OTTAWA - Retroactive tax cuts introduced in October by Finance Minister Jim Flaherty have had a dramatic impact on the government's budgetary bounty, reducing the accumulated surplus by $2.7 billion after recording the first monthly deficit of the current fiscal year.

The government reported Friday that its accumulated surplus for this fiscal year has shrunk to $6.6 billion for the first seven months of the fiscal year as of the end of October, down from the $9.3 billion at the end of September.

This marks the first time during the 2007-2008 fiscal year that the government has recorded a monthly deficit, and it is almost entirely due to a $2.5-billion adjustment to revenues as a result of Flaherty's Oct. 30 mini-budget.

"These measures consist of the reduction in the lowest personal income tax rate from 15.5 per cent to 15 per cent and the increase in the basic personal amount to $9,600, both effective January 1, 2007,'' the finance department reported.

The mini-budget also included cuts to corporate taxes and a reduction in the GST by one percentage point, but those measures do not go into effect until Jan. 1, 2008.

Overall, budget revenues in October decreased by $1.7 billion, or 9.2 per cent, and program spending increased by $1.7 billion, or 11.3 per cent, on higher transfer payments and departmental operating expenses.

Corporate income tax revenues rose $0.3 billion, or 12.6 per cent.

For the fiscal year so far, corporate taxes are up $3.3 billion, or 19.9 per cent, reflecting the ongoing profitability of Canada's businesses.

"The exceptionally strong growth to date also reflects tax remittance patterns last year, when corporations on average underpaid their tax liabilities during the first part of the fiscal year, but then made up this difference with significant settlement payments in February and March 2007,'' said the department.

As a result, it said the high growth rate of corporate receipts is expected to dissipate in the last quarter of the fiscal year.

The year-to-date surplus, while considerably smaller than last month, is still $200 million higher than during the same period last year when the final surplus totalled $13.8 billion.

And despite the adjustment, revenues were still $6.8 billion more than during the first seven months last year, a 5.3 per cent increase.