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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!

February 23, 1993|MARY WILLIAMS WALSH | TIMES STAFF WRITER

TORONTO — 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.

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