New Finance Chief Tackles Canada's Debt, Jobless Rate

But where to cut government services to reduce the deficit and stimulate the economy is hotly debated

FINANCE Minister Paul Martin is Canada's man in the hot seat.

Liberal Prime Minister Jean Chretien promised Canadians ``jobs, jobs, jobs'' and at the same time to reduce the growing federal deficit to 3 percent of gross domestic product (GDP) from about 6 percent currently.

Now it is Mr. Martin's job to deliver on both big promises. To do that, he will have to haul down the country's 11 percent unemployment rate, while at the same time reducing the projected record deficit level of $46 billion (Canadian; US$34 billion) for this fiscal year.

The problem is, people here are in favor of government spending that has for decades provided them with a much broader array of services and a social safety net superior to their superpower neighbor. That huge cost now poses a threat to Canadians' standard of living, and cutting back is something most agree on. But how and where to cut is hotly debated.

Knowing tough policies are on the way, Martin appears to be tearing a page out of the playbook of United States President Clinton, who held an economic conference critics said was unnecessary, to gain broad consensus he can point to later when the going gets rough.

On Monday, Martin did much the same thing, bringing 40 economists from across Canada to an all-day summit in Ottawa, the first of four. While solutions to economic problems varied, the problems identified were consistent:

* Large federal deficits threaten the nation's economic health, making deficit cutting a priority.

* High unemployment has made people reluctant to spend, weakening the domestic economy, even though exports are booming.

* High taxes are not only squelching economic growth, but a thriving ``underground economy'' is cutting ever more deeply into government tax revenues.

``I think Canadians want to see deficit reduction,'' Martin told reporters at the conference. ``They're tired of having governments talk about it and seeing deficits go up, but they want to know that at the end of all of this there is going to be a payoff'' in tax reduction.

The combined debt of the federal government and provinces is about $690 billion, or 96 percent of GDP, according to the Toronto Dominion Bank. That level makes Canada one of the world's most indebted nations, the economists agreed.

How did it get so high after nine years of ``conservative'' economic rule during the 1980s? One reason, several economists said, is that past governments consistently underestimated spending while overestimating revenues, leading to large annual deficits.

``One is left with the indelible impression that what has gone on in these forecasts is a failure of political leadership,'' said Michael Walker, an economist with the Simon Fraser Institute. ``Because of a failure of courage, or because of the desire to engage in wishful thinking, [there has been a tendency] to use revenue estimates completely out of keeping with the economic scenario in order to make the deficit look good.''

Martin's stated goals are a federal deficit of just $20 billion and unemployment of 8 percent in the next three years. To do the latter requires reviving the private sector to create jobs.

But unlike ``the good old days'' Mr. Chretien promised, a Keynesian ramp up of government spending is not possible given the large deficit.

Several economists said deep cuts in government spending would lead to lower interest rates, stimulate the economy, and lower the deficit. The only way to do that politically is to spread the cuts.

``People can't say consistently that there's a problem with deficits but solve it on somebody else's back,'' Martin told reporters. ``What people have to understand is that there can be no sector of the economy that is sacrosanct. If there's pain, then it's going to have to be shared equally.''

Carl Beigie, one of several economists criticizing the performance of Bank of Canada chief John Crow, said Mr. Crow had kept interest rates too high, contributing to today's unemployment problem. The high levels, he said, were due in part to ``an insane policy of keeping the Canadian dollar ... at an overly high level of about 88 US cents during the late 1980s.''

Martin also has expressed ambivalence about reappointing Crow. Many more economists, however, warned Martin to reappoint Crow after his term ends on Jan. 31 in order to maintain the confidence of overseas investors, who hold a large percentage of Canada's $690 billion debt.

Uncertainty in the bond and currency markets would lead to higher interest rates that would hurt the economy, the economists said.