Although the Conservative government has managed to underestimate the likely size of the federal surplus, tax relief will probably be modest, says TD Economics.

“Despite taking some steps that should have improved the accuracy of federal government fiscal projections, it appears that like their Liberal predecessors, the Conservative government has under-predicted the size of the budget surplus,” TD says. “In the Fall 2006 Economic & Fiscal Update the surplus for 2006-07 was predicted to be $7.2 billion. After the first eight months of the year it sits at $6.1 billion, down only $0.5 billion from the same period of 2005-06 when the full year result came in at $13.2 billion.”

The surplus over the remaining four months should be lower than in the previous year, TD says, because of the initiatives in the 2006 Budget. “However, the results over the remainder of the year should be sufficiently favourable to lift the 2006-07 surplus to $9 billion- $10 billion, or $1.8 billion — $2.8 billion higher than the government last publicly predicted.”

TD explains that revenues could be up $1 billion – $2 billion from the Fall Update prediction for 2006-07, program expenses could be down $0.5 billion -$1 billion, and interest on the public debt could be down $0.5 billion – $1 billion. “In total these ranges would give a lift to the predicted surplus of $2 billion – $4 billion, bringing it to $9.2 billion – $11.2 billion for the fiscal year, again before any year-end special bookings,” it says.

But this windfall won’t necessarily result in lots of new spending, TD cautions. “These planning surpluses may seem to give the government considerable latitude to introduce new initiatives. However, they have made a number of commitments that could easily eat up all the room,” it says.

One new initiative could be some capital gains tax relief, it suggests. “One of the few promises the government made in the 2006 election campaign that hasn’t been acted upon yet is deferral of capital gains taxation on investment roll-overs. As described (albeit very generally) in the election campaign, the cost would likely be at least $1 billion a year and its administration, for both the government and taxpayers, would be cumbersome,” TD notes. “In the context of allegations they misled people about taxing income trusts, they will be reluctant to let this promise slide.”

“Let us assume they introduce some stripped down version (such as allowing deferral up to a lifetime limit within a dedicated investment account) costing $0.3 billion – $0.5 billion. Finally, while it is not likely the government will reveal a definitive environment plan in the budget, it is hard to believe there won’t be any measures. Let’s assume $0.3 billion – $0.5 billion there. Adding up the list so far gives $4.1 billion – $5 billion per year, with the proviso that this would be the “mature cost” and some of the measures could be phased in,” it says.

“In conclusion it is hard to see how the government could deliver on everything that has been discussed in the context of the 2007 budget and remain fiscally responsible. The only way it could deliver a significant dose of personal income tax relief would be to take a pretty risky stance on the fiscal projections and greatly up the anticipated surpluses from the numbers presented just a few months ago in the Fall Update. And even then the amount of tax relief per filer would be rather modest,” it concludes.