The latest federal budget has Canada sailing closer to deficit than it has been in decade, suggests Global Insight, but it believes government will be able to skirt that outcome.

The economic research firm says that the forecast in 2008 budget is very reasonable. However, it has run a couple of scenarios that are slightly more pessimistic than the base forecast of the budget, estimating the probability of the small fiscal surpluses forecasted in the budget turning into deficits.

The most likely outcome, it says, is that the economy performs as forecasted, so no deficit is reported.

If the economy is slightly weaker than forecasted, the government may still avoid deficit. “In this scenario, in the closing months of the fiscal year, it appears the government is heading toward a small deficit. Finance and Treasury Board officials are directed to use the maximum amount of imagination and pressure to find roughly $1 billion so the government does not have to report a deficit. They are successful. The impending deficit is headed off, and when the books close, the government reports a very small fiscal surplus,” it notes.

In the final scenario, the U.S. economy does not pick up as expected in the final half of 2008, and the Canadian economy performs well below forecast, and the impending fiscal deficit is simply too large to be avoided by last-minute heroics.

It puts the probability of the expected scenario at 65% this year, and 55% next year; the second scenario is estimates at 20% probability this year and 25% next year; leaving the deficit scenario as just a 15% probability this year, and 20% next year.

“Reporting a deficit would clearly be a serious blow to the credibility of the finance minister and the government, unless that deficit was the result of a much weaker U.S. economy than forecasted in Budget 2008. From the economic perspective, however, a small deficit in 2008/09 and/or 2009/10, in itself, would not significantly alter Canada’s economic performance or prospects. Canada’s debt burden is now at a very reasonable level, both by historical standards and by international comparison. Canada has built up credibility in fiscal performance over the past decade,” Global Insight says.