Canada Faces Its Own Budget Deficit. IMF URGES ACTION
HOW to deal with Canada's deficit is the biggest problem facing Finance Minister Michael Wilson when he presents his budget next month. Canadians say they want to deal with the deficit. A recent poll by Angus Reid and Associates of Winnipeg shows that 57 percent of those surveyed want the deficit reduced. But when the government tried to cut into social programs four years ago to reduce the budget there was an outcry. Mr. Wilson had suggested that old-age pensions not be indexed to inflation. He had to retreat under a storm of protest.
The government of Canada will spend $132.3 billion (Canadian: US$109.8 billion) on everything from keeping soldiers in Europe to paying unemployment insurance in the current fiscal year, which ends March 31. (The accompanying chart cites deficits measured in a different manner known as the ``national accounts basis.'') But it will come up short of at least $28.9 billion, according to the forecast that the finance minister made in last year's budget.
Now the International Monetary Fund has suggested that Canada must cut its deficit by at least $9 billion. In a confidential report leaked to the press, the IMF said Ottawa should raise taxes and cut spending to meet the target.
The Canadian dollar reacted to the news by dropping sharply before recovering. ``They have done us a favor,'' said a senior Canadian foreign exchange trader in Toronto.
The government in Ottawa had mixed views.
Prime Minister Brian Mulroney said he might agree with the message but not the amount. ``There is no magic figure. The $9 billion calculation is theirs,'' he told reporters. ``The prescription for our problem will be devised by Canadians.''
Canada's minister of finance was less worried. The IMF report ``underscores what we've been saying for four years,'' said Wilson. It appears doubtful, however, that Wilson will take the advice of the IMF to radically reduce the deficit, even if he agrees in principle with the suggestion.
Peter Martin, a senior economist with the Toronto firm of Walwyn Inc., was critical of the IMF's recommendations. He says the only way to cut that much of the budget deficit is to raise taxes, which might send the country into recession, or to cut out social programs completely, such as the family allowance checks that are mailed monthly to every parent in Canada.
``It is ridculous - even arrogant - of the IMF to ask the Canadian government to cut $9 billion from the budget without naming specific programs it wishes to cut,'' says Mr. Martin, who wrote a book on fiscal policy in Canada. ``It is the same as telling my son to study hard and listen to his mother. It's obvious we should cut the deficit, but the IMF should give details on just how to do it.''
Canada's overall debt is $322 billion (Canadian: US$267 billion). Wilson last year predicted that interest rates would average 7.8 percent in 1989. As of today, he is 4 percent below the actual short-term interest rate. The federal deficit has grown by $1.9 billion because of higher interest payments.
It's not just the IMF that is calling for a reduction in Canada's deficit. Canadian organizations, from the Canadian Chamber of Commerce to the C.D. Howe Institute (a privately funded think tank), have called for drastic spending cuts, although none went as high as $9 billion.
But economists doubt the federal government will get anywhere near to cutting into the deficit on that scale. ``It is naive of the IMF to suggest such large cuts,'' says Martin. ``They have not given any thought to the political and social costs.''
Wilson and Mr. Mulroney remember the demonstrations and outcry the last time they cut social programs in a bid to reduce the deficit. That's why the IMF's theory is unlikely to be put into practice.