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Canada to unveil smaller budget deficit, hopes will shift focus

OTTAWA, Oct 24 (Reuters) - Canada's Liberal government is expected to unveil a smaller budget deficit on Tuesday as well as new spending on the middle class as it seeks to shift focus from conflict of interest allegations facing Finance Minister Bill Morneau.

The fiscal update will show a sharp improvement in the nation's balance sheet since the March budget, as stronger economic growth boosted revenues, but is unlikely to project balanced budgets anywhere on the horizon, economists said.

"It basically boils down to the fact that the economy looks like it's going to grow by more than 3 percent this year, when they were basing their assumptions on growth of less than 2 percent back in March," said Doug Porter, chief economist at BMO Capital Markets.

In March, the government projected a budget deficit of C$28.5 billion in the 2017-2018 fiscal year, which ends in March, up from the C$17.8 billion shortfall the previous year. At the time, economists said their economic assumptions looked easy to beat, all but guaranteeing they could boast of an improvement later.

Prime Minister Justin Trudeau's government has been badly shaken by a conflict-of-interest controversy surrounding Morneau, but hopes the fiscal update will reset pubic focus on the strong economy.

The Liberals won a surprise majority in 2015 pledging to run C$10 billion annual deficits to spur the economy, and the Bank of Canada has said the fiscal stimulus, which included a family tax credit, boosted growth in recent quarters.

The fiscal update will include a pledge to boost payments made to families under the Canada child benefit program, the Canadian Broadcasting Corp reported, citing multiple sources.

A spokesman for Finance Minister Morneau declined to confirm the report, but hinted at further spending rather than fiscal restraint, and said there will be "good news" for the middle class.

"We will not only update on how well (our policy has) been working, but giving back as well, by re-investing in the people who are creating jobs and growing the economy - the small business tax cut is a good example of that," Dan Lauzon said in an email.

Morneau, seeking to counter a backlash against a tax reform that targeted wealthy individuals and family businesses, said last week the government will cut the small business tax rate to 9 percent from 10.5 percent. (Reporting by Andrea Hopkins; Editing by Andrea Ricci)