TORONTO - After nine years of imposing painful tax hikes and spending cuts north of the border, Canadian officials are well positioned to assess President Clinton's budget-cutting prospects.
"Do as much as you can quickly," urges Peter DeVries, director of fiscal policy at Canada's Finance Ministry, when asked what counsel he might have for his new U.S. counterparts.
DeVries should know. The government of Prime Minister Brian Mulroney took office in 1984 with a promise to cut the deficit, and in fact has done so by whacking spending, raising taxes and turning Canada's operating deficit into a surplus. (The operating deficit doesn't include interest payments on government obligations.)
Overall, the Mulroney budgetary track record is much better than that of his conservative U.S. soul mates, Ronald Reagan and George Bush.
And yet Mulroney, after seeing his popularity rating fall lower than interest rates, Wednesday announced he'll step down in June.
What went wrong? The international credit markets remain unsatisfied with Canada. Mainstream economists here complain that the Mulroney government has moved far too slowly and cautiously. And the impressive-looking Canadian surplus disappears if interest obligations are included: After interest payments on the public debt, Canada's books remain deeply in the red.
"It's depressing," says David Brown, senior policy analyst at the C.D. Howe Institute, a nonprofit research organization in
Toronto. "(Mulroney's fiscal team) has tried very hard, but they've had an awful lot of bad luck along the way since 1984."
Canada's experience suggests what a difficult mission Clinton has in store as he tries to cut the U.S. deficit.
From north of the border, it looks like a task that involves extraordinary effort for marginal results - all at a heavy political cost. In fact, after nine exhausting years of belt tightening, Canada is still digging its way out from under a mountain of debt. Since 1984, it has more than doubled to more than $355.5 billion (Canadian dollars) and by now the public has clearly reached the limits of its patience.
Mulroney's approval ratings are the lowest of any prime minister in the history of Canadian opinion polling. His face now decorates everything from toilet plungers to dolls that are made to be smashed.
Unemployment is 12 percent, the worst since the Depression of the 1930s. As a result, government tax revenues have fallen while social-benefit payments have soared. The result: higher deficits and higher offshore borrowing.
"It's really striking, what's happened to the social psyche of Canadians," says Brown. "Almost everyone is worried about their jobs." Not coincidentally, the latest Mulroney budget cuts involve unemployment compensation.
Why hasn't it worked as well as expected?
Back in 1984, Canada had a bigger budget deficit per capita than the United States, and it was growing fast. Mulroney's predecessors had been increasing spending, on average, by 14 percent a year for the previous 15 years, and tax revenues had failed to keep up.
Most of Mulroney's attacks on the deficit have taken place on the spending side of the ledgers. Canada now posts the lowest rate of federal spending growth in the Group of Seven major industrial powers.
Mulroney has taken substantial action on the tax side of the ledger as well. During his nine years in office, Canada has:
-- De-indexed personal income-tax brackets.
-- Eliminated gaping corporate tax loopholes.
-- Increased a manufacturers' sales tax, which is charged directly to consumers at the cash register.
-- Substantially increased taxes on alcohol, tobacco and gasoline.
It adds up to an impressive list. But even as Mulroney brought his government's program spending into the black, the total deficit continued to grow.
That's because the government continued to have an operating deficit - albeit a shrinking one - each year between 1984 and 1988. It still had to sell Treasury bills and bonds to finance the shortfall. Of course, it had to pay interest on those securities, as well as on the bills and bonds sold to finance the deficits of previous governments.
The cost of servicing those debt instruments has turned out to be crushing for Canada, because Canadian real interest rates soared higher than U.S. rates in recent years.
Canada must now earmark 6.2 percent of its public spending for interest payments, compared to just 3.9 percent in the United States.
In addition, Canada's foreign debt has climbed to 96 percent of gross domestic product, making it the world's No. 1 foreign debtor on that basis. One-third of every Canadian tax dollar goes to servicing the debt. In the United States, the foreign debt is 51 percent of GDP and Clinton wants to reduce it.
It is Canada's debt burden - more than operating expenditures - that has the international credit markets so nervous about the country. "Canada is fast approaching a crisis point, where continued heavy borrowing may not be possible," warns a report issued this month by a number of prominent Canadian economists.
None of this would be a threat, the economists added, if only the Mulroney government had chopped spending harder and faster. Then the government would have had less of a stock of debt to service over the past few years.
While initial moves on deficit reduction were impressive, the government let up on those in the pre-1988 period, cutting income taxes and raising spending to help its re-election efforts. That resulted in an important backsliding in deficit reduction.
Mulroney's fiscal planners say they thought that the cuts they were making would be sufficient at the time, but that they had based their deficit-reduction measures on forecasts that turned out to be overly rosy.
"We did the maximum we thought we could do at the time we were doing it, and we thought it would do the trick," says DeVries. "In retrospect, we know that if you've got a fiscal problem that's got to be addressed, you've got to address it quickly."
-- Material from the London Observer Service and Toronto Globe and Mail is included in this report.