The federal government remains on track to post a modest surplus for fiscal 2008, but will not engineer a surplus at the expense of the provinces, Finance Minister Jim Flaherty reasserted in Toronto on Wednesday.

Speaking to the Empire Club of Canada, Flaherty promised that the government would be prudent in spending as it aims to balance the budget.

“We will do what we can, despite the challenging economic circumstances, to keep the budget balanced,” he said.

But he said the government would not cut funding in key areas that would impact Canadian families.

“What we will never do is engineer a surplus at any price, because that price will ultimately be paid by Canadian families,” he said.

“Long term damage can result from this kind of an attempt to balance the books during this kind of a historic global downturn.”

But despite his assertion that the government would not engineer a surplus on the backs of the provinces, Flaherty warned that one area of spending set to take a hit is equalization. He noted that federal transfers to provinces and territories were nearly $54 billion this year — growth of 56% since 2003-2004.

While he acknowledged that this spending goes to such critical services as health care and education, he said that level of growth cannot continue.

“Clearly in this time of fiscal uncertainty, we cannot sustain that rate of growth.”

He said equalization would continue to grow, but must grow at a rate closer to the rate of economic growth, which is expected to be very modest next year.

Comparing Canada to other countries around the world, Flaherty emphasized that this country remains in a strong position to deal with the continuing financial crisis.

“Our financial system is the soundest in the world,” he said. “We will come out of this uncertainty stronger than ever.”

He discussed measures the Canadian government has taken to ensure long-term growth and reduce economic risk for the economy in the past two years, and specific actions it has taken in addressing the current crisis.

Such measures as tax cuts and reducing debt in 2007 have put the country in a much stronger economic position than other countries, Flaherty said. “We have the best fiscal record in the G7.”

He added that more recent liquidity actions by the government, including the establishment of the Canadian Lenders Assurance Facility, have been vital to keep the economy strong.

“These changes are keeping our banks competitive and strong, and are keeping credit flowing,” he said.