The federal government suffered the biggest deficit in history last year at $55.6 billion, but Finance Minister Jim Flaherty said Tuesday that Ottawa remains on track to balance the budget in just over five years.

Bay Street economists caution that getting there is going to entail spending restraint starting in 2011, and even then disappointing economic growth could derail those plans.

BMO Capital Markets calls the update “a classic good news/bad news report”, noting that the bad news is that the final budget deficit figure for fiscal 2009/2010 was a higher than expected $55.6 billion, but the good news is that the current fiscal year’s projected deficit has been revised down to $45.4 billion, from the expected $49.2 billion in March’s budget.

“A good chunk of the swing simply reflects an accounting adjustment, where Ottawa had to allow for $5.6 billion in HST transition payments to B.C. and Ontario,” BMO explains.

The government is still expecting to have the deficit erased by fiscal 2015/2016.

BMO says that these latest projections are based on GDP growth assumptions of 3.0% this year and 2.5% in 2011. “Again, this is good news/bad news, as this year’s call has been hiked from 2.6% since the March budget, but next year has been revised down from 3.2%,” BMO says.

“The projections remain relatively prudent given relatively conservative growth estimates for the economy,” notes RBC Economics, adding that they imply that fiscal restraint will become more aggressive starting in fiscal 2011/2012.

“In part this reflects the ending of such initiatives such as the infrastructure program that will end the first quarter of 2011. However, details of additional expenditure reductions remain to be provided in future budgets,” RBC adds. “Higher taxes have never been a component of the government’s game plan to lower the deficit and today’s update does not alter this priority.”

“To achieve even the federal government’s slightly downgraded projections, the government does have to terminate its temporary stimulus plans and implement the planned expenditure restraint,” agrees TD Economics. However, it adds that if additional fiscal stimulus is injected into the economy, “the government’s track to balance within four-five years may have to be revisited.”