* Budget sticks to 2015 target for closing deficit
* Two of three opposition parties reject budget
* Fate of minority government lies in hands of NDP
* Budget packed with numerous targeted measures
By Louise Egan
OTTAWA, March 22 (Reuters) - Canada's ruling Conservatives pledged on Tuesday to slice the budget deficit by a quarter this year and return to surplus in 2015, while offering a host of treats to opposition parties in the hope of avoiding an election.
The opposition Liberals and Bloc Quebecois immediately said they would vote against the budget. But the minority Conservative government, which relies on an increasingly antagonistic opposition to pass major legislation, may have to wait until Wednesday to find out whether it has done enough to win the backing of the third opposition party -- the New Democrates -- and pass the budget.
The three parties have ramped up attacks on the government of Prime Minister Stephen Harper in recent weeks over ethical breaches, fueling speculation they would seek to topple him as early as this week in a confidence vote.
"To secure our recovery from the global recession, Canada needs a principled, stable government. Now is not the time for instability," Finance Minister Jim Flaherty said in his budget speech.
Strong economic growth is helping narrow the budget gap slightly more in the next five years than the government predicted last October. Canada's deficit looks paltry compared to the record US$1.645 trillion shortfall the United States faces in 2011, and austerity measures planned are far less severe than those planned by the British coalition government, for example.
But Flaherty embedded extra cautious economic outlook into his fiscal plan and left intact his prediction of a return to a small surplus in 2015-16.
"From an economics policy perspective, this budget I think is pretty much what people were looking for going into it, but it does seem to be heavily tilted towards a political budget as well," said Craig Wright, chief economist at Royal Bank of Canada.
The new spending plan in theory makes it difficult for at least one party -- the left-leaning New Democratic Party (NDP) -- to object as it includes measures that appear to be lifted directly from the NDP budget wish list.
Polls show the Conservatives would retain power in an election. ******************************************************************* Timeline: crucial week for Canadian government: [ID:nN17163250] Interactive graphic on G7 government debt: http://r.reuters.com/set58r ***************************************************************
Because it holds a minority of seats in Parliament, the Conservative government needs the support of at least one opposition party to pass key legislation and stay in power.
The main opposition Liberals have made it clear they won't back the budget, which completely ignored their main demand that corporate tax cuts be reversed. The separatist Bloc Quebecois' requests were not met either.
NDP leader Jack Layton had conditioned his support for Harper on more help for poor seniors, tax relief on home heating bills, a beefed-up state pension plan and more family doctors.
Flaherty told reporters he had tried to take into account the many demands made of him but added: "The job of the government is not to appease opposition parties."
The budget items that most obviously court the NDP were more income support for low-income seniors at a cost of C$300 million a year, renewal of a program that reimburses Canadians who make energy-efficient home renovations for C$400 million, and student loan forgiveness for doctors and nurses who work in rural Canada. It also proposes a tax credit for people who miss work to care for elderly family members, which will cost C$200 million over two years.
"I am surprised by the sheer volume of measures, mostly fairly small but they do add up next year to C$2.3 billion, so it's significant," said Don Drummond, economic adviser to Toronto-Dominion Bank and a former finance official.
Businesses got some help too, in the form of a two-year extension of the accelerated capital cost allowance for investment in manufacturing and equipment and a tax credit for small businesses to hire new workers.
CLOSING THE GAP
The government opted to err on the side of caution in its economic and fiscal projections, lowering the private sector forecasts of gross domestic product growth used as budget assumptions, citing Europe's debt woes and the catastrophic earthquake and nuclear disaster in Japan.
After a decade of surpluses and boasting the strongest fiscal reputation in the G7, Canada fell into deficit during the global financial crisis. Flaherty has vowed to keep cutting taxes and rely on the withdrawal of a stimulus program and spending restraint to balance the books in the medium term.
The budget foresees the federal deficit narrowing in the 2011-12 fiscal year to C$29.6 billion, or 1.7 percent of GDP, compared with C$29.8 billion in its previous forecast in October, down more than 25 percent from an estimated C$40.5 billion gap in 2010-11 period ending March 31.
The deficits in subsequent years are slightly smaller as well, returning to a surplus of C$4.2 billion, or 0.2 percent of GDP, in 2015-16. Ottawa sees the economy growing 2.9 percent this year and 2.8 percent next year.
The government, which has already cut spending through a strategic review of programs, said it hopes to squeeze out an additional C$11 billion in savings between now and 2016.
Ottawa also built in a cushion against future financial market crises into its debt management strategy, proposing to borrow an additional C$35 billion for a "prudential liquidity" buffer in case of disruptions in funding markets. (Additional reporting by David Ljunggren, Howaida Sorour and Chandra Ramarathnam; Editing by Jeffrey Hodgson)