With a return to fiscal surpluses apparently looming, the federal government faces some difficult, albeit welcome decisions about how to spend the windfalls. The government’s focus should be on productivity-enhancing investments.

The latest budget numbers point to the federal government swinging back into surplus in 2014-15, a year ahead of schedule. From there, it’s expected that the surplus will grow over the next several years, giving the government upward of $50 billion, by some estimates, to allocate in the coming years. As always, there will be far more claims on that money than the government can hope to meet, including demands for increased provincial transfers to new spending ideas, tax cuts and debt reduction.

To be sure, this is an enviable problem; but there are no easy answers. And, given the economic headwinds that Canada is facing – including an aging population, lagging productivity and diminishing growth potential – the government will have to be particularly prudent with its policy choices.

The feds have already signalled that they intend to use some of the surplus to fulfil past promises. These include increasing contribution limits on tax-free savings accounts and allowing income splitting.

Beyond that, broad-based tax cuts always are an appealing idea. But, they are, naturally, very expensive – and they can be politically difficult to reverse course on. Given the still fragile state of the global economy, this is an option that the government should probably preserve.

Debt reduction generally is a sound idea. Although, with interest rates at rock-bottom levels and Canada in a relatively good position regarding its debt, this strategy may not produce the most bang for the buck.

Increased infrastructure investment is sorely needed, may be politically appealing and could help to underpin future growth. The same could be said for boosting the public side of the retirement savings system, although the present government has shown little appetite for that.

With Canada facing modest growth prospects for the foreseeable future, the focus should be on boosting productivity and setting the stage for future financial resilience.

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