The finance minister has made returning the country's financial books to the black by the next election in 2015 a compulsory goal. That would mean eliminating the current $26-billion deficit in less than three years.
To accomplish the feat sources say Flaherty will unveil almost no new spending in Thursday's document and no major tax measures, but there will be plenty of new and renewed programs and promises of problem fixes designed to make Canada's economy more efficient and competitive.
Flaherty outlined his priorities this week in a letter to caucus, listing three general areas for action — skills training, fixing the country's crumbling infrastructure and beefing up the manufacturing and processing industries that generate about 1.8 million of the country's best-paying jobs.
"We're going to talk about manufacturing in the budget tomorrow and some specific measures that we are going to take particularly to help manufacturing enterprises in Canada, including Ontario's," he said Wednesday while engaging in the traditional pre-budget photo-op of trying on a new pair of shoes at a Roots outlet in Toronto.
"Another important part of things is innovation... and to survive you need to be innovative."
Flaherty has given a broad outline of what he intends to do on the skills training front, saying he wants Ottawa to have a greater say in how about $2.5 billion a year is spent to achieve a better match between the jobs that Canadians are being trained for and those that actually are available.
In a new report Wednesday, Statistics Canada calculated there were 221,000 job vacancies in December, while about 1.3 million Canadians remained unemployed. At the same time, there were about 338,000 temporary workers in the country.
With federal-provincial labour market agreements coming up for renewal this year, industry insiders say Flaherty is looking to use some of the money in the skills fund to directly pay firms on a matching basis to train workers or to have firms direct funds to specific skills training institutions.
Funds will go into luring more aboriginal Canadians, the disabled, youth and seniors into the labour force.
Flaherty is said to also be looking at creating an innovation investment fund, reshuffling about $400 million Ottawa is saving from remodelling the Scientific Research and Experimental Development tax credit program into encouraging product development.
Manufacturers will almost certainly have their expiring tax credit for purchases of machinery and equipment renewed at more than $1 billion a year and Ottawa may seek to leverage its procurement muscle, particularly in the defence sector, to encourage the development of new technology in Canada.
Flaherty said he intends "do more" on infrastructure. With stimulus construction projects now complete and the $8.8-billion Building Canada Fund about to expire, the minister is expected to announce an extension of the program in the budget.
Lastly, the budget is likely to devote some resources to help exporters make inroads into fast-growing emerging markets like China and Brazil.
The flurry of initiatives is the product of years of thinking about how to get the most out of what is a shrinking government pot for spending from inside the government through commissioned reports on R&D, aerospace and defence procurement.
Asked if he still thinks he can balance the budget in 2015, Flaherty responded without hesitation Thursday. "Absolutely," he told reporters.
But he conceded the economy has not produced the kind of growth that might have made the task easier.
Against all predictions — particularly from last year's budget — the second half of 2012 saw the economy all but stall, causing Flaherty to up his projection for the 2012-13 deficit to $26 billion from the original estimate of $21 billion. Earlier this month, he got more bad news as economists warned him growth would be slower than anticipated again this year, shaving about $2.1 billion in tax revenues.
Bank of Montreal chief economist Doug Porter said the surprisingly bad turn in the economy has set Flaherty back about a full year from the fiscal track he set last March.
Then as if to pile on, Atomic Energy of Canada Ltd. said Wednesday costs for cleaning up its nuclear program had gone up $2.4 billion, all of which will be booked against the 2012-13 budget year.
To make up the difference, Flaherty has said he will hold the line on spending, find new savings from discretionary spending and intensify efforts to track down tax cheats. For the latter, he suggested it may be wise to spend more on beefing up enforcement at Revenue Canada Agency.
The last time the agency got more resources for enforcement in 2005, the government got back $2.5 billion in tax compliance over four years for an initial investment of $30 million, said Dennis Howlett, head of Canadians for Tax Fairness.
Flaherty may also find himself at a better starting point this year than he anticipated during November's economic update, analysts say. The deficit may be a few billion dollars to the better than $26 billion estimate of the update, even after the AECL surprise.
But some economists, including Porter and TD Bank's chief economist Craig Alexander, note that part of the restraint being applied by Flaherty is self-imposed.
There is no compelling economic reason that Flaherty must eschew all new spending for the sake of the deficit. If it took a year or two longer to achieve balance, the financial markets would barely blink, the say, because Canada remains a fiscal boy scout compared to the U.S. and many European countries.
"If the goal is to balance to budget within three years, there isn't much leeway," Porter said.
"The question is whether that's an appropriate anchor. From a market standpoint there's very little difference between three and four years, so let's face it, a lot of this is self-imposed."
The rationale has both a personal and political component. Flaherty, who is rumoured not to want to run again, has publicly pledged to stay on until he balances the budget. As well, the Conservative government wants to offer Canadians two plums in the 2015 campaign — income splitting for tax purposes and doubling the popular tax savings funds. But those pledges made in 2011 were contingent on having eliminated the deficit.
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