America From Abroad : Canadian Budget Plan Cuts to the Quick : Mulroney’s nine years of taxes and trims have stemmed the red ink but drawn political blood. Watch out, Bill Clinton!

After nine years of imposing painful tax hikes and spending cuts north of the border, Canadian officials are well-positioned to assess President Clinton’s budget-cutting prospects in the United States.

“Do as much as you can quickly,” urges Peter DeVries, director of fiscal policy at the Canadian Finance Ministry, when asked what counsel he might have for his new U.S. counterparts.

DeVries should know. The government of Prime Minister Brian Mulroney took office in 1984 with a promise to cut the deficit, and since then it has whacked spending, raised taxes and ultimately turned Canada’s operating deficit into a surplus. (The operating deficit measures the total budget deficit less interest payments on government obligations.)

Overall, the Mulroney budgetary track record is much better than that of his conservative U.S. soul mates, Ronald Reagan and George Bush.

Yet even so, the international credit markets remain unsatisfied with Canada. Mainstream economists here complain that the Mulroney government has moved far too slowly and cautiously. And the impressive-looking Canadian surplus disappears if interest obligations are included in the calculations: After interest payments on the public debt, Canada’s books remain deeply in the red.

“It’s depressing,” says David Brown, senior policy analyst at the C.D. Howe Institute, a nonprofit research organization in Toronto. “(Mulroney’s fiscal team) has tried very hard, but they’ve had an awful lot of bad luck along the way since 1984.”

Canada’s experience suggests what a difficult mission Clinton has in store as he tries to cut the U.S. deficit.

From north of the border, it looks like a task that involves extraordinary effort for marginal results--all at a heavy political cost. In fact, after nine exhausting years of belt tightening, Canada is still digging its way out from under a mountain of debt, and by now the public has clearly reached the limits of its patience.

Mulroney’s approval ratings are the lowest of any prime minister in the history of Canadian opinion polling. His face--which has aged considerably over the past nine years--now decorates everything from toilet plungers to dolls that are made to be smashed. He must call an election before next fall, and analysts say it will take a miracle--or at least a sustained economic boom--to get his Progressive Conservative Party reelected.

“It’s really striking, what’s happened to the social psyche of Canadians,” says Brown. “Almost everyone is worried about their jobs.” Not coincidentally, the latest Mulroney budget cuts involve unemployment compensation.

What has Mulroney done, and why hasn’t it worked as well as expected?

Back in 1984, Canada had a wider budget deficit than America, and it was growing fast. Mulroney’s predecessor governments had been increasing spending, on average, by 14% a year for the previous 15 years, yet tax revenues had failed to keep up.

Most of Mulroney’s attacks on the deficit have taken place on the spending side of the ledgers. Canada now posts the lowest rate of federal spending growth in the Group of Seven major industrial powers.

Several of Mulroney’s budget cuts will sound familiar to Americans who watched President Clinton’s State of the Union message on television last week:

* About 11,000 federal employees have lost their jobs since 1986, thanks to a 1% reduction of the federal work force each year between 1986 and 1991.

* Federal employees who didn’t lose their jobs had their pay frozen in 1991, this year and will again in 1994. In 1992, they received raises of no more than 3%.

* Key social benefits that were formerly pegged to keep pace with inflation have been de-indexed; some have had new eligibility requirements imposed.

* Military spending growth has been reduced to 1.5% per year, or less than this country’s rate of inflation. Canada has had to scrap plans to buy nuclear submarines, and has pulled its troops out of Europe.

* Foreign aid, which used to grow faster than the overall economy, now grows by just 3% per year.

* Much of the cost of universal free health care, and that of higher education, has been shunted from Ottawa onto the provinces. (Traditionally, the two levels of government had split the costs.) As a result, provincial budgets have been thrown into disarray, hospital beds have been eliminated, insurance coverage for certain medical procedures and drugs has been dropped, and some provinces are even talking about charging fees for some health services.

* The federal government has cut its matching payments for provincial welfare programs in the three richest provinces--at a time of deep recession, when the welfare rolls have burgeoned.

* Subsidies to the government’s passenger rail and postal services have been dropped, meaning certain train routes have been scrapped, and some small towns have lost their post offices. The government won’t even forward misdirected letters free any more.

* Most recently, the budget-cutters have targeted this country’s generous unemployment insurance program. Beginning this spring, Canadians who lose their jobs will collect lower benefits than in the past, and they won’t get any benefits at all if they can’t show they left their jobs for a good reason.

Mulroney has taken substantial action on the tax side of the ledger as well. During his nine years in office, Canada has de-indexed personal income-tax brackets; eliminated gaping corporate tax loopholes; increased a manufacturers’ sales tax and eventually started charging that tax directly to consumers at the cash register; and substantially increased taxes on alcohol, tobacco and gasoline.

It adds up to an impressive list. But even as Mulroney brought his government’s program spending into the black, the total deficit continued to grow.

That’s because the government continued to have an operating deficit--albeit a shrinking one--each year between 1984 and 1988. It still had to sell Treasury bills and bonds to finance the shortfall. Of course, it had to pay interest on those securities, as well as on the bills and bonds sold to finance the deficits of previous governments.

The cost of servicing those debt instruments has turned out to be crushing for Canada, because Canadian real interest rates soared higher than American rates in recent years.

Canada must now earmark 6.2% of its public spending for interest payments, compared to just 3.9% in the United States.

It is this debt burden--more than operating expenditures--that has the international credit markets so nervous about Canada. “Canada is fast approaching a crisis point, where continued heavy borrowing may not be possible,” warns a report issued this month by a number of prominent Canadian economists. “Belgium, Ireland, Italy and Greece: These are the main countries Canada now compares with” in terms of indebtedness.

The report went on to warn about bond-rating downgrades, currency nose dives, and even International Monetary Fund-imposed austerity programs.

None of this would be a threat, the economists added, if only the Mulroney government had chopped spending harder and faster. Then Ottawa would have had less of a stock of debt to service over the past few years.

Mulroney’s fiscal planners say they thought that the cuts they were making would be sufficient at the time, but that they had based their deficit-reduction measures on forecasts that turned out to be overly rosy.

“We did the maximum we thought we could do at the time we were doing it, and we thought it would do the trick,” says DeVries. “In retrospect, we know that if you’ve got a fiscal problem that’s got to be addressed, you’ve got to address it quickly.”

Cutting Where It Helps--and Hurts

Here are some things Canada has done to fight the budget deficit.

* Selling the store

Canada sold some “crown corporations,” or government-owned industries, such as the national air carrier. It plans to sell others, such as PetroCanada, an oil company, once the market for them improves.

* Fewer jobs

About 11,000 federal jobs have been cut since 1986; pay increases are strictly limited.

* Hold the mail and the rail

Canada stopped subsidizing the post office and national passenger rail. Rail routes were dropped, some village post offices were closed and some people stopped getting doorstep mail delivery.

* Bringing up baby

In 1945, Canada began paying a monthly “baby bonus,” to help with child care, to every family, rich or poor, that had at least one child under 16. Mulroney’s government now confines the payments to the poor only.

* Taxing habits

Taxes were raised on gasoline, tobacco and alcohol.

* Please pay up front

The sales tax that manufacturers paid on their raw materials went up; later, this was converted into a retail tax paid by consumers on almost everything except basic foods.