Canadian Budget Cuts Deeply But Proves Popular

IN one fell swoop, Canada sacrificed a truckload of sacred cows, gave pink slips to 45,000 civil servants, challenged Quebec separatists, and took a giant step toward firming up its credibility on world financial markets.

In short, Canada's annual federal-budget speech delivered Monday by Finance Minister Paul Martin was anything but a snoozer.

''It kept me awake all right,'' says Gregg Downie, a Manitoba farmer who gathered with friends in Wawanesa, 120 miles west of Winnipeg, to watch the speech. ''Everyone took a hit this time around. We got hit. It was a tough budget no doubt. But it was a fair one.''

The budget pleased bankers, too. ''This was perhaps the most important budget we've had in 10 to 15 years,'' says Ken Foxcroft, senior vice president at Toronto Dominion Bank. ''If Martin had not come forward with the hefty budget cuts he did today, it could have been quite disastrous for the currency and interest rates.''

Warning signals sounded Feb. 16 when Moody's announced a debt-ratings review and possible lowering of Canada's triple-A credit rating on $400 billion (Canadian: US$288 billion) worth of debt. Expectations for the budget ballooned.

With jittery currency traders calling the Canadian dollar the ''Northern Peso'' and a looming $12 billion to $15 billion shortfall over two years, Mr. Martin announced sharp cuts that beat earlier deficit targets by:

*Chopping a total of $25 billion (US$18 billion) over three years from cherished subsidies and programs in agriculture ($1.3 billion), fisheries ($600 million), industry ($2.7 billion), transportation ($4.2 billion), defense ($4.8 billion), and foreign aid ($1.6 billion).

*Cutting $1.6 billion in transfers to provinces to pay for social services and giving provinces more control over how those education, health care, and other funds are spent.

*Privatizing government-owned Canadian National railway, the nation's air-traffic-control system, remaining holdings of Petro-Canada, and a government printing company.

*Raising taxes, including a 1.5 cent per liter gasoline tax, closing tax loopholes used by wealthier Canadians, and raising taxes on Canada's largest corporations and banks.

*Refusing to raise personal income taxes.

The result of this selective, chain-saw approach to budget cutting is that the deficit will fall from $37.9 billion this fiscal year to $21 billion in 1996-97 -- the first significant spending decline since the 1950s.

''It would have been such a disaster if the government hadn't done deep cuts,'' says Daniel Schwanen, senior policy analyst of the C.D. Howe Institute in Toronto. ''I think the public was ready.''

Indeed, Mr. Downie was. Losing a $550 million annual grain rail subsidy to western grain farmers will mean $15 more per ton to haul his wheat, barley, and canola to market. His cost: $20,000 more a year. Still, the farmer wants more government budget cuts. ''There was a consensus in our group that the cuts didn't go far enough,'' he says.

Canada's federal debt load was creaking this year at $546 billion, or 73.2 percent of gross domestic output. The average United States debt-to-GDP ratio between 1990-92 was 32.4 percent. Financial markets immediately delivered a thumbs up with the Canadian dollar rising sharply during Martin's speech.

Quebec has long demanded more control over provincial programs paid for in part by federal funds.

Touting the newly flexible social-spending plan, Martin challenged separatists ''to choose to remain proud partners in a large, reforming country. Or to become something else -- smaller and alone.''

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