Source: The Canadian Press

The federal government may be headed for a smaller deficit than it feared in the just past year, thanks to a quicker and stronger than expected recovery in economic activity.

Ottawa reported Friday that its deficit increased by a modest $902 million in February, compared to an $800-million surplus a year ago.

For the fiscal year – which has one more month to run – Ottawa’s shortfall has now risen to $40.5 billion.

But that is still well below the record $53.8-billion deficit Finance Minister Jim Flaherty had projected in the March budget.

The Finance Department routinely cautions that timing factors can at times give a false impression of the state of the government’s finances, and the monthly data is subject to revision, but the trend over the past few months has been generally rosier for the government.

The big surprise in February was that government revenues, which had been falling steadily, showed an $800-million improvement over last February.

Especially robust were revenues from corporations, which were $1 billion – or 31% – stronger.

GST revenues were also up, but receipts from personal income taxes were down about seven per cent.

Program expenses increased by $2.5 billion, reflecting increased transfer payments and operating expenses for federal departments, Crown corporations and agencies.

Despite the better than expected numbers, the latest accounting is a vivid reminder how difficult economic conditions, including increased unemployment, has hit the government’s once solid fiscal position.

From the mid-1990s to the recession, which hit in the fall of 2008, Ottawa had recorded a dozen years of surpluses and paid down about $100 billion of the national debt.

The year-to-date $40.5-billion deficit is a sharp contrast to the $1.3-billion surplus Ottawa enjoyed at this time last year, with $18 billion of the shortfall attributed to stimulus spending intended to arrest the economic slide.

As well, revenues are down almost $17 billion from last year, reflecting losses in both personal and corporate tax receipts.

Meanwhile, programs are costing the government $26.4 billion more in higher transfers, the bailout of the auto industry and higher payouts to newly unemployed Canadians.

The government, like many Canadians, did benefit from low interest rates and saw the cost of servicing the debt decline by $1.5 billion.