Canada has a $4.4-billion deficit for the first two months of the fiscal year. (Canadian Press)

The federal government had a $4.4-billion deficit during the first two months of the fiscal year, but that's a big improvement over last year, when the economy was still mired in recession.

While preliminary, the new numbers for April and May reflect the government's improving fiscal position as the country emerges from a deep recession that saw Ottawa go from a decade-long surplus to record amounts of red ink.

The Finance Department's fiscal monitor, released Friday, notes that during the first two months of fiscal year 2009, when the country was still in recession, the government spent $7.5 billion more than it took in.

That's because tax revenues were down and social and economic spending to offset the slump was higher.

The improvement in the deficit year-over-year was most visible in revenue from personal income taxes and the goods and services tax.

Income tax receipts rose $2.4 billion, or seven per cent, from the same period last year, the Finance Department said.

Meanwhile, the GST took in $2 billion more during the two months, a whopping 87 per cent gain.

However, revenues from corporate taxes were down 13.5 per cent.

The government said the deficit includes about $1.8 billion in spending under the stimulus package introduced in January 2009.

In the March budget, Finance Minister Jim Flaherty projected that the federal deficit would come in at $49.2 billion this fiscal year, which runs from April to March 2011.

But economic conditions in the first quarter of this year were far better than projected. The economy grew at a decade-high 6.1 per cent during the first three months of 2010, and employment growth has kept advancing.

In the last three months ending in June, the economy created a massive 227,000 jobs, adding to tax revenues and reducing the government's burden for unemployment insurance.

The jobless rate has gradually declined from last summer's high to the current 7.9 per cent.

The quicker-than-expected recovery so far is also expected to produce a smaller deficit than the $53.8 billion shortfall Flaherty had forecast for the previous fiscal year, although final results have yet to be released.

The Bank of Canada has projected that growth in the second quarter and for the last half of the year will be considerably slower, however, which could slow the pace of revenues going to Ottawa.

But if the trends towards a shrinking deficit continue, it might soften the impact of the government's proposed austerity program of spending cuts planned over the next few years to help balance the books.