OTTAWA - Higher than projected government revenues are giving Finance Minister Jim Flaherty more wiggle room to hand down an election-ready budget Monday that will include a healthy dose of tax cuts, economists say.
Despite the economic slowdown in December, the government's planning surplus is expected to approach $8 billion for the next fiscal year thanks to continuing strong employment growth and high corporate profits. That gives Flaherty the manoeuvrability to pay for Conservative commitments to resolve the so-called fiscal imbalance with provinces, and provide up to $3 billion in tax cuts for individuals.
The trick for Flaherty is not so much figuring out how much the government can afford to cut taxes, but how to target the reductions to attract voters in the event of a spring election.
"The calculus of tax cuts is really brutal because $2 billion or $3 billion is only about $100 or $150 an individual if you apply it broadly," said Don Drummond, chief economist with TD Bank.
"I think you'll see a bunch of stuff you'll never guess."
One widely rumoured measure is a subsidy for buying gas-saving hybrid cars, a move that would be popular with the environmental lobby and the NDP, whose support would be crucial if the Liberals and Bloc Quebecois were to vote non-confidence in the Conservative government.
The budget will almost certainly include a Working Income Tax Benefit for low income workers and to help welfare recipients enter the work force, costing about $500 million. Other previously announced measures include income splitting for seniors, and relief on the capital gains tax with a limit on the amount that can be claimed or type of capital eligible.
Drummond said he also expects the budget to raise the thresholds in which higher tax rates kick in, a measure that allows for greater flexibility than lowering the rates themselves. A half-point reduction in the bottom tax rate of 15.5 per cent would cost about $1.4 billion, eating up about half the available room at the finance minister's disposal, whereas thresholds can be calibrated at much cheaper levels.
The previous Liberal government had cut the bottom tax rate to 15 per cent, but the Tories rescinded that in their first budget.
Dale Orr of Global Insight Canada believes that, depending on the size of the surplus projected for fiscal year 2007-08, Flaherty may restore the 15 per cent level while raising the basic personal amount at which individuals start paying federal taxes by $300 to $9,229.
Such a move would cost the treasury $2.3 billion, but the amount could be lowered by delaying implementation to July 1.
"Reducing the lowest tax rate is one of the best things you can do to impact productivity and the economy," Orr said.
Recent spending announcements from Prime Minister Stephen Harper, including the $1.5-billion EcoTrust Fund, $1 billion for municipal transit in Toronto, and another $1 billion for farmers, will play a minor, if any role, in the budget calculations, said Orr.
"You have to read the fine print with many of these announcements. The environmental spending and the aid for farmers will mostly come out of this year's surplus, and Toronto's transit money will see the light of day on in future budgets."
The government is not expected to use the budget to announce pricey schemes such as income splitting for all couples, or cutting the GST to five per cent - each of which could cost a whopping $5 billion.
As well, corporations will be disappointed that corporate income tax reductions will not be accelerated beyond those announced in last fall's fiscal update, although $100 million will likely be set aside to aid beleaguered Canadian manufacturers defray rising capital costs.
Of more importance to the minority Conservative government is how the budget will be received by Canadians.
If tax cuts are the key measure, John Williamson of the Canadian Taxpayers Federation says Flaherty will need to dig deeper into the government's pockets.
One way Flaherty could clear up even more room for tax cuts is to reduce government spending, but Williamson said the Conservatives have been spending as liberally as the previous Liberal government.
"Their words on spending haven't matched reality. As well, they've raised expectations of significant tax cuts for Canadians and it would be betrayal if they don't deliver."
