`The End Of The Canadian Dream'?

For most Canadians, a well-padded safety net protects against personal hardships and social ills borne by their neighbors south of the border. With tuitions averaging around $2,000 a year, they lose little sleep over paying for the kids' education. Until recently, they could collect unemployment benefits after quitting their jobs voluntarily.

Now, Canada is facing a reality check. The runaway costs of such benefits are forcing sharp cutbacks in an effort to slow down the growth of huge debts piled up by Ottawa and the provinces. On Apr. 23, Floyd Laughren, finance minister in Ontario's labor-oriented provincial government, unveiled reductions of $3.2 billion out of a budget that had been expected to total $45 billion for the fiscal year starting Apr. 1. The cuts include an end to such largess as free prescription drugs for all senior citizens. The belt-tightening is a stunning turnabout for Laughren, known as "Pink Floyd" for his socialist leanings. But most of the other nine provinces have announced similarly austere budgets in recent weeks. And on Apr. 26, federal Finance Minister Don Mazenkowski tabled a $125 billion budget that proposes to eliminate 16,500 federal jobs and slash spending by $25 billion over five years.

These are just the opening shots in what promises to be a protracted battle to curb Canada's debt. "The social fabric that has been so important to Canada is under attack," says Bob White, president of the Canadian Labor Congress. Programs from unemployment insurance to day care and even medical care are being pared. Maude Barlow, head of the Council of Canadians, a public interest group, warns that the downward spiral, if it continues, "will mark the end of the Canadian Dream" of a generous society.

Ironically, Canada is being forced to scale back its social net just as the Clinton Administration is proposing to expand U.S. programs such as health care--and hike taxes to pay for them. As the two countries' economies become more closely linked, differences between them are narrowing. Canadian opponents of North American free trade complain that it's forcing Canada to adopt social policies more like those of the U.S. But most economists say Canada has to curb such costs, with or without free trade, to stay competitive globally.

TORY COMEBACK. Politically, the growing recognition that Canada must curb spending seems likely to benefit the ruling Progressive Conservative Party, with its image of fiscal restraint. Recent polls show the Tories coming back from record lows. Most likely to be hurt, with a federal election approaching next fall, is the New Democratic Party: It is inflicting pain on its labor constituents in Ontario, where it runs the government.

The deficit-and-debt crisis driving the retrenchment makes U.S. woes look mild by comparison. In the fiscal year that ended Mar. 31, Ottawa and the provinces racked up deficits totaling $46 billion--about 60% federal and 40% provincial. That pushed net government debt over $500 billion--equal to a staggering 91% of Canada's gross domestic product and second only to teetering Italy among major industrial powers. In the U.S., government debt equals just 51% of GDP, according to a study by Canada's Business Council on National Issues (BCNI). Equally frightening, Canada's net debt to foreigners has soared to $240 billion, or 43% of GDP--a higher ratio than any other industrial nation's.

As the problem mounts, business leaders worry that it could trigger a full-blown currency crisis. Canada is threatened by a possible "serious loss of confidence" in domestic and international financial markets, the BCNI says. That could cause interest rates to spike "more than 500 basis points," or five full percentage points, warns Lloyd Atkinson, chief economist of the Bank of Montreal.

White, who's leading a union fight against spending cuts, rejects such scenarios as scare tactics. He notes that there's no sign of a flight from Canadian bonds: Foreigners have bought near-record amounts in recent months. Still, on Apr. 27, Canadian Bond Rating Service, a leading bond appraiser, downgraded Canadian long-term debt from its prized AAA rating to AA+, arguing that the federal budget cuts aren't deep enough. Currency markets reacted by dropping the Canadian dollar almost a full cent, to close around U.S. 78 on Apr. 27. The shaky outlook has already pushed up the real interest rate on Canadian long-term bonds to around 6%, almost twice as high as in the U.S. and at "historic highs for this point in the business cycle," says George Vasic, economics director for DRI Canada. The high rates and spending cuts are slowing Canada's recovery from its long recession, with only 1% GDP growth in 1992 and an expected 3% this year.

Such prospects are pushing the deficit high on the list of Canadians' anxieties, pollsters say. In response, politicians are rolling out plans to attack it. But most of them are wary of raising taxes. The restraint reflects the fact that Canada's tax burden is already 25% higher than that of the U.S.

That leaves social spending cuts as the main antideficit weapon. Across Canada, thousands of public-sector jobs are being eliminated, and plans for national child care have been shelved. Universities are capping enrollments and raising tuition. In many provinces, more restrictive welfare programs are forcing poor Canadians to turn to volunteer help. Last month, Toronto's Daily Bread Food Bank gave emergency relief to 163,000 people, far above the 1990 level.

Even health care is coming under the knife, although no one is seriously proposing an end to universal health care. The provinces have already stopped paying for services from wheelchairs to children's dental checkups. And Ontario's budget calls for cutting payments to physicians by $220 million this year, an average of almost $10,000 per physician.

To be sure, social spending is still generous by U.S. standards. For example, Canadians pay no fees to use the medical system. But the squeeze will become more painful, with most proposed cuts in the federal budget timed to take effect after the election. "We are still a long ways from exercising real fiscal responsibility," says Stephen Van Houten, president of the Canadian Manufacturers' Assn. "Our system of social benefits," he adds, "is no longer sustainable." The day of reckoning, Canadians now realize, is rapidly approaching.

Before it's here, it's on the Bloomberg Terminal.