Canada's Provinces Finally Tackle Their Fast-Rising Indebtedness

Some have frozen spending, but others have cut social programs

AFTER years of borrowing to help pay for health care and other social services Canadians have long enjoyed, Canada's provincial governments are tightening their belts in unison.

All 10 of Canada's provinces cut their deficits in fiscal year 1994 - the first time this decade, according to a recently released Toronto Dominion Bank report.

What this unusual confluence indicates, analysts say, is that Canada's provincial governments have gotten the message from voters and world bond markets - both of whom are disenchanted with Canada's fast-rising indebtedness.

``All the provinces are in the same boat, under the same pressures,'' says Teresa Chandler, senior economist at Toronto Dominion Bank. ``The financial markets have made it very clear they want these deficits to come down.''

The good news, she says, is that the total provincial deficit for the year 1993-'94 was reduced by $5.8 billion (Canadian; US$4.23 billion) to $19.5 billion. The bad news is that total debt still went up last year, and the pressure is on for more cuts, with debt-ratings services watching closely for signs of weakening resolve.

Among the seven leading industrialized nations, only Italy is more heavily in debt than Canada relative to its economic output. The provinces together will owe about $229 billion by the end of the fiscal year, while Canada's federal government will owe $550 billion, the report says.

The combined $780 billion federal and provincial debt equals $26,768 for each of Canada's 28.7 million people. And for the first time, the debt will exceed 100 percent of Canada's gross domestic product (GDP) this fiscal year, the bank report says. Italy's debt, by comparison, is 113 percent of GDP, and US debt is 63 percent of GDP, according to the Organization for Economic Cooperation and Development.

``We've run these [deficits] for long enough now that there has been a huge increase in taxes just to pay for the rise in interest payments on the debt,'' says William Robson, senior policy analyst at the C.D. Howe Institute, a Toronto-based public-policy think tank. ``After a while, that starts to seep through into peoples' thinking.''

Combined provincial and federal debt is expected to cost Canadians $60 billion in interest alone - that is more than $2,000 per Canadian compared with $1,850 per person five years ago, the bank report says. This fact, Mr. Robson says, has not gone unnoticed by voters. There has been a ``general shift in public attitudes toward debts and deficits,'' he says.

Cutting the federal deficit was a key issue in last fall's federal election. Voters' deficit concerns spilled over to their own provinces. While some provinces have avoided difficult cuts by freezing spending, Alberta and Saskatchewan have cut into social programs in a way that would have been politically impossible a few years ago, analysts say.

In Alberta, Premier Ralph Klein won election last year in part because he promised cuts to the provincial deficit without raising taxes. The cuts have angered many, but Mr. Klein's support has stayed surprisingly strong.

Some provinces appear to be taking a cue from Alberta. While most provinces, in the past, have chosen to raise taxes to meet deficit targets, that has not often worked. Instead, for fiscal 1995, all 10 provinces have eschewed major tax increases, opting for tax freezes or tax cuts, the bank report says.

One reason why cuts are even remotely possible is that the Canadian economy is growing at a rate of about 3 percent annually. So the tax increases put in place during the recession are now generating strong revenues.

But the cuts have made many people question whether chopping social services will simply transform Canada into a society with more striking social ills. Many Canadians worry that their social safety net may end up with the same gaping holes they see in the US. Others may worry about that, but support cuts anyway.

``I came [to Alberta] for a brighter future,'' says Alexander Ramos, a 24-year-old Edmonton resident who immigrated from the Philippines and is working toward a high school degree. ``I can live on $5 an hour. But I know people who have been cut from welfare, and it's hurting them,'' he says.

Still, Mr. Ramos shows that he views the problem in a way many of his friends do not - from the government's point of view.

``I know that Mr. Klein is working on the deficit now so our children won't have these problems later,'' he says, ``so in the future out children can find more jobs.''

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