The Conservative government will squeeze public-service salaries and sell off government assets to enter the next federal election with a budget surplus of at least $3.7-billion, paving the way for promised big-ticket tax cuts.

Finance Minister Jim Flaherty's economic update Tuesday reflects the political motivation driving the Conservative government's push to show an election-year surplus. And it comes as the Tories, a government that has branded itself as economic stewards, struggle to put the Senate expenses scandal behind them.

In his last budget, Mr. Flaherty projected a 2014-15 deficit of $6.6-billion, and a modest surplus of $800-million a year later. But Mr. Flaherty is now ahead of schedule, raising the estimated surplus for 2015-16 to $3.7-billion. There are also several conservative assumptions in the numbers, meaning the surplus could easily come in higher than currently planned.

Story continues below advertisement

The federal spending plan includes several factors that could easily plump up Ottawa's bottom line, allowing the Conservatives to deliver on tax cuts that were promised during the 2011 election but were contingent on balanced books. Those promises include income splitting for parents and new and expanded fitness tax credits.

Mr. Flaherty, who reiterated that he plans to run in the next election, said the government must get its financial house in order before it commits to tax cuts.

"I'm not a believer in spending money we don't have, and we need to get to a balanced budget first," he told reporters in Edmonton after the government delivered its economic update. "And our plan was always to get to a balanced budget in 2015-16 to create room so that other initiatives can be undertaken."

In contrast to the March budget, Ottawa is now forecasting a rosier bottom line over the coming years. This year's deficit is expected to come in at $17.9-billion, partly because the government is booking $2.8-billion for disaster assistance related to the June floods in Alberta and $60-million to assist the town of Lac-Mégantic related to its deadly rail disaster.

The size of the deficit is expected to drop sharply in 2014-15 to $5.5-billion, $3-billion of which is cushioning for risk.

"They are within striking distance of balancing the books a year early," said Bank of Montreal Chief Economist Doug Porter, who notes that federal "spending discipline" is proving to be stronger than expected.

The government now forecasts surpluses of $3.7-billion in 2015-16, $5-billion in 2016-17, $5.7-billion in 2017-18 and $9.8-billion in 2018-19.

Story continues below advertisement

All those years include a $3-billion cushion for unforeseen events. That means if growth and spending play out as forecast, the cushion will not be needed and the actual size of the surplus would be $6.7-billion in 2015-16.

The operating budget freeze announced in the recent Speech From the Throne is estimated to save $1.1-billion in 2015-16.

The freeze means any raises negotiated by employees will have to come out of savings found elsewhere in departmental budgets.

The update suggests there are other ways in which the government's bottom line could come in better than expected. For instance, departments continue to "lapse" – or underspend – large amounts of their approved budgets. That was a main reason why last year's deficit came in nearly $7-billion less than forecast in the March budget. Should that trend continue, the government's bottom line would improve.

Further, the government is expecting a significant amount of revenue based on the future sale of government assets over the coming years. The update indicates that its revenue estimates in this area are conservative.

The update assumes Ottawa will generate $500-million in 2014-15 and $1.5-billion in 2015-16 through asset sales. Examples listed in the report include the government's remaining shares of General Motors, Ridley Terminals and Dominion Coal Blocks – two coal-related properties in British Columbia.

Story continues below advertisement

Mr. Flaherty also said he is open to discussions about the sale of Ottawa's 8.5-per-cent stake in the Hibernia offshore oil project.

NDP finance critic Peggy Nash said the government has "a record of misleading Canadians" by overestimating its deficit projections for political gain.

Liberal finance critic Scott Brison noted that $1.5-billion of the government's estimated $3.7-billion surplus depends on asset sales that have not taken place.

"It's a little bit like selling the furniture to pay for the groceries," he said.

With a report from Carrie Tait in Edmonton

THREE STEPS TO SURPLUS

Story continues below advertisement

The sales: The government is expecting to generate $500-million in 2014-15 and $1.5-billion in 2015-16 through asset sales. Examples listed in the report include the government's remaining shares of General Motors, Ridley Terminals and Dominion Coal Blocks – two coal-related properties in British Columbia.

The freeze: The government pledged to freeze the overall federal operating budget in its Speech from the Throne – this is estimated to save $1.1-billion in 2015-16. The freeze means that federal departmental budgets will not be increased to fund annual wage increases and any raises negotiated by employees will have to come out of savings found elsewhere in departmental budgets.

The cushion: The economic update forecast for the current fiscal year includes a $1.5-billion cushion for risk. All of the following years include a $3-billion cushion. That means if growth and spending play out as forecast, the cushion will not be needed and the actual size of the surplus would be $6.7-billion in 2015-16.