With federal revenues likely to continue to beat expectations, the question will be how the government allocates the windfall, say economists at TD Bank.

“In recent years federal revenues have persistently come in higher than anticipated, opening up further choices in budget planning. More often than not, the decision has been to ramp up spending,” TD notes. “Most of the provinces that have tabled budgets this year have similarly found higher-than-expected revenues and have opted for the same choice.”

“This note asks the question whether the new federal Conservative Government will also strike the revenue mother lode. It looks like a yes,” it says. TD Economics reports that analyses of the changes in nominal GDP forecasts and recent revenue collections both suggest that Ottawa is yet again receiving a revenue windfall.

In terms of spending this windfall, TD says, the first option is to boost prudence itself. “The Liberal Government’s forecasts featured a $1 billion “economic prudence” buffer on top of the contingency reserve. With little fanfare, the economic prudence factor was dropped in the Conservative’s election platform fiscal plan. It could be restored, or given the confusion over the distinction between economic prudence and the contingency reserve, forecast “protection” could be augmented through a new approach,” it says.

The government could use the extra revenues to run higher surpluses and hence pay back more debt, although TD says that would seem to be a low probability outcome. “Alternatively, they could put the extra money into higher spending, thus following the lead of their predecessors and most provinces,’ it suggests.

“The easiest spending increase would be to void a spending cut. In the Conservative’s election platform fiscal plan, they incorporated an internal spending savings target of $22.5 billion cumulatively over the 5 fiscal years 2006-07 through 2010-11. TD Economics has estimated that the annual pattern works out to something like $2 billion for 2006-07 and $3 billion in 2007-08. By coincidence, that’s about the difference calculated above for the revenue impact of changed economic projections,” it notes.

“This, however, would be an unfortunate choice. As the Conservatives have introduced new spending priorities, by definition the priority attached to some previous spending has slipped down a couple of rungs. Some of that existing spending should be cut to finance the new priorities,” it adds. “The Liberal Opposition, as well as the provinces, would likely argue that the extra revenues should be used to keep the federal-provincial daycare agreements in tact.”

“The final option of course is to cut taxes above and beyond the promises set out in the Conservative’s election platform. That would be taking the road less traveled. A surprise, yes, but a very pleasant one,” TD concludes.