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UPDATE 2-Flaherty says to expect surprises in Canada budget

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OTTAWA, Feb 25 (Reuters) - There will be a surprise or two in Canada’s 2008-09 budget to be released on Tuesday, Finance Minister Jim Flaherty said on Monday, without giving details.

Flaherty didn’t rule out a policy change on the capital gains tax, an election promise that has yet to be fulfilled.

“That is an outstanding commitment that we’ve been paying a lot of attention to but you’ll have to wait for the budget to see what we’re able to do,” he told reporters.

Before being elected with a minority government in 2006, the Conservatives promised to defer the tax on capital gains for investors who reinvest their assets within six months.

That has proven a complex measure to implement and Flaherty has recently suggested his office is studying alternative proposals to help investors subject to the tax.

Asked if the budget held any surprises, Flaherty said, “one or two.”

Flaherty will likely squeeze out as many goodies as possible from his third budget, despite the strong economic headwinds coming from south of the border.

That’s because the budget has the potential of bringing down the minority government and forcing an election if it is not supported by any of the opposition parties.

Still, Flaherty tried to temper expectations.

“It is a time of some economic slowness especially in the United States and that affects us, so people ought not to expect any big-spending items because we have to stay within our means and be prudent, and fiscally responsible, which we will be tomorrow.”

“I hope (the opposition parties) take some time and have a look at what’s in the budget,” he said.

The Liberals, the biggest opposition party, have hinted they will allow the budget to pass.

Asked if the government would bid to save money by crimping spending, Flaherty said his department was looking into that.

“We are going to review every agency, every program , every initiative in the government of Canada ... over four years. We’ve already looked at about 15 percent of it and I’ll talk more about that tomorrow.”

The finance minister’s remarks came during his customary pre-budget visit to a shoe store. In previous years, Flaherty has bought a new pair of shoes, but this year, he repaired an old pair with new soles and laces.

“It suits the budget,” he said. “We’re spending in a controlled way given the economic circumstances this year and next year.” (Reporting by Louise Egan and John McCrank; Editing by Bernadette Baum)