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Ottawa starts year in better shape narrowing deficit to $1.15B in April-May

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OTTAWA - The federal government continues to show progress in its drive to eliminate the deficit by next year, the latest accounting from the Finance Department indicates.

In the first report on its financial position for the new 2014-15 fiscal year, the department said it posted a combined $1.15-billion deficit for April and May, the first two months of the fiscal year. That compared with a $2.7-billion shortfall last year during the same period.

The improvement was mostly on the revenue side as the government took in $1.6 billion, or 3.8 per cent, more than in the April-May months last year, while program expenses increased only $216 million, or 0.6 per cent. Debt charges fell by $167 million.

By individual months, Ottawa said April produced a $1.4 billion deficit, while May brought a tiny surplus of $267 million.

The April-May numbers slightly undershoot the pace required to achieve the budget goal of a $2.9-billion deficit in 2014-15, especially since the government is counting on making huge strides on the deficit during this fiscal period.

The budget estimate for last year's deficit was $16.6 billion, meaning that Ottawa will need to shave about $13.7 billion from that number in one year to meet the target.

Analysts caution, however, that the monthly tracking of the fiscal position can be "lumpy." Individual reports can show large swings that are not indicative of the underlying state of the country's finances.

"It's a pretty respectable start, although it is early days yet," said Mary Webb, a senior economist with Scotiabank who specializes on fiscal policy.

"The part I worry about is on the revenue side because employment has not been very strong and for the government personal income tax is very important."

Employment growth has been weak in Canada the past 12 months with only 72,000 net new jobs created. However, the government has benefited from strong oil prices and higher inflation, which tends to increase tax revenues.

Webb said attaining a balanced budget by 2015 is "important politically" for the Harper government, but not from a market perspective.

"If Ottawa was able to reduce the deficit to below $5 billion, it will look very good and the deficit will be a fraction of GDP (gross domestic product)," she pointed out.

Politically, however, the Conservatives need to balance the budget in order to fulfil a 2011 election promise to cut taxes for families through income splitting once the deficit is eliminated.

Ottawa has a few aces in the sleeve toward achieving the target, even if economic and employment growth underperform expectations.

Although the budget projected a $16.6-billion deficit for last year, the preliminary numbers point to a shortfall about $4 billion below that number. As well, Ottawa has built in a $3-billion contingency buffer it may not need. Finally, the government can sell assets, such as millions of General Motors shares, to reduce the deficit.

Still, the expectation is that in the coming months Ottawa's books will be showing fewer and smaller monthly shortfalls, turning to surpluses by the end of the year.

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