The federal government missed last year's deficit target by nearly $1.4-billion and risks falling short again in 2012-13 as the global economy cools.
The final shortfall was $26.2-billion for the fiscal year that ended March 31, down from a deficit of $33.4-billion in 2010-11, according to the government's annual financial report, released Friday.
But Finance Minister Jim Flaherty had forecast a more rapid decline in the deficit to $24.9-billion in his March budget.
Mr. Flaherty put a more upbeat spin on the numbers.
"This positive performance is encouraging and reflects Canada's sound economic and fiscal fundamentals," he said in a statement. "However, the global economic environment is still fragile and uncertain, and recent economic developments suggest that there are downside risks to the fiscal outlook."
The Finance Department added that the financial report "clearly demonstrates the Harper government's ongoing efforts to ensure prudent and responsible spending," citing a downward trend in program spending relative to gross domestic product.
The main cause of the larger gap was weaker than expected revenue. Economists pointed out that Ottawa will also likely have trouble meeting its deficit projection for 2012-13 of $21.1-billion.
"It's going to be a little bit more of a challenge to meet their target," acknowledged Paul Ferley, Royal Bank of Canada assistant chief economist. "The starting point is higher. So it's a little bit more difficult for them."
Through July, Ottawa's deficit for 2012-13 is roughly $3-billion lower than last year. But the March budget forecast a $4-billion decline.
Mr. Ferley said Ottawa could still get "back on track" in the remaining eight months of the government's fiscal year. The main threat to Ottawa's fiscal outlook is the uncertainty over where the global economy is headed, according to Mr. Ferley.
Once-booming Asia is slowing, much of Europe is back in recession and Canada's largest trading partner, the United States, risks following suit if the President and Congress can't reach a budget compromise soon. Without a deal after the Nov. 6 election, the U.S. government would head over a "fiscal cliff" of sharply higher taxes.
Canada's overall fiscal position remains healthy, according to the Finance Department. The country's total debt-to-GDP was 33.3 per cent in 2011 – best in the Group of Seven. The second-best performer was Germany, with a ratio of 52 per cent.
Parliamentary Budget Officer Kevin Page warned in a report earlier this month that while Ottawa finances are improving, the fiscal situation of some provinces is getting worse. If provinces and municipalities keep piling on debt at the current pace, they could look like troubled Greece within a few decades, he warned. The report calculates that provinces and their municipalities have a fiscal gap of about 2 per cent of gross domestic product now – or $36-billion – and by 2086 will have debt worth 350 per cent of GDP. Ottawa, Mr. Page said, will be in a structural surplus.