Canada seeks relatively modest budget cuts

By Randall Palmer and Louise Egan

OTTAWA (Reuters) – Canada’s plan to balance its budget by 2014-15 hinges on spending cuts that seem laughably small compared to those the United States would need to do the same job, but they still will be painful.

The Conservative government, which transformed its minority into a defeat-proof majority in last month’s federal election, says it should be able to run a budget surplus by 2014-15 if it can cut annual spending by C$4 billion ($4.1 billion).

The Canadian economy is roughly one-tenth the size of that of the United States, and U.S. policymakers would be elated if they only had to cut spending by $40 billion, given the current U.S. budget deficit of $1.4 trillion.

But the low-hanging fruit in Canada — the easy spending cuts — is already gone and new cuts, on top of previously announced stringencies, have already prompted union pushback.

“On one side I think it’s wrong to suggest this is going to be totally pain-free, but on the other side I don’t think that this is going to be an apocalypse,” said University of British Columbia economist Kevin Milligan.

Canada expects to be the first of the Group of Seven industrialized countries to return to surplus and its projected 2011-12 deficit of C$32.3 billion amounts to only 1.9 percent of the size of the economy. The U.S. deficit is almost 11 percent of gross domestic product.

Canada’s planned savings of C$4 billion will come from a total 2011-12 budget of C$281 billion.

But the government has ruled out cutting payments for health and unemployment programs, and debt payments can’t be touched. That leaves some C$80 billion in operating costs, and points to cuts of about 5 percent of that.

 

NO SMALL TASK

Tony Clement, the minister in charge of implementing the cuts, said the 67 government departments had been asked to draw up scenarios for cuts of 5 and 10 percent, with options that could include merging operations across departments, making programs more efficient and introducing user fees for some services.

“Some of this may require legislative or machinery changes,” he told public service executives on Wednesday. “So we have no small task ahead of us.”

Clement made no direct mention of jobs cuts, the issue on everyone’s mind. If the C$4 billion in annual savings came from job cuts alone, it could eliminate 40,000 positions from a federal public service that’s currently 285,000-strong.

Roughly 40,000 people are expected to retire in the next four or five years, bringing the chance of attrition rather than layoffs, but having 40,000 fewer employees would leave a big hole in government operations.

“Cutting public services and jobs is the wrong priority at the wrong time,” said John Gordon, head of the Public Service Alliance of Canada, which is mounting a Google and Facebook ad campaign and encouraging members to send direct messages to the Twitter account of Treasury Board President Tony Clement.

Experts say the most effective way to cut is to eliminate government programs, although just about every program has a devoted constituency.

When Canada’s government made big cuts in the 1990s, some departments postponed capital expenditures and trimmed costs so deeply that they were at times unable to manage their programs. Several years later, spending rose.

“A new program review exercise must…generate lasting savings,” Peter DeVries and Scott Clark, who held senior positions in the Finance Department at the time, said in a blog entry. “This can only be done through reduction/elimination of existing programs. It will not be achieved through administrative savings.”

Milligan said a rough rule of thumb is that 80 percent of operating expenses are wages and salaries and 20 percent is nonpersonnel spending, and jobs will have to go.

“It’s people, it’s bodies,” he said. “You can cut the lawn every second week rather than every week, you can save on paper clips — but frankly that’s not going to add up to much more than a few hundred thousand dollars.”

He added: “Maybe there are some programs that are past their best-before date. I’m encouraged that they’re looking in that direction.”

The government says that if the economy goes as forecast, and if all the budget cuts are realized, Canada should be running a budget surplus of C$8 billion by 2015-16. ($1=$0.98 Canadian) (Editing by Janet Guttsman)