/** labr.global: 208.0 **/
** Topic: IMF's Draconian Plans In Canada **
** Written 3:40 PM Dec 10, 1995 by labornews in cdp:labr.global **
From: Institute for Global Communications <labornews@igc.apc.org>

IMF pressing Ottawa to slash billions more in deficit fight

From Southam News, 10 December 1995

OTTAWA -- The International Monetary Fund has been pressing the federal government to impose draconian spending cuts that would take billions of dollars a year more out of the pockets of the unemployed, the elderly, the sick, and even war veterans.

A confidential IMF documents, obtained by Southam News, also reveals that the global financial watchdog has urged Ottawa to consider increasing the GST, a tax which the Liberal government has promised to replace.

The IMF has warned Ottawa that its pace of deficit reduction, aimed at bringing the annual shortfall to three per cent of gross domestic product or about $24 billion by 1996-97, is "unduly slow."

Instead, it urged Finance Minister Paul Martin to cut the shortfall to 1.5 per cent of GDP, about $12 billion, or risk a financial setback should there be an unexpected jump in interest rates or slump in the economy.

Martin, in a brief interview, acknowledged that the IMF is not satisfied with the speed at which the deficit is being cut but insisted he is "sticking" to his own targets.

However, Canadian officials confided to the IMF that Martin expects to do better than he's letting on, the documents show.

"The Canadian representatives stressed that the fiscal outcome was likely to be better than projected owing to the deliberate adoption of very conservative economic and technical assumptions..."

Martin will present Canadians with a financial and economic update Wednesday during an appearance before the Commons finance committee.

However, the IMF, which acts as a lender of last resort, has suggested a menu of options that it claims would allow Ottawa to wipe out the deficit before the end of the century.

The proposed actions include cutting $4.5 billion a year from unemployment insurance by 1998 to "reduce its use as a long-term welfare system."

The UI cuts proposed by the IMF would more than double the savings expected from reforms that have already been announced, including those unveiled last week.

The IMF also recommended chopping $3.9 billion from old age security by means-testing benefits, and eliminating $600 million in tax breaks for war veterans and natives.

It also urged that Ottawa axe $8 billion from "overly generous" payments to the provinces for health care, education, welfare and equalization which goes to the seven poorest provinces.

While the IMF viewed the February '95 budget as a "significant effort" to reduce the deficit, it has since "reiterated its view that the three per cent target still would leave federal finances under stress with the debt-to-GDP ratio declining only slowly from a very high level."

"Canada's fiscal problems remain serious," warns the document, dated two months after the budget.

The IMF can't force Ottawa to swallow the medicine it prescribes unless the government needed to go cap in hand to it for a loan. Nonetheless, the government acted on some of its recommendations, first made just prior to the 1995 budget.

For example, the document shows the controversial strategy of using UI as a deficit-reducing cash cow and cushion against another recession rather than cutting premiums was the brainchild of the IMF.

"Savings from structural reforms could be used to build up a higher surplus in the short term while other fiscal adjustment measures are phased in," the IMF suggested just before the last budget.

In the budget, Martin announced that rather than cut premiums once the UI fund was balanced as required by existing regulations, the government would delay premium reductions until the fund had accumulated a $5 billion surplus.

The fund now has a $1 billion surplus which is expected to balloon to $5 billion next year despite the marginal cut in premiums announced last week.

The government also plans to cut transfers to the provinces as the IMF recommended, but not the degree suggested. According to the IMF document, the cuts in provincial transfers announced in the '95 budget would total only $4.6 billion a year.

Further, Canadian officials told the IMF that Canada is considering cutting foreign aid to 0.23 per cent of GDP, a mere third of the amount the government had promised.

But the government, so far at least, has shied away from other more politically sensitive deficit reduction measures suggested by the IMF, including reform of the "generous" old age security system.

The government has also not shown any appetite for some other IMF proposals, such as eliminating the tax exemption on veterans' benefits, or slowing the growth in transfers to natives, two measures which the IMF says could save $600 million a year.

-- Southam News