Liberal Government Vows To Cut Deficit, Create Jobs

Critics say proposals do not go far enough. CANADIAN BUDGET REFORM

IT is a Canadian tradition for the finance minister to get a pair of new shoes to wear while unveiling his new budget. This year, Finance Minister Paul Martin got work boots.

Heeding that not-so-subtle message from Prime Minister Jean Chretien (who gave him the boots), Mr. Martin on Tuesday announced his plan to promote job growth while cutting Canada's ballooning deficit from 6 percent of gross domestic product (GDP) to 3 percent in three years.

Canada's Progressive Conservatives handed the Liberals a federal government deficit of $45.7 billion (Canadian; US$34.2 billion) for fiscal year 1993-1994. Martin says his cuts will lower that to C$39.7 billion in 1994-1995. Over the next three years, Martin says, the deficit will be cut by C$20 billion.

Wearing a red rose on his lapel, Martin unveiled for members of parliament a group of fairly modest job initiatives (including a Youth Service Corp program) which will create about 173,000 jobs this year and about 300,000 next year. The government will extend C$1.7 billion in federal aide to hard-hit cod fishermen in the Atlantic provinces.

The measures will push federal spending up to C$163 billion from about C$160 billion. So to pay for the initiatives and to cut the deficit, Martin promised to:

* Cut defense spending by C$7 billion over five years by closing four military bases, cutting back five others, closing two out of three military colleges, and cutting military and civilian personnel from 108,400 to 91,900 over four years.

* Reduce unemployment insurance benefits by C$5.5 billion over three years.

* Freeze wages for about 381,000 federal employees - everyone from the prime minister to clerks - saving C$1.5 billion over three years.

* Renegotiate its role in the International Space Station in order to cut C$500 million from a 10-year, C$1.4 billion commitment. Funding was cut to the KAON particle accelerator in British Columbia, saving about C$236 million.

No major tax increases were announced, although removing some exemptions will raise revenue. These include ending a C$100,000 exemption on capital gains and cutting the deduction for business lunches. ``The days of simply nibbling at the edges [of the deficit] are over,'' Martin said. ``This is the most comprehensive reform of government policy in decades.''

Most opposition members of the House of Commons, however, were critical of the effort. Official Opposition leader Lucien Bouchard said more job creation was needed, as well as more deficit cutting. Meanwhile, Reform Party Leader Preston Manning called it a ``missed opportunity'' to cut deeply into spending. But Martin ended his speech with a challenge to both parties to either specify cuts or clarify where the revenues would come from.

Mr. Chretien is under intense pressure not only from voters, but from international lenders to stanch the flow of federal and provincial government red ink. Canada's federal debt now rests above the C$500 billion mark. Almost C$40 billion of the C$160 billion Canadian budget is spent paying interest on the nation's debt, Martin reported.

With Canada approaching debt levels often associated with developing nations, several bond ratings agencies are reviewing Canada's overall credit worthiness. What they have wanted to see from Martin is a detailed plan on how the government will achieve its deficit reduction years from now.

``Martin's deficit numbers are exactly what people expect,'' says Carl Weinberg, chief economist for High Frequency Economics, a New York economics research firm. ``While [the deficit] may be higher than what many would like to see, it's a practical, achievable, realistic set of targets.''

In the past, the conservative government was accused of failing to meet budget targets, in part because of rosy projections. But Martin's estimates for inflation (0.8 percent in 1994), unemployment (10.8 percent in 1994), and real GDP growth (3.8 percent next year) are ``middle of the road,'' says Michael Gregory, an economist at Wood Gundy, a Toronto-based brokerage.

What will make or break Martin's numbers is not unrealistic projections, say Messrs Gregory and Weinberg, but simply the political will to follow through in later years with cuts to social programs. These ``sacred cows,'' as Weinberg puts it, include health and social security programs.

``There are major structural changes that must be done,'' Gregory says. ``Before too long the other shoe will drop on social programs. Beyond the first year or two, C$4 billion or $5 billion [in cuts] gets pretty hard to find.''

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