OTTAWA - The magnitude of the impending fiscal wreckage became clear over a two-day span last month as the Finance Department was inundated with grim economic data.
The federal and provincial finance ministers were swapping horror stories while meeting in Saskatoon. Revenue Canada revealed that corporate tax revenues were cascading. Companies were declaring losses. Private-sector economists were revising their forecasts downward.
Scant weeks earlier the Conservatives had been denying the prospect of budget deficits and even mocking their rivals for being unnecessarily skittish.
But in mid-December Finance Minister Jim Flaherty and his staff arrived at some disheartening conclusions: the projected deficits were real and they would be spectacular.
The Tories tossed aside their previous projections and revisited their plans for the upcoming budget.
Among the headaches they faced was how to break the bad news to Canadian taxpayers.
The Conservatives knew they could take a political hit, having campaigned on a no-deficit promise while Prime Minister Stephen Harper cheerfully denied an imminent recession.
"The deficit number was going to be shocking. It was going to overwhelm everything else," a government official said Tuesday.
"We wanted to get that out of the way first."
They opted to break the news gently.
Reporters were summoned to a briefing with officials from the Prime Minister's Office and sat in slack-jawed silence as a government official told them there would be a $34-billion shortfall.
Once they grasped the scale of the deficit, the Conservatives spent the ensuing weeks frantically putting together what promised to be one the most important budgets in Canadian history.
They turned to their chief rival, Liberal Leader Michael Ignatieff.
They were uncommonly polite to their new foe. Instead of disparaging him in attack ads, as they did with his predecessor Stephane Dion, they made public and private appeals for him to provide a Liberal wish-list for the budget.
The Liberals were skeptical. They feared that in addition to their support, the minority government was looking to them for political cover.
After all, around Parliament Hill, Conservatives had been musing for months that if the government slipped into deficit, they would seek to share the blame. Opposition parties could hardly complain about excessive spending, the logic went, if they helped write the budget.
So Ignatieff kept them waiting.
The Conservatives became increasingly frustrated as their demands for specific budget proposals prompted only vague suggestions from the Liberal boss.
With the budget almost finished, the government finally sent Ignatieff a letter two Fridays ago giving him one final chance to propose ideas.
They received the reply from Ignatieff just a few days ago: one page, three brief paragraphs, each sentence more vague than the next. Ignatieff asked that the budget avoid structural, long-term deficits, and help vulnerable people.
"They haven't really asked for anything," a government official said. "I don't think there's anything in here that the Liberals could hold up as a trophy."
Liberals suggest that's been their intention all along.
The party points with pride to its string of balanced budgets and, come election time, will be all too eager for Harper to own this $34 billion deficit by himself.
The Conservatives were painfully aware that they would take a political hit for the deficit.
So they decided that if a deficit was inescapable, it might as well be put to good use.
They struck a panel of economic advisers headed by former B.C. finance minister Carole Taylor, and held a stunning number of meetings with stakeholders -- 680 since last fall.
A government official said they learned cautionary lessons from the U.S., where the Bush administration sent out $600 cheques to each adult last year.
Much of the money was spent on imported goods like electronics and had a negligible impact on the economy.
"We didn't just want people buying stuff made in the U.S. and Japan," he said.
"In a situation like this one, you don't just do temporary stuff. You don't just spend a lot of money. You look at the long term -- because you're going to be judged on this."
The Conservatives opted instead for a mixture of measures, some guaranteed to have a short-term impact and others aimed at longer-term improvements.
There are measures intended to offer short-term relief: $7 billion on infrastructure like new roads; $7.8 billion for housing construction and renovation that could benefit contractors and lumber companies; $2 billion in tax cuts.
Other items are intended to offer longer-term benefits: $2 billion to repair and build post-secondary institutions; $1.5 billion to send laid-off workers back to school; $750 million for the Canada Foundation for Innovation; $407 million for faster train service; $225 million for rural Internet broadband.
Several Conservatives expressed a common regret when asked about the plethora of budget choices they faced.
They said they'd hoped to introduce larger personal income-tax cuts. They believe the criticism that they haven't done enough to reduce personal income taxes is valid, and that the cuts in Tuesday's budget represented only a baby step toward their ultimate goal.
With hopes of massive tax cuts and balanced budgets summarily squashed by a slumping economy, one official was asked what the government had accomplished instead.
"The headline we want is: We listened to people on the stimulus side, but we did it smartly," said the senior political strategist.
"So I guess the headline is, 'Smart stimulus.' "
An economist at Tuesday's budget lockup suggested an alternate narrative.
"I think it's a sign of a government that's come a long way in six months," said Derek Holt of Scotia Capital.
"We've gone from the denial phase . . . towards a recognition that we have a much bigger problem on our hands."
