Youth unemployment expected to be focus of federal budget

But number one goal is to control spending, says Flaherty

(Reuters) — The federal government will present a cautious budget on Tuesday, lacking any big new measures, as it lays the groundwork for a surplus in 2015 that will allow it to offer tax breaks and other goodies before an election late in that year.

Finance Minister Jim Flaherty is eager to eliminate the government's relatively small budget deficit and restore the reputation Canada had before the financial crisis as having the strongest fiscal record in the Group of Seven major economies.

Infrastructure projects, youth employment and reducing the price difference between Canadian and U.S. consumer goods, possibly through tariff reductions, are some of the budget initiatives Flaherty hinted at in television interviews on the weekend.

But his number one goal is to control spending.

"There will be initiatives in the budget that will help continue to encourage economic growth, jobs and prosperity in Canada," Flaherty said on Friday.

"But the primary function of the budget is to make sure that we stay the course, that we keep Canada the envy of the world, and that we make sure that we don't waver from the path of fiscal responsibility."

Canada had 11 straight years of surplus before the global financial crisis, but plunged into a deficit in 2008-09 as a result of stimulus spending and tax cuts. Germany is currently the only G7 country running a budget surplus.

The federal deficit stands at about one per cent of gross domestic product (GDP). But the "general government deficit," which includes provincial governments and is used for international comparisons, was forecast at 2.2 per cent of GDP in 2014 by the Organization of Economic Cooperation and Development. That compares with a 2.5 per cent deficit in the European Union and a 5.8 per cent deficit in the United States.

Flaherty, 64, is staking his reputation on success in balancing the books. Despite battling a rare skin disease that has slowed him down and forced him to travel less, the veteran cabinet minister vows to stay on until there is a surplus.

Prime Minister Stephen Harper, it is widely believed, is counting on that happening before a general election scheduled for October 2015. Harper, in power since 2006, promised in the 2011 election campaign that his party would use a surplus to offer new tax cuts.

Harper's main opposition in Parliament, the New Democratic Party (NDP), is criticizing the government's plans for a minimalist budget, pointing to the sluggish job market and calling for incentives for small businesses and a cap on credit card and ATM fees.

"Canadian families need a fair break and they need action now, not next year," NDP legislator Guy Caron said.

Surplus within reach

The budget balancing act has taken longer than Ottawa initially thought, but most economists now see it as within reach as long as there is no big economic shock.

The domestic and U.S. economies are gathering momentum and the government has already lowered program spending, frozen departmental operating budgets and announced plans to sell the remainder of the shares it obtained for its role in the bailout of General Motors as well as other assets.

In November, Ottawa estimated a budget shortfall of $17.9 billion for the 2013-14 fiscal year ending March 31. It forecast the deficit would narrow to $5.5 billion in 2014-15, followed by a surplus of $3.7 billion in 2015-16.

If Flaherty's hints are a guide, the budget will revise the government's projection for the 2015-16 surplus higher.

All the forecasts include a $3 billion contingency fund to cover surprises such as the 2013 Alberta floods, the most costly in history.

Economists said it wouldn't take much additional effort to post an underlying surplus in 2014-15 if the contingency fund is not needed.

"So if they don't use that, there's a potential for them to return to surplus sooner. Having said that, I believe they'll keep in that degree of fiscal prudence just to be on the safer side," said Laura Cooper, economist at Royal Bank of Canada.

"Then as they see how the numbers are tracking through the year they may boost to a surplus in the November update instead," she said.

The previously announced measures to curb spending already imply a pullback of 0.2 percentage points on expenditures, Cooper said.

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