Feb. 23 (Bloomberg) -- Canada said it will keep its budget surplus near the lowest in a decade in fiscal 2005-06 as the minority government cuts corporate taxes and raises spending on health care and the environment to win support from opposition parties.

Finance Minister Ralph Goodale proposed a C$196.4 billion ($159 billion) budget today that projects a surplus of C$4 billion in the fiscal year ending March 2006, the ninth straight year that revenue exceeds spending. The government cut its projected surplus for the current fiscal year to C$3 billion from C$8.9 billion to reflect rising health and childcare outlays, the budget showed.

Prime Minister Paul Martin is raising spending to improve government services, win support of opposition parties and offset an economic slowdown sparked by a stronger Canadian dollar. The government expects the world's eighth-largest economy to expand 2.9 percent this year, down from 3.3 percent forecast a year ago.

``The real challenge they face is whether there is too much for everybody in the budget, and not enough of focus and discipline,'' said Hugh Segal, president of the Institute for Research on Public Policy and chief of staff for former Prime Minister Brian Mulroney.

The federal government has been boosting spending since November, leading to a 2005 fiscal budget surplus that will be two- thirds less than projected three months ago. Goodale's budget anticipates C$7 billion in new spending between November and March 31, mostly to health care projects and day-care centers. The fiscal 2005 budget will close next month with a 12 percent increase in program spending, the largest since 1983.

The budget raises spending by 2 percent in the year ending March 2006. Revenue is projected to rise 2.3 percent to C$200.4 billion, down from a 5.2 percent increase in the current fiscal year. The government hasn't had a surplus of less than C$7 billion since 1999.

Brag

``Our goal is not to accumulate statistical bragging rights,'' Goodale said in his budget speech to parliament. ``Our goal is to use the fruits of our success to employ the dividends of fiscal and economic strength to keep on building a world- leading society.''

The spending programs, which include more money for hospitals, cities, the military and day care, are needed to ensure opposition support for the budget. Under Canada's parliamentary tradition, Martin must quit or call an election if he loses the budget vote next month. Martin's Liberal Party is 22 seats short of a majority in the 308-seat House of Commons.

Since last year's budget statement, Canada has committed C$11.4 billion in additional health care and funding for the provinces in the two years ending March 2006, plus C$700 million for a new national childcare program. These moves may appease the separatist Bloc Quebecois and the socialist New Democratic Party.

The military will receive an additional C$12 billion over five years, including C$2.5 billion for new helicopters and trucks and increased funding to expand the armed forces by 5,000 troops. Another C$600 million in federal gas tax revenue will go to cities for road and infrastructure upgrades. The government will spend an additional C$3.2 billion over five years to help companies reduce greenhouse gas emissions.

Tax Cuts

The budget also includes C$13.4 billion in new tax cuts for businesses and low-income earners by 2010 to help the government win support from the Conservative Party, parliament's second- biggest bloc with 99 seats. The Conservatives have said they may try to defeat the budget if it doesn't include tax cuts and other measures to boost the productivity of the nation's economy.

Goodale will cut the corporate income tax rate by 2 percentage points to 19 percent by 2010 and raise the basic tax exemption level by 25 percent to C$10,000, removing 860,000 workers from the tax rolls. It will reduce taxes it charges air travelers by as much as 17 percent, and remove limits on foreign investments in registered pension plans. The annual limit on pension contributions will also rise to C$22,000 by 2010.

The tax cuts may help revive consumer spending, said Annette Verschuren, President of Home Depot Canada, and chairwoman of the Retail Council of Canada. Retail sales fell 1.4 percent in December, their biggest decline since 1998.

Dollar

The 23 percent gain in the Canadian dollar against the U.S. currency over the past 24 months has curbed exports, which account for 40 percent of the C$1.1 trillion economy.

``In an environment like this, with pressure on exporters, (tax cuts) would be a real sign of confidence in our economy,'' Verschuren said. ``That would release money out there to spend and to stimulate the economy.''

With the Liberals ahead in the polls, the spending and tax measures should be enough to win opposition backing, said John Braive of TAL Global Asset Management in Toronto, who helps manage the equivalent of $28.5 billion of bonds.

``Our view is the government won't fall on the budget and it shouldn't be anything more than a short-term concern,'' he said.

The minority government also has promised the opposition to improve its forecasting to curb the size of the unaccounted surpluses it has run in recent years.

Opposition parties claim Martin's governing Liberal party is deliberately underestimating revenue so that extra money is available for late year spending on its own political priorities that are not properly debated in parliament, such as the additional C$7 billion that has been allocated since November.

Debt

The government has underestimated its budget balances by C$85 billion since 1995, the Canadian Centre for Policy Alternatives has estimated. Unaccounted surpluses go to debt repayment by law if not allocated before the end of the fiscal year.

``There's political pressure not to put so much money on the debt at the end of every fiscal year and I would chalk that up to opposition parties trying to position themselves on issues they think they have an advantage,'' said Ken Boesenkool, a vice president at Hill & Knowlton and senior policy adviser to Conservative Party Leader Stephen Harper between 2002 and 2004.

The budget anticipates debt will decline by C$6 billion to C$496 billion in 2005 and 2006, compared C$10 billion for fiscal 2004 alone. The country has cut its debt by more than C$60 billion since 1997.

Goodale promised he will continue to make debt reduction a linchpin of his fiscal policy in coming years. The 55-year-old finance minister has pledged to keep the country in the black for at least another five years and set out a 10-year strategy to cut federal debt to 25 percent of gross domestic product, less than half the goal set by the European Union.

Canada began to rein in spending in 1994, when the federal government posted a record budget shortfall of C$42 billion and the nation's debt rating was cut one notch to Aa1 by Moody's Investors Service. The government has since cut its debt to 39 percent of output from 68 percent a decade ago.

Reserve

To ensure funds are available for budgeted spending, the fiscal 2006 budget will include a reserve of C$3 billion in case revenue falls short. If the reserve isn't spent, it will be used to buy back debt.

The government needs such contingencies to keep the budget from falling into deficit, Goodale said in the budget plan. For every 1 percentage point that growth misses Goodale's targets, the surplus will shrink by C$2.5 billion, the budget predicted.

Such precautions may mean the government will end the fiscal year with more unspent revenue than he planned.

``The reality is they've usually paid down more debt at the end of the day than they indicate would occur when they make their budget statement,'' TAL's Braive said.

To contact the reporters on this story: Theophilos Argitis at (1) targitis@bloomberg.net Kevin Carmichael in Ottawa at kcarmichael@bloomberg.net.

Last Updated: February 23, 2005 16:04 EST