By Louise Egan
OTTAWA (Reuters) - Canada's Conservative government vowed on Tuesday to slash corporate and personal taxes and still pay down C$10 billion in debt this year, but any speculation that the plan would trigger an election was quickly doused.
Finance Minister Jim Flaherty outlined C$60 billion ($63 billion) in tax cuts over the next five years and projected a budget surplus in 2007-08 of C$11.6 billion.
In a challenge to the main opposition Liberal Party, Flaherty said he planned to bring forward by three years a planned cut in the unpopular goods and service tax.
Since the Conservatives have only a minority of seats in the House of Commons, they need the support of at least one opposition party to stay in power. The New Democrats and Bloc Quebecois have said they would vote against the tax plan.
But the Liberals, who trail the Conservatives in public opinion polls, said they would not bring down the government, even though they oppose a cut to the sales tax.
"We will choose our time when we decide to put this government down. It will not be tomorrow ... The key point is that we will not choose to have three elections in 3-1/2 years," Liberal leader Stephane Dion told reporters.
Economists and business groups largely welcomed the tax reductions.
"Overall, it's positive for growth prospects which should be positive going forward for the Canadian economy and likely provide some uplift for the Canadian dollar," said Craig Wright, chief economist at Royal Bank of Canada.
"We'll have to wait and see if it stands the test of time. In the political environment it's in, it's still uncertain," he said.
Flaherty's fall fiscal update -- reflecting a balance sheet awash in cash -- proposed the federal sales tax be reduced to 5 percent from 6 percent from January 1, 2008.
Flaherty said corporate income taxes would be cut faster and deeper than previously promised, at a cost of C$14.4 billion to Ottawa through to 2013. He also brought in personal tax cuts affecting low-income earners, which would be made retroactive to January 2007, at a cost of C$10.9 billion in the same period.
The sales tax cut will eat C$1.4 billion out of the current budget and C$6 billion in 2008-09.
The general corporate tax will be cut to 19.5 percent in 2008 from 22 percent now, which includes a previously legislated elimination of a 1.2 percent surtax. The rate will be gradually lowered to 15 percent in 2012. The government previously pledged to cut the rate to 18.5 percent by 2012.
The minister added a note of caution to his fiscal update, saying that although the economy was on a strong footing, Ottawa was concerned about the rising dollar and major weakness in the U.S housing markets.
"We are mindful of the challenges that confront us," he said in a speech introducing the update.
"We are seeing a significant decline in the U.S. housing market and the negative economic effects that can have. And we are seeing a rapid appreciation in the Canadian dollar," he said. He also mentioned weakness in export markets and increasing foreign competition.
Experts said the tax cuts for business would help offset the difficulties caused by the Canadian dollar's rapid flight past parity with its U.S. counterpart.
"An overall decrease in the tax rate improves Canada's competitiveness abroad definitely, and when you look at that, coupled with the strengthening of the Canadian dollar, it would help to offset some of the lack of competitiveness," said Warren Pashkowich, a partner with Ernst & Young LLP.
Flaherty failed to fulfill a key demand of manufacturers, one of the sectors suffering most from the strong Canadian dollar. They have asked him to extend a two-year writeoff of investments in machinery and equipment.
Ottawa also projected there would be surpluses through to the 2012-13 fiscal year and said it expected the federal government's debt-to-GDP ratio would fall below 25 percent by 2011-12, a full three years earlier than the original target.
($1=$0.95 Canadian)
(Additional reporting by David Ljunggren, Randall Palmer and Frank Pingue)
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