Finance Minister John Manley says Canada's economy will continue to grow at a modest pace for the next two years but told Canadians that the large budget surpluses of recent years will not return until 2006.

Manley said tax cuts, health-care costs and the lingering effects of last year's economic slowdown were largely to blame for the lower surplus projections.

Manley made the comments in Halifax, where he delivered an update on Canada's economy to the House of Commons Finance Committee.

"Canada has continued to post strong economic growth which has surprised many analysts," said Manley, who added that Canada will likely lead the G-7 countries in growth for the year.

Canada's economy grew by five per cent in the first half of 2002 and created 427,000 new jobs, Manley said. He said Canada will post overall economic growth of 3.4 per cent in 2002 and said forecasts point to a 3.5 per cent rise in output in 2003.

Manley said Canada recorded a budget surplus of $8.9 billion in fiscal year 2001-02. All the extra money was used to pay down the national debt.

However, lower government revenue will narrow this year's budget surplus to $1 billion and predicted surpluses of $3.1 billion in 2003-04 and $3.5 billion in 2004-05.

He said large surpluses are set to return in fiscal 2005-06 ($6.8 billion) and grow to $14.6 billion in 2007-08.

"These private-sector fiscal projection indicate relatively small surpluses in the near term," Manley told the committee. "This is due to two main factors."

"First, the ongoing impact of last year's economic slowdown upon tax revenues; and second, the effect of previously announced policy initiatives, particularly the $100-billion five-year tax reduction plan and the $23.4-billion health accord, both of which are still coming on stream."

But he also warned that Canada's booming economy is subject to "global risks" and uncertainties that could dampen continued growth.

Manley said the government will continue its "prudent" approach to spending and ruled out a return to deficit government financing.

"We will stay on course and on target," he said. "We must spend wisely and live within our means."

"That is how we will reach our potential as a northern tiger."

Manley said the surplus projections don't include $3 billion that will be set aside each year as a contingency against unexpected changes in the economy.

Manley said any year-end budget surplus will go towards reducing Canada's massive $536-billion national debt.

"We must continue to pay it down," Manley said. "It (the debt) costs 22 cents out of every revenue dollar we take in."

Manley has been under pressure to announce how the government intends to finance Liberal promises outlined in last month's speech from the throne.

The expected ratification of the Kyoto environmental accord and government promises to overhaul the health-care system are also expected to put pressure on Ottawa's coffers.

Manley recently asked his cabinet counterparts to examine their departments' spending as one way of potentially boosting Ottawa's bottom line.

"Further to this issue, I would seek the committee's input on how the government can best realign its spending to meet the highest priorities of Canadians."

He said any departmental savings will go towards other programs rather than debt reduction.

"We spend over $170 billion a year so there's got to be room for reallocation," Manley told reporters afterwards. "I think ministers and departments that find ways to reallocate ought to be rewarded for their effort in support of new initiatives that are more timely."

Manley said Ottawa hasn't undertaken a full examination of departmental spending in five or six years and that "it's time" for another review.

Manley is expected to deliver a full federal budget in February.

Opposition leader Stephen Harper called Manley's update "a peculiar statement" that failed to reveal the costs of the programs outlined in last month's speech from the throne.

"We don't really know where they're going financially," Harper told CTV's Mike Duffy. "None of it adds up."

"I see a lot of soft numbers that don't mean very much."