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Federal deficit shrinks as revenues up, costs down

The economy’s strong first half of the year is doing wonders for the federal government’s balance sheet.

OTTAWA — The economy’s strong first half of the year is doing wonders for the federal government’s balance sheet.

The Finance Department reported Friday that it recorded a tiny, $473-million shortfall in July after $5.8 billion of red ink in the same month last year.

As for the fiscal year so far — four months — Ottawa’s deficit is only $7.7 billion, or 42 per cent of what it was in the first third of the previous year — $18.3 billion.

In the March budget, Finance Minister Jim Flaherty estimated this year’s deficit would reach $49.2 billion.

Analysts say the government is well on its way to beating that projection, although not by as much as the current pace suggests.

“We caution market participants against extrapolating recent budget balance improvements,” TD Bank economist Pascal Gauthier advised.

He noted that the government is benefiting from the extraordinary rebound from the recession that occurred at the end of 2009 and beginning of 2010, with growth rates of 4.9 per cent and 5.8 per cent.

But the economy has come crashing back to earth since. The second quarter of this year produced a mere two per cent gain, and the current third quarter, which ends Sept. 30, is now predicted to come in at about 1.5 per cent.

The prognosis is not much better for the rest of the year, or 2011.

“What is clear is that Canada’s fiscal position, while better than most of its G7 counterparts, will not be balanced solely through economic growth in the years ahead,” Gauthier said.

He believes the government will beat the $49-billion target, by between $3 billion and $5 billion.