Financial Markets Approve Of Tough Canadian Budget

Canada’s new deficit-denting budget won endorsements from the financial community Tuesday as the Canadian dollar and the Toronto stock market opened higher and interest rates dropped.

Market analysts were nearly unanimous in their praise for what was described as the biggest cut in government spending in 50 years. “It’s something Newt Gingrich would like,” quipped Michael McCracken, an Ottawa-based analyst.

“In general, it’s the toughest budget we’ve seen in Canada since World War II, and that’s because these cuts are real,” said Patti Croft, senior economist with CIBC Wood Gundy, a Toronto brokerage house.

Croft and others also applauded the conservative economic assumptions built into the $117-billion budget, which rolls back government subsidies to agriculture, business and social programs and promises to eliminate 45,000 jobs - 14 percent of the federal government work force - in three years.

All this may not be enough, however, to keep Moody’s Investor Services from downgrading Canada’s bond rating, which Moody’s announced it was reviewing two weeks ago. Croft noted that while the government has a credible plan for reducing the deficit to 3 percent or less of the total economy by the end of fiscal 1996-97, it has charted no course beyond that to zero deficit.

And even with the cuts - which will total about $9.6 billion over two years - Canada’s accumulated federal debt will remain unchanged at more than 73 percent of gross domestic product. When the debts of the provinces are added, it hovers around 100 percent of GDP. That debt ratio is second only to Italy among the Group of Seven top economic powers.

Tough as the new budget is, Canadians will feel still more pressure next year, when federal spending for health care, higher education and welfare drops and responsibility for those services transfers to the provinces.

“Canada is going to see a series of tough budgets,” said Croft.

The budget prompted boos in some quarters. The union representing government employees announced that members will consider a work-to-rules slowdown to protest the projected elimination of federal jobs. No strike vote has been called “at this time,” a union official said.

Even critics conceded Prime Minister Jean Chretien’s government was pressed into cuts by restive international investors, who hold 40 percent of Canada’s national debt. In December, investors unnerved by the destabilization of the Mexican peso also turned on the Canadian dollar, driving it near an all-time low and forcing up interest rates.

Following Monday afternoon’s budget presentation, the Canadian dollar rose to a high for the year in overnight trading and opened Tuesday at 71.93 cents. It then drifted down slightly to 71.86 in profit-taking.

The budget includes increased taxes on gasoline, cigarettes, banks, corporations and airline tickets. Hit hardest by cuts were Defense, Transport and Natural Resources programs and departments.

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