The federal government says it began the new fiscal year with a $500 million deficit as new tax cuts introduced in January and a slumping economy cut into revenues and public spending rose.

The government said Friday that revenues fell by 4.1% in April and May of this year, compared with the same period last year, while spending increased 7%.

Revenues from the GST tax plunged 20.9% from last year, the Finance Department said, and revenues from corporate taxes fell 16.6%. Many companies, especially manufacturers and forestry operators, have been reporting lower profits because of the slumping economy.

The small deficit to start off the year is in sharp contrast to the $2.8 billion surplus the department reported last year for April and May.

The early increase in spending reflected increased financial transfers to provinces and individuals, but the department said spending would moderate significantly as the year progresses to an average growth of about 3.4%.