Surplus swells, may leave room for bigger tax cuts

Steven Chase,  Globe and Mail Update

OTTAWA — Ottawa's budget surplus is once again swelling beyond expectations, cash that may give the Harper government room to offer even bigger tax cuts in the 2007 budget.

The federal government is running a $7.3-billion surplus nine months into the fiscal year, close to where it stood one year ago.

Last year's surplus came in at $13.2-billion after all 12 months were counted and economists say it's not impossible this year's windfall could approach that amount.

The rising surplus appears to give Finance Minister Jim Flaherty more spending room to deliver tax cuts, while at the same time writing cheques to quell provincial complaints about a fiscal imbalance between Ottawa and the provinces.

There are two ways the fiscal boon could lead to more tax cuts. It could provide the Tories with more year-end cash to pay down the federal debt, which would free up more interest savings that the Harper government has pledged to use to lower taxes.

The surging tax revenue behind the windfall may also give the Harper government more optimism about how much revenue it can expect next fiscal year, meaning they could count on this extra cash when they devise the 2007 budget to be tabled March 19.

The windfall won't all show up on the official year-end surplus recorded March 31 because in early February the Tories spent $1.5-billion of it to create an environmental trust fund.

“Even with some of the end-of-year spending we're seeing, it appears the surplus is going to be even much larger than anticipated, and this will permit the government to provide more tax relief through its tax-back guarantee,” said John Williamson, federal director of the Canadian Taxpayers Federation.

The unexpectedly large surplus is nonetheless also a potential embarrassment for the Conservative Party, which vowed to end the former Liberal government's practice of low-balling surplus estimates.

The Tories had only forecast an underlying surplus of $3.6-billion for this fiscal year, a forecast they bumped up to $7.2-billion in November.

That's the number before $3-billion is subtracted for preplanned debt reduction.

While this year's surplus might appear on track for another such windfall, the Finance Department cautioned against breaking out the champagne yet.

“It's really important to remember these numbers only offer a partial picture of the year and there's transactions in and out that have to take place and the final numbers won't be released until the fall,” Finance spokesman David Gamble said.

Still, the fiscal outlook appears rosier than forecast.

So far in the first nine months, Ottawa's overall budgetary revenue is up $7.8-billion or 4.9 per cent from the same period last year.

The overwhelming reason is personal income taxes collected — the biggest single source of Ottawa's revenue — which have been flooding in at a higher-than-expected rate.

It's far beyond what the Tories predicted in the 2006 budget, based on Finance's traditional rule of thumb for predicting how rising personal incomes should affect tax revenue.

Liberal finance critic John McCallum said the rising tide means the Tories have no option but to offer significant tax reductions. “The fact that Ottawa is once again drowning in cash proves that Canadians are overtaxed,” he said.