OTTAWA–Arguing that a recession is not the time to cut income taxes, the federal Liberals yesterday served notice on Prime Minister Stephen Harper that he risks defeat if he goes ahead with across-the-board cuts.

Harper, whose minority Conservative government will stand or fall based on what's in the Jan. 27 budget, has said the economic rescue plan being prepared for the budget must include tax breaks for middle-class Canadians, whose spending can help revive the economy.

The Liberals are opposed to making tax cuts the centrepiece of the budget, and new leader Michael Ignatieff signalled yesterday the party is prepared to dump the Conservative minority if the budget is inadequate.

Ignatieff, installed as leader early last month to replace Stéphane Dion, has shown only lacklustre support for the idea of a Liberal-NDP coalition (backed by the Bloc Québécois) to defeat the Tories.

But as he opened a two-day caucus meeting with a rallying speech, Ignatieff warned "if the budget does not respond to the circumstances, if the budget is not equal to the crisis that we all face, we have to vote against (it)."

"This budget has three simple tests that it must pass," Ignatieff told Liberal MPs and Senators. "Will it protect the most vulnerable? Will it save jobs? And most important of all, will it create the jobs of tomorrow?"

As they position themselves in advance of the budget, the Liberals argue that, while they generally favour income-tax cuts, it's the wrong approach during the recession.

"We don't want to see the Prime Minister come up with the kind of broad-based tax cuts that put Canada in a permanent, structural deficit once we recover from this (recession)," Liberal finance critic Scott Brison (Kings-Hants) told CTV yesterday as his party gathered in Ottawa for the caucus meeting.

Liberal MP John McCallum said such cuts are fiscally irresponsible at a time when the Tories have already put Ottawa's books in a deficit position and there's no way to ensure tax cuts benefit those who have lost their jobs or otherwise need help during the recession.

"There's a very good argument to be made that this is not the right time for across-the-board tax reductions," said McCallum, MP for Markham-Unionville and chair of a party advisory committee on the economy.

Canadians may not spend the money they save through tax cuts, which would deprive the economy of the sought-after stimulus.

It's generally agreed that U.S. President George W. Bush's attempt to prop up the American economy last year with $131 billion in tax cuts didn't work because taxpayers saved the cash.

The lack of an economic stimulus package in the Conservatives' Nov. 27 mini-budget led the Liberals and NDP to join forces (with the support of the Bloc) in an effort to defeat the Tories and take power with a Liberal-NDP coalition.

In the 308-seat House of Commons, the Tories have 143 seats. The Liberals have 77 seats, the Bloc, 49, and the NDP, 37. There are also two Independent MPs.

Harper now promises to use the Jan. 27 budget to bring in an extensive pro-growth economic strategy with so much spending and tax cuts that Ottawa could run a $30-billion deficit this year.

The Liberals want to see increased spending on urban renewal and other programs to stimulate the economy, improvements in the Employment Insurance program to help the jobless, more skills training and more money for social housing.

Ignatieff, who won sustained applause from fellow Liberals yesterday, called for his party to become the "smart, compassionate alternative" to the Harper government.

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"There is fear in the land," said Ignatieff, who has been holding consultations across the country in advance of the return of Parliament next Monday.

Ignatieff said Canadians are deeply worried about the economic recession and concerned for their jobs.

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