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The federal government is showing the slimmest of surpluses for next year and the year after, and warns that any fiscal stimulus package would likely put it over the edge into deficit territory for the first time in 12 years.

Ottawa is balancing the books — barely, and only for now — by chopping government spending, capping civil servant wages, and dramatically scaling back on equalization transfers to the provinces, its annual fall economic update shows.

The Conservative government is also removing the right of civil servants to strike for a year, considering selling off corporate assets, and ending the $1.95-per-vote funding that goes to political parties after elections.

All three opposition parties said they would not support the statement, raising the spectre of a showdown that could lead to yet another federal election.

The government also said it is injecting $700-million into the capital base of government-owned banks in order to boost financing to exporters and small business.

It is also making legislative changes to give it leeway to bail out commercial banks if need be. And it is reducing the required minimum withdrawal amount for Registered Retirement Income Funds by 25 per cent for 2008.

But new stimulus for the sagging Canadian economy won't come until after the government has consulted with the provinces and the public, Finance Minister Jim Flaherty explained.

"Any additional actions to support the economy will have an impact on the bottom-line numbers in our next budget," he told the House of Commons. "These actions, or a further deterioration in global economic conditions, could result in a deficit."

His priorities are accelerating infrastructure projects and improving opportunities for workers and suffering sectors, as long as new spending benefits the long-term development of the Canadian economy.

He projected a $100-million surplus for both fiscal 2009-10, and fiscal 2010-11. He expects a slightly bigger surplus of $800-million for this fiscal year, which ends March 31, 2009. The slim surplus numbers are well within the margin of error on a total budget of about $250-billion, and fly in the face of most private sector projections, as well as the Parliamentary Budget Office forecast of growing deficits next year and the year after.

The government surpluses are based on economic growth of 0.6 per cent in 2008, 0.3 per cent in 2009, and a recovery to 2.6 per cent in 2010.

"Canada has not faced such severe economic tests in a generation," Mr. Flaherty said.

Ottawa is able to show a surplus mainly by chopping $4.3-billion in government spending in 2009-2010. Those cuts will come in the form of capping salary increases, trimming departmental spending, and selling off corporate assets if need be.

"Canadian tax dollars are precious. They must not be spent frivolously or without regard to where they came from," Mr. Flaherty said. "We cannot ask Canadians to tighten their belts during tougher times without looking in the mirror."

The federal government is also avoiding forecasting a deficit by making $1.1-billion from commercial banks that partake in Ottawa's recent moves to buy back mortgage securities.

But the biggest savings come in a cap imposed on equalization payments to the provinces — a deal that was agreed to by the provincial premiers earlier this month. The cap allows equalization payments to growth in tandem with nominal growth in the country's gross domestic product.

Instead of giving have-not provinces $16-billion next year and $20-billion the year after, Ottawa will instead hand over $14.2-billion next year and about $14.5-billion in 2010-2011. That's a savings of about $7-billion over two years.

The new plan "will bring fairness and stability to both the provinces and the federal government, while reflecting changes in the Canadian economy," Mr. Flaherty said.

The Official Opposition Liberals decried the Conservative restraint exercise as a sham to delay declaring a deficit, saying a significant portion of the planned savings is for sales of government assets that haven't even been identified yet.

"It's a fudge-it, not a budget," Liberal finance critic Scott Brison said. He said selling government assets such as buildings and properties as a recession looms would amount to a fire sale giveaway.

"It's a buyer's market. I can see the signs going up: bargain basement sale, very motivated seller," he said.

With a report from Steven Chase and Kevin Carmichael in Ottawa