The federal Conservative government is set to unveil a balanced budget on Tuesday, one without major new tax cuts or spending plans, but possibly a surplus at least $1 billion higher than expected.

On Tuesday, Finance Minister Jim Flaherty promised "one or two" surprises, but hinted his third financial blueprint will be a cautious and prudent one for uncertain financial times.

Finance Minister Jim Flaherty laces up his newly resoled shoes during a traditional pre-budget photo op at a shoe repair store in Ottawa Monday.
(Tom Hanson/Canadian Press)

"We are doing spending, but we're doing spending in a controlled way, given the economic circumstances this year and next year."

"People ought not to expect any big spending items because we have to stay within our means and be prudent and fiscally responsible."

As for tax cuts, the government has already knocked two points off the GST and reduced personal and business taxes in its fall economic update.

Questions remain over whether the Opposition Liberals will support the budget or follow the NDP and Bloc Québécois, which have already indicated they may vote against it.

"So we'll see the budget and we'll react when we have seen it," Liberal Leader Stéphane Dion said Monday.

Despite Flaherty's assertions that expectations should be kept low, there is widespread belief that Flaherty has more room to act.

Economists pointed to the $7-billion surplus this fiscal year that Flaherty earmarked for debt reduction in October, plus a $3-billion contingency fund and a $1.6-billion planning surplus — an $11.6-billion surplus in total.

They also point to any other money the expected program review of federal departments can scare up.

Reports suggest the Conservative government might disclose at least $1 billion more than expected in surplus money with a total surplus possibly pegged at $13 billion.

"I find it hard to believe we're going to have a budget that could possibly precede an election and have virtually nothing in it," said TD chief economist Don Drummond.  

A government official with information about the budget told the Canadian Press on Monday that some of the extra money will likely go into job-creating projects such as rebuilding infrastructure, including roads and bridges.

The Globe and Mail reported that Conservatives will provide millions for Ontario's auto industry.

Economist Mike McCracken, with Informetrica Research, an Ottawa based financial think-tank, also said Flaherty may have more money than he's letting on.

He said there could be spending in key areas that are important to voters.

"Certainly, one area will be the environment," he said. "I don't think they like the idea of the federal government dragging their heels as they have been doing for so long."

Flaherty is expected to include in the budget an extension of the manufacturers' writeoff on investments in machinery and equipment, at a cost of about $1.3 billion over five years. The mining sector may get an extension of the exploration tax credit scheduled to expire March 31.

Insider says Flaherty likes surprises

One Conservative insider said, "Jim [Flaherty] always likes to have a surprise or two in his budgets."

Those surprises are expected to include:

• Measures to encourage Canadians to save, either through an enriched RRSP program, an investment income deduction of up to $1,000, or an investment savings fund that would allow people to park and grow savings withdrawn upon retirement.
• A request for proposals for a carbon capture or sequestration pilot project in the Alberta oilsands.
• An extension of the lake cleanup initiatives he announced in the last budget, as well as funds for clean water projects. Much of this will build on programs aimed at winning votes in Ontario.
• Revamped and enriched programs to encourage research and development, such as the science, research and experimental development programs.

Flaherty will likely sweeten the working tax income benefit, designed to increase incentives for low-income individuals to enter or stay in the workforce.

He will also likely opt for a renewed and enhanced commitment to post-secondary education funding.

CBC Newsworld will begin federal budget coverage at 2 p.m. ET with a pre-budget special.

Live federal budget coverage begins at 4 p.m. ET on CBC Radio, CBC TV & CBC Newsworld and live streaming on CBCNews.ca.

With files from the Canadian Press