Finance Minister Jim Flaherty says he's confident the federal government will report a modest surplus this fiscal year even though Ottawa posted a $1.7-billion deficit in August.

Flaherty released his Fiscal Monitor report Friday showing the August deficit, which grew from a deficit of $0.1 billion in August 2007.

"For the first five months of the 2008-09 fiscal year, the budgetary surplus is estimated at $1.2 billion, down $5.5 billion from the $6.6-billion surplus reported in the same period of 2007-08," said the report.

The deficit in August was linked to a 10.1 per cent spending surge in transfers to provinces and individuals and in departmental costs.

"Spending does not tend to be even during the year federally and revenues don't come in even during the year," Flaherty said during a press conference Friday in Niagara Falls, Ont.

"I'm comfortable with the fact that we will have a modest surplus this fiscal year."

Flaherty said he'll have a better idea next month, when he releases his fall economic update, about whether the country could face deficits in the future.

He said Canada's economy is fairing relatively well with unemployment at near historic lows.

"The World Economic Forum assessed Canada's economic performance to be the most sound in the world," Flaherty said.

"Likewise, the International Monetary Fund concluded that Canada's financial system is unique, sophisticated and well-managed and able to withstand sizable shocks. This is made-in-Canada stability."

Still, he acknowledged that some businesses are facing tough times and many families are worried about their employment and savings.

Don Drummond of TD Bank told CTV Newsnet's Mike Duffy Live on Friday that the current economic crisis will hit Canadians like people in other nations, by affecting the price of available credit from banks.

"Our banks have been afflicted by the world difficulty, again not quite the same extent, but that means our economy will be afflicted by worldwide difficulties as well," Drummond said.

In an interview with CTV Newsnet Friday, Liberal House Leader Ralph Goodale said the August deficit is a classic case of "Conservative bad management."

He said Flaherty and Prime Minister Stephen Harper chose not to be prudent by increasing government spending to an "all-time record high without any Canadian on the street being able to tell you one or two tangible things they got from all of that spending."

Goodale also blamed the Tories for eroding the tax base without increasing disposable incomes or improving Canadian productivity.

"Most seriously, they've eliminated all of the shock absorbers, all the prudence factors, all the contingency reserves and the planning process that used to be built in to the federal budget to make sure that when these nasty international surprises come along we have the wherewithal to defend ourselves against them," he said.

Liberal finance critic John McCallum told Mike Duffy Live on Friday that Flaherty was partly to blame for the difficult choices he is now faced with by cooking up an economic "toxic soup."

"They ratcheted up spending by 33-billion dollars per year since they came to office (and) they abolished the three billion dollar contingency reserve which was our insurance policy against going back into deficit," McCallum said.

"In June of 2006, Mr. Jim Flaherty permitted, for the first time in our history, a 40-year mortgage with zero down payment, just what caused the problems in the United States."

Flaherty has said Ottawa is taking a second look at its spending commitments to determine whether they are still affordable, given the current economic slowdown.

"The Conservatives admit their spending has gone up a little more than they would like and they have over the last couple of years introduced a lot of income tax cuts that are reducing their revenue," CTV's Roger Smith said Friday from Ottawa.

"Mr. Flaherty, assuming he will be kept in his job when the new cabinet is sworn in next week, will have to be looking at their programs and any tinkering he might have to do before next February's budget."

In last February's budget, Flaherty predicted Ottawa would record a $2.3 billion surplus in 2008, followed by a $1.3 billion surplus next year.