Finance Minister Jim Flaherty brought down a budget Tuesday that was short on big spending pledges but one he called "prudent" while facing the prospect of a slowing economy.

"Some would have us go down the path to higher spending, higher interest payments and higher taxes, perhaps even an increase in the GST," Flaherty said in the prepared text of his address for the budget, which was tabled in the House of Commons in Ottawa.

"But that approach is misguided. There is another way."

Finance Minister Jim Flaherty delivers his budget speech in the House of Commons on Parliament Hill on Tuesday.
(Fred Chartrand/Canadian Press)

With economic growth expected to come in at around 1.7 per cent for 2008, the government's coffers are projected to become less bountiful. From a $10.2-billion surplus for the 2007-08 fiscal year, which will go to pay down debt, the government sees sharply smaller surpluses of $2.3 billion for 2008-09, and $1.3 billion the year after that.

With Stephen Harper's Conservatives in a minority situation, the future of the government hinges on its ability to win support among the opposition parties for its spending plans.

Just half an hour after the budget's release, Liberal Leader Stéphane Dion said even though he found the budget "a grab bag that does nothing," he said his party would not vote against it — thus ensuring it would pass.

"Under the circumstances, I don't see enough in this budget that would justify that we precipitate an election that Canadians do not want for now," he said. 

After the major tax cuts that were introduced in October 2007's economic statement, the budget contains several small spending items.

A key feature

A key feature of Flaherty's document is the introduction of a new investment vehicle for Canadians, dubbed a Tax-free Savings Account.

Individuals will be able to put up to $5,000 a year into one of the accounts. Capital gains earned on investments in the account will be exempt from tax, even when withdrawn. Account holders will be able to withdraw money at any time without restriction. Unlike an RRSP, contributions to the new account will not be tax-deductible.

"An RRSP is primarily designed for retirement," said Flaherty. "In many ways, a Tax-free Savings Account is like an RRSP for everything else in your life."

For businesses, Flaherty said the manufacturing sector would benefit from a three-year extension of the acceleration of capital cost allowances on machinery and equipment. The move will cost the government about $1 billion between 2009-10 and 2012-13.

There would appear to be little in the budget to make environmentalists smile. Environmental groups had been seeking a price on carbon emissions or a form of carbon tax, but the budget mentioned neither.

On Monday, the Suzuki Foundation unveiled a plan for a tax on carbon that David Suzuki said could generate between $50 billion and $100 billion in revenues.

Instead, the government promised $250 million for carbon capture and storage projects, plus $66 million to lay the groundwork for a regulatory system for industrial emissions that would price carbon and introduce carbon trading in Canada.

The Conservatives have also promised more money for students. With the end of the Canada Millennium Scholarship Foundation, the government will put $350 million into a new Canada Student Grant Program in 2009-10 and that amount will rise to $430 million in three years.

Flaherty said the new plan would reach 245,000 students, which he claimed was more than 100,000 more than under the previous system.

A vote on the budget, which is a confidence motion, is slated for March 5.