The 2010 federal budget, set to be delivered on March 4th, might well be the least anticipated budget in recent memory. Perhaps this shouldn't be surprising given the expected $56 billion deficit in 2009/10 and further deficits amounting to $109 billion over the next five years. The reality is that the government has virtually no fiscal room to appease the plethora of special interests that eagerly await handouts and special tax credits on budget day.

With few new initiatives expected in the budget, the government is touting its plan to stay the course on the two-year stimulus plan enacted in last year's budget. However, continuing to push forward with 'stimulus' spending poses a real risk to economic recovery. Rather than continue to roll-out more stimulus, now is the time to tighten the spending reigns and focus on balancing the budget.

With 40% of the total federal stimulus package being devoted to infrastructure projects, most of this money will not be spent until well into this year. The risk for 2010 is that a large portion of government stimulus spending (particularly infrastructure spending) will be spent when the economy is growing again. As a result, the government will compete with the private sector for scarce resources resulting in increased costs and fewer private sector projects than would otherwise be the case.

If the government truly wants to increase economic activity, it should examine the economic evidence on stimulus packages, which clearly shows stimulus spending fails while tax relief works.

A recent study by economists Andrew Mountford and Harald Uhlig compared the economic impact of various cases of deficit-financed spending, deficit-financed tax cuts, and tax-financed spending in the United States from 1955 to 2000. They found that deficit-financed tax cuts are the best form of fiscal policy to stimulate the economy. Perhaps more importantly, they found that both deficit-financed and tax-financed spending do not stimulate the economy but instead discourage private investment.

Similarly, a recent analysis by Harvard economists Alberto Alesina and Silvia Ardagna of stimulus initiatives in Canada and 20 other industrialized countries from 1970 to 2007 also found that successful stimulus initiatives-those that increase economic growth-focus on tax cuts while unsuccessful ones rely on government spending.

A major problem with the federal government's two year, $47.2 billion stimulus plan is that only 13% was dedicated to tax relief.

Given the economic evidence, the top budget priority for 2010 should be to abandon any planned stimulus spending. In addition, the budget should include an aggressive plan to eliminate deficits. A prudent and realistic plan would eliminate the deficit by 2011/12.

Fortunately, the current government has precedent to follow in its efforts to eliminate the deficit. The austerity reforms initiated by former Prime Minister Jean Chrétien and then Finance Minister Paul Martin during the 1990s balanced the budget within three years. And the deficit they faced (4.8% of GDP) was larger than the current deficit (3.7% of GDP).

Once the government gets its fiscal house back in order, the fiscal room can be created to refocus on improving Canada's ability to attract investment and create jobs. The key to improving Canada's competitiveness is to focus on tax-relief that improves the incentives for Canadians to work, save, invest and be entrepreneurial. Of particular concern are Canada's high marginal personal income tax rates on middle and upper income Canadians that apply at relatively low levels of income. For instance, Canada maintains among the highest marginal personal income tax rates on middle and upper income earners among the G7 countries.

The Conservative government claims it's committed to staying the course but let's hope it reconsiders.