Budget to include tax cuts and new spending

When Finance Minister Jim Flaherty stands to deliver his second budget Monday afternoon, it's likely one eye will be on his speech and the other on the next election.

In a minority government, every budget is crucial, since a defeat in the House of Commons would trigger a trip to the polls. Monday's budget will likely include billions in tax breaks and billions in new spending, along with increases in transfers to the provinces.

Dale Orr, managing director of the economic consulting firm Global Insight, is predicting Flaherty will unveil $3 billion in tax cuts. Orr thinks there will be an increase in the basic personal amount that Canadians can earn before tax is owed, as well as a reduction in the lowest marginal tax rate.

The government has indicated that a Working Income Tax Benefit — first promised in last fall's economic statement — will be unveiled this time. The benefit would give lower-income earners a tax credit they can apply to their earned income, effectively giving them more take-home pay and encouraging them to work.

"Now, the way things are, when [low-income people] work and earn more money, they lose eligibility for certain social programs, [so] there's too much disincentive there," Orr told CBC News. "So this is a very worthwhile program."

Ottawa has also signalled a reduction in the capital gains tax.

During the election campaign last year, Harper proposed that capital gains not be taxed immediately if the gains are re-invested within six months. That measure was not in Flaherty's first budget, but some version of it is widely expected this time.

Several observers predict the new measure will be a "stripped-down" version that could cap the amount of tax deferral at some lifetime limit or possibly limit the types of assets that could qualify.

"In the context of allegations they misled people about taxing income trusts, they will be reluctant to let this [capital gains] promise slide," TD Bank chief economist Don Drummond wrote in a recent report.

The bottom line will likely be a modest personal tax savings that will average $100 to $200 per tax filer.

Big cuts in corporate taxes are not expected.

In fact, some budget-watchers have mused that tax breaks currently given to companies developing the Alberta oilsands could be cut or even eliminated entirely. The NDP has demanded as much.

Everyone seems to agree that Flaherty will have plenty of available cash to play with this time around. The finance department said last month that the federal surplus had hit $7.3 billion for the first nine months of the fiscal year. Observers say the final surplus could exceed $9 billion.

But some groups say the Conservatives' recent spending announcements and future tax cut commitments could mean an end to the days of big surpluses.

Left-leaning group predicts surplus will be halved

The left-leaning Canadian Centre for Policy Alternatives projects a 2006-07 surplus of $9.2 billion, but says that could drop to just$4.7 billion once some recent spending measures are factored in.

"Prime Minister Harper's tax cuts plan is so expensive, he may soon find himself having to choose between putting the nation back into deficit or slashing programs," said Ellen Russell, the centre's senior economist.

She thinks the surplus could run out as early as next year.

One of the biggest spending items falls under the general term "restoring the fiscal balance." That means anywhere from $1 billion to $3 billion in extra transfers and bigger equalization payments to the provinces, which have long complained that Ottawa has shortchanged them.

Another $3.5 billion in new spending has recently been announced in the areas of climate change, public transit, and aid for farmers.

Monday's budget will only become law, of course, if there's enough opposition support to pass it.

Is there political mileage for any of the opposition parties to oppose the budget and try to force an election?

Will the Conservatives want to go to the polls soon if they can't be guaranteed of a majority?

We'll get a better idea Monday afternoon.