Finance Minister Jim Flaherty said Sunday he could not safely predict that the federal government will stay in the black.

Asked about the possibility of a deficit, he told CBC News: "We will see. I would not categorically rule out a deficit," adding that with five months remaining in the fiscal year, the government will be watching the situation closely.

But he expects "a modest surplus" this fiscal year, which ends March 31, 2009.

The federal government ran a $1.7-billion deficit in August but reported a $1.2 billion surplus for the April-to-August period.

He said Ottawa would run a deficit "if it were the responsible thing to do in a critical situation in Canada," such as "a significant worldwide recession that was dramatically affecting the Canadian economy."

Such a deficit could provide a clear stimulus for the economy or for the international economy, he said.

But even if the federal government recorded a deficit, it is vital to avoid the structural, year-after-year deficits, of the kind Canada ran in the 1970s and '80s, Flaherty said. "That's a clear danger."

No cuts to provinces

If tax revenues drop in an economic downturn, governments sometimes cut spending.

But Flaherty said the current government will not cut payments to the provinces, the way the Liberals did in the 1990s, when they eliminated the structural deficit.

"We will not reduce the level of social transfers and health transfers to the provinces," he said.

Nor will the government take any steps that would remove economic stimulus.

Canada needs new infrastructure, and "we have to continue" the government's plan, he said. Tax cuts will continue because they also provide a boost, he said.

However, Canadians may have to wait to see certain spending the Conservatives promised in the recent election campaign, although the minister said those programs will begin within the four years the party promised.

Flaherty has meetings lined up to discuss the economy with the provincial and territorial finance ministers, and also with his international counterparts.

"We're not through this crisis," he said, but "there's good reason for confidence in the Canadian economy" because there was no housing bubble like in the United States, and the Canadian banks are solid.