The federal budget deficit now stands at $17.3 billion, eight months into the fiscal year, the Finance Department reported Friday.

That compares with $26 billion for the same period last year.

In November, the excess of spending over revenues grew by $1.9 billion. That was less than half the increase in the $4.5 billion shortfall a year earlier.

The latest accounting shows the deficit is shrinking at a faster rate than expected.

In the recent fall economic update, Finance Minister Jim Flaherty projected Ottawa would be in the red by $32.3 billion. With four months left, the government is on pace to come in with a deficit under $30 billion.

In a commentary, TD economist Sonya Gulati projected the deficit to come in at a range between $27 billion and 28 billion, with the deficit-to-GDP ratio for the year close to 1.7 per cent, a "significant" improvement from the 3.6 per cent figure at the peak of the recession beginning in 2009.

Harper, Clement, warn of cuts to come

In separate speeches Thursday, Prime Minister Stephen Harper and Treasury Board President Tony Clement struck a harsh note of austerity about the government's future plans.

Harper stressed his government's desire to slash spending with cuts to Canada's pension system, particularly the Old Age Security benefits and noted that he has already moved to reduce growth in health-care financing.

Clement said the government is looking to achieve even more savings from cuts to the public service — perhaps as much as $8 billion, up from the previously announced $4 billion.

The government's plans are aimed at reining in costs in preparation for the demographic squeeze down the road, when baby boomers move from taxpayers to receivers of social services.

Gulati said the government's eye appears to be not on this year's deficit, but on expected shortfalls down the road, when slow economic growth is expected to keep revenue gains modest.

"When you take a look at the medium-term profile, that's where the hardest task is," said Gulati.

"They've already said they are not going to be raising taxes, so (reducing the deficit) will have to come from expenditures."

In November, Ottawa said its revenues were down slightly, but expenses fell sharply by $2.5 billion, partly due to the windup of stimulus projects introduced during the downturn in 2008 and 2009.

With files from The Canadian Press