This is part of a series looking at issues of interest to the financial services sector in advance of tomorrow’s federal budget.

Finance Minister Ralph Goodale didn’t have much to work with in preparing Wednesday’s budget — given planning surpluses of just $500 million for fiscal 2006, ending March 31, and $900 million for 2007, according to his November update.

He does, though, have a big surplus for this year and could move some spending forward, a device frequently used by governments. One-time expenditures are appropriate for this because they don’t increase base program spending.

One possibility is the $2 billion “up front” payment to Newfoundland, which is part of the agreement that allows the province to keep 100% of its offshore royalties. The $2 billion represents about three-quarters of the expected additional royalties over the next 10 years. There was a similar agreement with Nova Scotia but no upfront payment was mentioned in the announcement.

In the November update, the surplus for this year was estimated at $5.9 billion, but it is probably much higher. It includes the costs of the health care and equalization agreements reached with the provinces last fall.

Finance reported an $11-billion surplus for the nine months of fiscal 2005 but that didn’t include the health care and equalization agreements because they hadn’t yet received royal assent. A figure of $3.9 billion is given for “proposed policy initiatives” including those two agreements. Also excluded are the costs associated with the recently agreed-to wage settlements with federal civil servants because they won’t be reflected when the agreements come into effect. No figure was provided for these.

If the $3.9 billion in costs of policy initiatives for this year is included, Ottawa’s surplus for the April-December period was $7.1 billion, which works out to $9.5 billion at an annual rate.

The federal Liberals made a lot of promises in the fall election and need to make plans for their implementation before the next election, which will probably take place within the next two years given their minority government status.

In a report last fall, TD Economics estimated that these promises will cost $20.3 billion over four years. TD assumed that they would start delivering on them in fiscal 2007. Some specifics are, therefore, likely in this budget.

The promises include the national day care program, officially called “early learning and child care foundations.” TD’s assumption was that the $5 billion cost will be spent as follows: $500 million in 2007, $1 billion in 2008, $1.5 billion in 2009 and $2 billion in 2010. There’s also a total of $1 billion for caregivers and a $1.5 billion GST enhancement for seniors.

Another big item is the gas tax or equivalent for cities and communities. TD assumes this will costs $700 million in each of 2007 and 2008, $1.5 billion in 2009 and $2.1 billion in 2010. There’s also a total of $1.5 billion for social and affordable housing.

The “peace and nation-building” and the “regional, rural and industrial development” initiatives will cost $3 billion and $2 billion, respectively, over four years. Other initiatives have a $1.3 billion price tag.

There are also two other issues that must be addressed. Canada must act quickly if it is to reduce greenhouse gas emissions to 1990 levels, an estimated drop of 20%-30%, by 2008-12, as it has committed to do through the Kyoto Protocol. More spending is also desperately needed for defence, but the government may want to wait until the current review is completed.