Canada Bites the Bullet With Austere Budget : Spending: Plan will carve down national debt by raising taxes, cutting many subsidies.


In a budget intended to contain the expanding national debt and reinforce its weakened currency, the Canadian government Monday called for historic rollbacks in subsidies to agriculture, business and social programs and promised to eliminate 45,000 federal jobs over the next three years.

The budget, presented in Parliament by Finance Minister Paul Martin, also includes increased taxes on gasoline, airline tickets, banks and other corporations and requires new immigrants to Canada to pay a $700 processing fee. Dollar for dollar, however, spending cuts outnumber new taxes by 4 to 1.

“This is by far the largest set of cuts in any budget since demobilization after World War II,” Martin said in a nationally televised speech before the House of Commons in Ottawa.

Martin’s $117-billion spending plan calls for reducing the budget deficit to $23.4 billion by the end of the next fiscal year and to $17.4 billion--about 3% of gross domestic product--by 1996-97. That would meet the target identified by Prime Minister Jean Chretien when he took office in November, 1993.


Canadian officials will be watching for the next several days to see how financial markets react. Foreign investors, who hold about 40% of Canada’s accumulated government debt, have jackhammered the Canadian dollar in recent months, driving it down to between 70 and 71.5 U.S. cents and forcing the Bank of Canada to raise interest rates in defense.

In addition, Moody’s Investor Services is considering a downgrade of Canada’s bond rating.


The initial reaction to the budget was positive in Asian markets as the Canadian dollar rose above 72 U.S. cents late Monday. Canadian financial analysts were also mainly upbeat in their assessment, though there were some complaints that Martin set no date for eliminating the deficit.


Canada’s total government debt--the combined accumulated deficits of the federal and provincial governments--equals the annual output of the economy, giving it the worst debt ratio among the seven largest industrial powers, except for Italy.

However, it also had the fastest-growing economy of those countries last year.

The new budget was crafted to soften the blow to middle-class families, who mainly will be affected by the gasoline tax, but it includes cuts to a wide spectrum of government activities.

For example, rail subsidies granted to Canadian grain farmers since 1896 will be eliminated. The government-owned CN railroad and Petro Canada oil company will be sold. The $2 bill will be replaced by a coin.

And, in a move similar to Republican-backed measures in the U.S. Congress, beginning in fiscal 1996-97, Canada will combine federal payments for health, welfare and higher education into block grants to the provinces, giving provincial governments more flexibility over how to spend the funds but reducing the amount of money available.