Flaherty promises to reduce both taxes and debt

• 2006-07: $4.2 billion
• 2007-08: $3.5 billion
• 2008-09: $2.4 billion
• 2009-10: $2.0 billion
• 2010-11: $3.6 billion
• 2011-12: $2.9 billion

Ottawa also enlisted four private sector organizations; the Conference Board of Canada, the University of Toronto, Global Insight and the Centre for Spatial Economics to project future public account surpluses. On average, the groups project a surplus of $6.5 billion in the current fiscal year, falling to $5.5 billion in 2007-08.

Despite the promise to cut personal taxes, the government is projecting personal income taxes will rise as a percentage of GDP, from 7.6% in 2005-2006, to 8% in 2011-2012. Over the same period, corporate taxes will drop for 2.3% of GDP to 2%.

In the economic and fiscal update to the Standing Committee on Finance, Flaherty pointed to Canada’s current strong position, with the lowest unemployment rate in 30 years, and “low, stable and predictable inflation.” The Bank of Canada will continue to aim for an annual inflation rate between 1% and 3%, until at least 2011.

Flaherty had promised earlier in the week that today’s economic update would include no new measures, but that did little to dampen expectations. Flaherty has recently floated the idea of expanding income splitting beyond seniors and the Conservatives have yet to follow through on their election promise to scrap capital gains taxation on gains that are reinvested within six months.

“There was a lot of speculation about whether they were going to bring in some kind of broad-based income splitting measure,” says Jack Courtney, assistant vice president for advance financial planning support, Investors Group. “Any of the economists I’ve seen commenting on it have come up with some pretty big numbers if they went to a true system of giving people the option to file with combined income. It really does favour the high income person with a spouse at home.”

Lower income households, where a sole breadwinner earns $45,000 a year, would see tax savings of $1,300 a year, Courtney says. A sole-breadwinner earning $150,000 would see a tax saving of almost $13,000 a year.

The proposed plan to allow pension income-splitting is expected to cost the government $165 million in the current fiscal year, rising to $675 million in fiscal 2007-2008.

The minister also repeated his party’s promise to cut the GST by another percentage point to 5%, no later than 2011, when it is it is expected to cut $1.5 billion from government revenues.

To pay for the tax cuts, the Conservatives pledge to narrow the focus of government activity and partner with the provinces and private enterprise in the delivery of programs, including “primary scientific research, a clean environment and modern infrastructure.”

The government did foreshadow a new item for the 2007 budget, called the “working income tax benefit” aimed at helping low income Canadians “get over the welfare wall” but there were no further details.

Among the risks which could derail Flaherty’s optimistic projections, he cited the current correction in the U.S. housing market, uncertainty over commodity prices, and the possibility of further deterioration in the U.S. dollar, making Canadian exports more expensive south of the border.

Flaherty also used somewhat stronger language than previous finance ministers with regards to a national securities regulator, who usually promise to work with the provinces on a new securities model. “We will build on our leading edge financial system by establishing a common securities regulator,” he said.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com