GDP ratio will be falling, he said.

Shenfeld said he wasn’t surprised by the spring deficit spike, but expects it to shrink over the next two years as dwindling corporate tax revenues and rising unemployment benefits start to reverse course.

Not all corporate losses will show up in the current tax year, which means the government may have to wait longer for the money to flow in, he acknowledged.

Carney has also warned that renewed growth after three quarters of economic shrinkage won’t lead to job growth until much later, when companies regain confidence and begin hiring again.

Statistics Canada calculates 370,000 jobs have disappeared since October, and some economists believe more than 500,000 will be lost before labour markets begin to recover.

That means the jobless rate of 8.6 per cent could rise above nine per cent or higher until employment begins to recover.

Flaherty noted Friday that the central bank estimates real GDP growth for 2010 at three per cent, while the Conference Board of Canada predicts 2.7 per cent economic expansion - solid growth numbers.

“They’re also showing that Canada ought to come out of the recession more strongly than the United States, which is what we anticipated,” he said.

“The reason is that our economic and our fiscal fundamentals are solid.”