Finance Minister Jim Flaherty said Wednesday the federal government will run a deficit in the 2009-10 fiscal year, admitting Canada can't withstand the sinking world economy.

Speaking after a meeting with his provincial and territorial counterparts in Saskatoon, Flaherty said it's quite clear a shortfall can't be avoided given the economic forecasts.

"The budget will be balanced for this … fiscal year. The big challenge is 2009 and going into 2010," he said. "But 2009 is going to be a difficult year for Canada and Canadians and we have to gird ourselves for that."

Flaherty said three factors are affecting Canada's economy: falling world GDP; a continuing U.S. recession; and a drop in commodities prices.

He says the measures the government outlined in the fall economic forecast won't be enough to keep Canada in the black.

The government will likely spend more than the $6 billion it has already planned to spend on infrastructure projects next year to help stimulate the economy, he said.

"I was encouraged by my provincial and territorial colleagues to do that," he said.

The provinces are working together to develop a list of infrastructure projects that are ready to go, he said.

Flaherty said they also discussed aid for the auto industry, housing needs and improved human resources, such as retraining and employment insurance.

Provinces must help

Earlier in the day, Flaherty said he expected to hear that the provinces are willing to put "their own resources where their mouths are" to help stimulate the economy.

He said he expected the provinces would want to move ahead with a stimulus package "as quickly as possible."

"There tend to be delays in infrastructure projects and, given the seriousness of the economic situation, it's important that shovels get in the ground, that repairs on buildings start as quickly as possible," Flaherty told CBC News.

He said he also expected to hear that the provinces will work with the federal government "to put their own resources where their mouths are, quite frankly, and make sure they help stimulate the economy."

Infrastructure Minister John Baird is on a cross-Canada tour meeting with his provincial and territorial counterparts to discuss possible projects.

Need to get moving

Flaherty said some projects will need to happen quickly.

"There's going to be significant unemployment next year in Canada so we need to do that."

But he said they must also look at projects that are "long-term stimulative" for the Canadian economy.

Ottawa has pledged $6 billion already set aside for 2009 for infrastructure spending.

On Tuesday, the Conference Board of Canada recommended that Ottawa spend $10 billion to $13 billion on stimulus, which it acknowledged would create a $20-billion federal deficit.

Provincial and territorial finance ministers will also be seeking aid for their particular struggling industries.

Last week, a deal was reached by the federal government and Ontario that would offer $3.3 billion in aid to the country's auto industry, contingent on the approval of a proposed $14-billion US bailout package in Washington.

While provincial finance ministers have signalled their approval of the deal, they also have a wish list.

B.C., Manitoba and Quebec have been pushing for aid for the forestry sector. Saskatchewan says the agriculture sector is also struggling.

"If we're going on a sector approach then certainly the automotive sector, for example, is much more severely being impacted than other sectors," said Saskatchewan Finance Minister Rod Gantefoer. "But I think we have to consider them all and so the magnitude of the support may vary from sector to sector."

But B.C. Finance Minister Colin Hansen cautioned that governments need to avoid the rush to spend money.

"There is a consensus the federal government has a role to play when it comes to economic stimulus," Hansen said. "But I also think we have to be very targeted. I'm concerned when I hear people saying, 'Well, if it's X number of billions of dollars it will be in the right range.' "

Another issue likely to come up is the government's plan to cap the growth of equalization payments to have-not provinces.

Quebec Premier Jean Charest said a decision to cap equalization payments will deprive Quebec of $75 million in 2009-10.

"We don't think this is the time to be playing around with this."

Ontario Finance Minister Dwight Duncan said he will be asking for an expansion of the employment insurance program for laid-off workers.

Alberta is seeking a one-time tax rebate for struggling families and an extension to 2015 of the accelerated tax writeoff on new equipment for manufacturers and processors.

With files from the Canadian Press