TD Economics foresees the federal government facing significant deficits in the years ahead.

In a special report issued today, TD projects that Canada will have a balanced budget in the 2008-2009 fiscal year, but it predicts that tumbles to a $10.4 billion deficit in the following year and $9.9 billion the year after that. Conditions are expected to improve after that, with deficits projected to shrink to $5.5 billion in 2011-2012, and $2.4 billion the next year.

TD says that these estimates are based upon its latest quarterly economic forecast with a few adjustments. That forecast featured a 0.7% growth rate for Canada’s real GDP in 2008, 1.2% for 2009 and 2.7% in 2010. “Even though that forecast was prepared only a few weeks ago, we feel it appropriate to downgrade the growth rate somewhat for the end of this year and the beginning of 2009 to account for the very weak recent data coming out of the United States,” it says.

“While some of the latest Canadian indicators have been positive, such as September’s astonishing employment surge, it is only a matter of time, and not much time, before the worsening situation in the U.S. economy spills over to Canada,” it notes. “This adjustment weakens federal government revenue growth in our estimates.”

But it also points out that the 50 basis point rate cut by the Bank of Canada since its forecast, and its prediction that another 50 basis points will be shaved off at the next Bank meeting “offsets somewhat the impact on the budget balance by lowering public debt charges”.