Parliamentary Budget Officer Kevin Page is forecasting a deficit of $16.7 billion in the fiscal year 2013-14. (Fred Chartrand/Canadian Press)

The provinces will have to cut spending or raise taxes to eliminate their budget deficits, the Conference Board said Monday.

The federal government, however, may be able to avoid those steps, the board said in its summer economic outlook for Canada, titled Slow Train Coming.

The question of how to end the deficits that governments are running to stimulate the economy came to the fore last week after the parliamentary budget officer, Kevin Page, said Ottawa may face a structural deficit — one that can only be addressed by spending cuts or tax increases — in 2013-14.

Finance Minister Jim Flaherty said last Wednesday that Page's forecast was too pessimistic. Prime Minister Stephen Harper said Friday the government would not raise taxes and cut programs just to balance the budget by 2013-14, as the January budget predicted.

The Conference Board said the federal government "is still in a structurally sound fiscal position," and "is expected to rebalance its books" as the economy grows and temporary economic stimulus measures end.

But the provinces — which are paying more for social programs, must match federal infrastructure spending to get federal contributions and are facing tax drops from declining royalties — are in a "more troublesome situation," the report said.

"The implication is that, sooner or later, provinces will have to boost taxes or cut spending in order to return to a balanced budget."

Economy to shrink 1.9% this year

The board is forecasting that the Canadian economy will begin to grow in the second half of the year, but not enough to offset the decline in the first half.

The result: real gross domestic product will fall by 1.9 per cent in 2009 and grow a weak 2.7 per cent in 2010.

The 2010 growth will be based on the government's infrastructure spending and a recovery in resource prices and exports.

"The current recession is so widespread that its effects are expected to linger for longer than the typical business cycle," Pedro Antunes, the board's director of the national and provincial forecast, said in a release.

Exports to the U.S. "can only rise" because they are so low now, and the stimulus plans most countries have adopted will begin to raise demand in the second half of this year.

The board's economic predictions are slightly more optimistic than the International Monetary Fund's. Last week, the fund said the Canadian economy will shrink 2.3 per cent this year and grow 1.6 per cent in 2010.

Senior managers see slow improvement

The Bank of Canada's business outlook survey also suggested corporate leaders expect the economy gradually to get better.

A majority of senior managers from about 100 firms said sales shrank in the past year, but most expect some growth in the next year. That's a change from the previous two surveys, where the managers expected further sales drops.

They also expect to hire more workers, and some companies believe that commodity prices bottomed out in the past few months.

The "vast majority" of respondents expect inflation to be within the bank's target range of one to three per cent over the next two years.