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OTTAWA (CP) - The Conservative government is suggesting that provinces blend their sales tax with Ottawa's GST as a way to help boost provincial revenues, sources say.

The federal government is raising the possibility as a part of its promise to deal with the fiscal imbalance, which some say exists between a wealthy federal government and less affluent provinces.

The proposal - which could be included in Tuesday's federal budget - follows Prime Minister Stephen Harper's pledge to lower the seven per cent GST to six per cent.

While that will cut almost $5 billion annually in federal revenues, it also frees up the same amount for provinces to tap into if they chose to raise their own sales taxes while also blending them with the federal GST.

GST harmonization has already been implemented in New Brunswick, Nova Scotia and Newfoundland and Labrador under the former Liberal government of Jean Chretien, but other provinces have declined.

The 15 per cent harmonized sales tax in those three Atlantic provinces added a significant cost to most purchases, including such essentials as home heating oil, telephone service and funerals which often were not covered by the previous provincial taxes.

Earlier this month, Quebec's government rejected an Opposition call there to boost its provincial sales tax when the federal government reduces the GST.

"There is no question of increasing the fiscal burden of Quebec taxpayers," the province's finance minister, Michel Audet, said earlier this month.

"It's not in my plans to increase the sales tax."

Audet said he hopes instead to secure more revenues through negotiations with Ottawa rather than raising taxes.

Other provinces have complained that raising taxes, even through a blended levy with the GST, won't make them any more competitive and won't solve the fiscal imbalance.

Cutting the GST by one percentage point has been one of Harper's often-stated priorities for the coming budget while other recent election commitments will be funded from the sizeable budget surpluses.

Meanwhile, Canadians should brace for deep spending cuts to be outlined in the budget document, Finance Minister Jim Flaherty warned Wednesday.

"Pain is a relative term, I suppose," Flaherty said outside the Commons when asked about the depth of the cuts to come.

"One of our major commitments was to restrain the rate of spending growth in government. We will begin that work and I'll outline the steps that we intend to take in the budget on Tuesday."

Analysts have predicted Ottawa's budget surplus hit a whopping $10 billion in the fiscal year that just ended and Harper can expect an even greater surplus of $13 billion this year.

Still, the minority Conservative administration has already started to shrink the size of the federal government, by eliminating a national child-care program and replacing it with a family allowance scheme. It has also cut several environmental programs.

So pressing provinces to harmonize their sales tax with the federal GST fits that agenda by effectively transferring of federal tax powers to the provinces.

Some spending will also be boosted dramatically in this budget, including billions for the military and the new family allowance plan; new tax credits for families with children playing sports; a possible break on transit passes for commuters; and some reductions to small business levies.

Finance officials have also been looking for various ways to reduce income taxes to counter Liberal accusations the Conservatives intend to raise income taxes.

During the winter election campaign, Harper said he planned to roll back Liberal income tax cuts implemented last year, a plan that has generated criticism of the Conservatives from business and taxpayers' groups.

In fact, various measures coming in this federal budget will reduce the cost of living for Canadians by about $10 billion, says Conservative MP Garth Turner.

On his website, Turner has listed several measures he expects to see in the budget, including the widely rumoured "surprise income tax cut I am sure Jim (Flaherty) has up his Irish sleeve."

Flaherty flatly dismissed Turner's speculation, suggesting few have been briefed on final budget plans.

"He wouldn't know."

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