John Manley’s first budget next week will be much like the budgets of previous Finance Minister Paul Martin according to BMO Financial Group.

In its Budget 2003 preview prepared by Rick Egelton, deputy chief economist, BMO says it expects to see a commitment to a balanced budget; a $3 billion per year contingency reserve which will be applied to debt reduction if not needed; and an economic prudence factor, which should ensure that the government continues to better its fiscal targets.

As well, BMO is predicting a modest increase in RRSP limits, and a couple of other tiny tax cuts.

BMO says that over the medium term (2004-2008) it expects no significant change from the economic outlook presented in October. Although it notes that the government’s fiscal performance over the first eight months of 2002-03 has been significantly better than was expected last fall, in part due to lower short-term interest rates, but mainly as a result of stronger-than-expected revenues despite the slightly weaker GDP growth.

BMO says the government’s move to full accrual accounting in the upcoming budget may free up more money. Some estimates suggest that the surplus may be as much as $3 billion higher in 2002-03 and $1 billion higher in 2003-04 under full accrual accounting than under the modified accrual basis.

As a result, the status quo fiscal surplus should be about $10 billion this year, $10.6 billion in 2003-04 and $23.6 billion by 2007-08. After allowances are made for contingency reserves and economic prudence factors, this leaves surpluses for planning purposes of $7 billion this year, $6.6 billion in 2003-04 and $16.6 billion by 2007-08.

BMO notes that A significant portion of the available surplus has already been accounted for by the recent Health Care Renewal Accord between the federal and provincial governments.

BMO says that the federal government will likely spend $4 billion of its planning surplus this year on health care a $2.5 billion immediate infusion of funds for the provinces, and the establishment of a $1.5 billion fund for diagnostic/ medical equipment with $11.4 billion to follow over 2003-04 to 2005-06 and a further $11.9 billion over 2006-07 to 2007-08.

BMO says that leaked reports suggest that defence will receive an additional $800 million per year in each of the next three years, or about 25% of the remaining $9.5 billion. And, after health care and defence, the emphasis is likely to be on tax cuts.

“However, there is not enough room for substantial tax reductions. For example, a one percentage point reduction in personal income tax rates would cost the government about $4 billion per year. Accordingly, with its limited fiscal room, the government will likely instead move to alleviate some of the more egregious tax problems.”

BMO expects to see some increase in the limit for contributions to RRSPs. “We expect to see the limit increase by $1,000 per year for the next several years. Each $1,000 increase in the limit costs about $200 million per year.”

It also expects the Child Tax Benefit to be increased, reducing personal income tax revenues by about $500 million per year.

“This still leaves a little money, ranging from $0.8 billion to $1.3 billion, in each of the next three years for other initiatives. Possible uses for the remaining surplus include more money for early childhood programs, aboriginal issues, environmental programs, municipal infrastructure, and reducing the air security tax,” BMO says.