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OTTAWA (CP) - Federal officials are considering ways the Conservative government could include some or all of the existing Liberal income tax cuts as well as an expensive cut to the GST in their upcoming budget.

Yet even if both are technically affordable - thanks to soaring government revenues - analysts say that won't likely happen because of the sheer cost, which would crowd out any new Tory spending.

And Prime Minister Stephen Harper has been making a lot of costly spending promises, from a new family allowance program to greater military spending to ending the so-called fiscal imbalance with the provinces.

"There are a lot of mouths they want to feed," says Doug Porter, deputy chief economist with BMO Nesbitt Burns.

But some lobby groups are warning there will be a high political cost for a prime minister to roll back income tax cuts that have only started to appear on people's pay cheques.

"If those cuts are repealed in the upcoming budget, Canadians will end up paying higher income taxes this year and in future years," said John Williamson, federal director of the Canadian Taxpayer Federation.

"The only person talking about hindering tax-relief measures is the prime minister."

Federal Finance officials are now crunching the numbers for several different options including cutting not only the GST by one percentage point - which will cost the treasury about $5 billion every year - while keeping one or both of the two Liberal income tax cuts.

Those cuts, introduced late last year, cost roughly $2 billion each annually.

One measure has raised the basic personal exemption every taxpayer can claim before income taxes kick in; the other reduces the lowest tax bracket to 15 per cent from 16 per cent.

Harper has said he doesn't think both his GST cut and the Liberal measures are affordable, with a combined annual cost of about $9 billion.

But keeping even one of the Liberal tax cuts could be done, given the revenues rolling in to Ottawa from the red-hot energy sector, says Don Drummond, chief economist at TD Bank and a former senior Finance official.

"I really can't imagine them keeping both parts of the Liberal (tax cuts)," he said in a recent interview.

"They could certainly do one or the other."

Drummond has figured the federal budget surplus for the fiscal year that just ended March 31 likely reached about $10 billion - about $1.65 billion more than previously forecast, thanks to higher corporate profits and booming demand for Canada's commodities.

The current financial year 2006-07 looks even better, with as much as an extra $3 billion for a total surplus of more than $13 billion for Harper.

The following year should also see a surplus of about $12 billion.

All this is making it tougher for Harper to claim deep tax cuts and new spending are not affordable.

He'll likely be especially sensitive about running up high surpluses, since Harper's Conservatives long complained that massive Liberal surpluses showed Canadians were overtaxed.

But Harper also has some hefty spending pledges to meet in this budget, which could come as early as May 9.

His $2 billion per year family allowance program will begin on July 1, but at the same time, Harper will likely spend an extra $700 million this year to honour the existing Liberal child-care plan.

Cities are counting on Harper's election pledge to continue funding infrastructure spending, including an ongoing offer to share five cents per litre from the federal gasoline tax.

He even promised to go further, by introducing a five-year fund for highways and border infrastructure worth $600 million in its final year.

The military is hoping for billions in new spending, hinted at by the Tories.

Their campaign platform promised just $300 million in new defence dollars this financial year, more than doubling to $670 billion in 2007-08 for a five-year total of $5.3 billion.

But during recent pre-budget consultations, Finance Minister Jim Flaherty "did single out DND and the Canadian Forces as a very important commitment for his government, irrespective of the fact that it was not one of the stated five priorities," say military associations involved in the session.

Harper has focused obsessively on his top five priorities which include cutting the GST, introducing the new family allowance program, reducing health wait times, improving government accountability and a tougher justice system.

That could mean millions in new spending on jails and prisons as part of Harper's plan to toughen jail sentences.
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