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> Part III
> 
> The Need to Balance The Federal Budget
> 
> In the 5-R Jobs Plan we outline the necessity for quick and decisive
> deficit elimination because it enhances job creation. Here we lay out
> our rationale and a framework for the elimination of the federal
> deficit in three years. We hear Canadians when they tell us they want
> no more taxes and a government that lives within its means.
> 
> The failure of the federal government to live within its means will
> eventually cause Canada "to hit the wall." The Chr�tien government's
> fiscal policies to date are inadequate to prevent such a scenario. The
> failure to stave off and leave behind any possibility of financial
> collapse threatens the very existence of our social programs. At the
> least, it could result in an externally imposed revision of social
> programs instead of the carefully designed changes outlined in Part
> III.
> 
> Any plan to reduce the deficit must employ fiscally conservative
> forecasts and projections. Our plan to eliminate the deficit does this
> and recommends the creation by legislation of a contingency reserve to
> protect the credibility of the federal government's budgetary
> projections.
> 
> In the 5-R Jobs Plan we outline the necessity for a quick and decisive
> elimination of the deficit. Here we unfold our rationale and a
> framework for elimination of the federal deficit in three years, with
> particular reference to the inadequacy of the Liberal government's
> current fiscal path.
> 
>     ------------------------------------------------------------------------
> 
> 
> Eliminate the Deficit Quickly and Decisively
> 
> Reformers understand that there are many compelling reasons to
> eliminate the federal deficit quickly and decisively. Among them are
> the unsustainability of the Chr�tien government's current fiscal path,
> the twin threats of rising interest rates and a falling dollar, and
> the need to prepare responsibly for the next cyclical downturn in the
> economy. Two more are of particular concern to Reformers: the risk
> Canada's dire fiscal situation poses to our social fabric and the need
> to restore the confidence of Canadians and investors in the
> government's ability to manage its finances.
> 
> Reducing the Risk to the Social Fabric
> 
> The greatest risks to Canada's social fabric are the threats of annual
> deficits and a rising national debt which over the past thirty years
> have crowded out many legitimate expenditures of governments. As was
> demonstrated most vividly in the last recession, the government's
> ability to provide some stability during periods of economic
> dislocation is seriously strained.
> 
> Our social programs require substantial reform. But no reform will
> last if the present path of fiscal unsustainability is not
> interrupted. That is why reform of the social safety net in Canada
> must be accompanied by quick and decisive elimination of the federal
> deficit. Eliminating the federal deficit would allow Canada to take
> its first steps toward creating a truly sustainable social safety net.
> All measures designed to reduce the deficit should be done with a
> longer-term view to enabling Canadians to take care of their own
> security in the long run.
> 
> To be sure, the adjustment implied will involve a certain amount of
> change, and change - particularly social change - involves changing
> lifestyles. We should keep in mind, however, that over the past few
> years the private sector has undertaken a similar reorganization and
> is now better equipped to face the future.
> 
> Elimination of the deficit is an important step toward ensuring
> personal security for Canadians. It reinstills hope for the future in
> all Canadians.
> 
> Bolstering Confidence
> 
> Canadians and investors have lost confidence in their government's
> ability to deal with the current fiscal crisis.[16] Successive
> governments in 1984 and 1988 promised to deal with our fiscal problem,
> but failed. The current government stated its intention to take us
> down the path of fiscal reform, but promised action later rather than
> sooner. Now there are many indications that it will resort to higher
> taxes rather than reductions in the size and scope of government to
> achieve its meager deficit-reduction targets. This is a strategy of
> which voters are increasingly wary.
> 
> Canada can only reestablish its credibility both with voters and those
> who invest in this country by declaring war on the deficit. An
> important first step is to declare unequivocally that deficit
> reduction will be achieved without raising the level of taxation on
> Canadians. Then a clear and coherent strategy must be embarked on to
> cut spending quickly and decisively.
> 
> Saying that the deficit will be reduced at some vague point in the
> future by way of savings to be announced later does not instill
> confidence. That is why Reform's plan states up front which measures
> will be taken. A credible, realistic plan will go far toward
> instilling investor confidence in the ability of governments to deal
> with this crisis.
> 
>     ------------------------------------------------------------------------
> 
> 
> The Three-Percent Target is Totally Inadequate
> 
> Why does Reform not support the government in its stated aim to reduce
> the deficit to three percent of GDP? The Reform Party is not alone in
> asserting the weakness and inadequacy of the government's target. The
> International Monetary Fund (IMF) and the Organization for Economic
> Cooperation and Development (OECD) both called the government's
> targets too weak. The C.D. Howe Institute and The Fraser Institute
> called the government's targets "timid" at best. The Financial Post,
> The Wall Street Journal and The Globe and Mail say that the government
> is not doing enough. For its part, The Globe and Mail released a plan
> to eliminate the deficit in three fiscal years, calling for $24
> billion in cuts and no increases in taxation. Witnesses appearing
> before the Commons' Standing Committee on Finance consistently called
> for a more decisive strategy, and Canadians from coast to coast fear
> that this target will not be enough to halt Canada's slide towards
> bankruptcy.
> 
> Three Percent: Canada at the Mercy of Economic Cycles
> 
> It is fair for Canadians to ask what happens when and if the
> government reaches its timid target in two years. By then Canada will
> have added $100 billion to the national debt and will have increased
> annual interest payments from $40 billion to nearly $50 billion per
> year. Under the Liberal scenario Canada would show a deficit between
> $25 billion and $30 billion going into the next economic downturn.
> This would leave little or no room to lessen the impact of such a
> downturn. Further, this would restrict the government's ability to
> further reduce the deficit. It is not enough. Decisive action needs to
> be taken now.
> 
> The current government apparently hopes the current recovery will last
> forever - that it will have a perpetually open window through which to
> reduce the deficit. It has not learned the lessons of the recent past
> when a timid deficit reduction strategy was neutralized by an economic
> downturn.
> 
> Three Percent: A Lost Political Window
> 
> In its first budget, the Chr�tien government missed an important
> opportunity to take quick and decisive action against the deficit. At
> that time the Liberals had four years before it needed to worry about
> re-election, a federalist government was in charge in Quebec, and they
> were a new government with a strong mandate. Yet with its first budget
> this government did little beyond promising to act in "the second
> round." Its failure to act decisively has only worsened the situation.
> 
> Now, three years or less from an election campaign, there is barely
> enough time to launch Canada down a sustainable fiscal path. If the
> Liberal government sticks to its timid targets, and puts off the most
> difficult decisions until later in its mandate, the government will
> find it much more difficult to act decisively. The present timeframe
> may well be the last political window open to the current government.
> 
>     ------------------------------------------------------------------------
> 
> 
> Planning for Contingencies
> 
> In any budget exercise there are significant unknowns. Predicting
> economic conditions can involve considerable uncertainty. A recent
> examination of federal, fiscal forecasts found that while Department
> of Finance forecasters have been more accurate than their private
> sector counterparts, they were nevertheless consistently off by wide
> margins.[17]
> 
> Prudent Forecasting
> 
> Setting prudent targets and bringing down a credible budget will go a
> long way toward reducing the large interest-rate premium on our debts.
> While uncertainty over Quebec is a negative factor affecting interest
> rates and currency, foreign and domestic investors demand a risk
> premium on federal debt primarily because of Canada's failure to
> establish a credible, federal, fiscal policy.
> 
> A deficit elimination package with all the cost reductions clearly
> spelled out would result in a reduction in the risk premium on
> Canadian interest rates. The three-percent target failed to establish
> credibility, in part due to the Minister of Finance's failure to lay
> out in detail where the spending reductions would come from. The
> recent fall in the value of the Canadian dollar and the continued rise
> in interest rates suggest that international and domestic markets are
> losing confidence in the Chr�tien government's deficit reduction
> policy.
> 
> Part of the Reform Party's plan to ensure prudent fiscal forecasts is
> to enunciate clearly where the savings will come from. This stands in
> stark contrast to the Chr�tien government's 1994-95 Budget which put
> off making details public about how it would reach its targets. As
> they see a clear and credible reduction strategy, the investment
> community will know immediately what reductions are to be made and
> will not need to wait for details. Increasing taxes because savings
> cannot be immediately realized is no solution. Meeting targets with
> tax increases will not establish credibility.
> 
> Fiscal Contingency Reserves
> 
> Canadian fiscal policy does not operate in a vacuum, but is influenced
> by events over which Canadian policy-makers have little control. It
> makes sense to build a significant contingency reserve into the
> budget. This reserve should be legislatively defined so that it cannot
> be used for any new spending or spending increases for current
> programs. Furthermore, the purpose of this fund should be established
> in the budget itself. Any request to deviate from the original purpose
> must be debated and approved by Parliament. According to this plan,
> any balance remaining in the fund at the end of each fiscal year would
> be applied against the deficit.
> 
>     ------------------------------------------------------------------------
> 
> 
> Reform's Timetable and Fiscal Framework
> 
> The Reform Party is committed to elimination of the federal
> government's deficit in three fiscal years. This process and the
> credibility it establishes would bring lasting economic growth and
> confidence to Canadians and investors.
> 
> Elimination of the Deficit in Three Fiscal Years
> 
> In order to restore confidence and to eliminate the deficit in three
> years, the plan must be clearly outlined and reductions clearly stated
> in advance. These can then be used to gauge the success of such
> measures. Because of the importance of deficit elimination, any
> discrepancies in forecasts would necessitate further reductions in
> spending. Increases in the level of taxation would not be resorted to
> (measures to ensure tax fairness could be incorporated but would be
> revenue-neutral). Any changes in the tax system to create greater
> equity and fairness must be made on the basis of revenue neutrality.
> 
> Economic Growth and Planning Assumptions
> 
> Taking into account economic growth, unemployment, inflation and
> interest rates without the resources of the Department of Finance is a
> very difficult exercise. As already noted, even the Department of
> Finance has been wrong in its estimates by a wide margin. The Liberal
> Grey Book updated the government's fiscal projections, acknowledging
> that they were seriously off-course in the longer term.
> 
> The Taxpayers' Budget is based not so much upon strict estimates of
> economic growth, but employs conservative planning assumptions. This
> means that we are using historical record and the present situation to
> present what we believe to be the most restrictive planning
> assumptions on which to base the budget.
> 
> First, we need to determine what conservative planning assumptions can
> be applied to growth in federal revenues over the planning period.
> When we look at the average growth in federal revenues over the last
> ten years, we find that federal revenues typically amount to between
> 16.5 and 17.0 percent of GDP, and that they have grown on average by
> about three to four percent per year. In 1993-94 the ratio was 16.3
> percent of GDP and is predicted in the Grey Book to rise to 17.0
> percent in 1995-96.
> 
> However, as our plan calls for transferring current federal revenues
> to the provinces in the form of tax points, we do not predict that the
> ratio of revenues to GDP will exceed 16.0 percent. Offsetting this
> drop in the revenue to GDP ratio will be a permanent reduction in cash
> transfers. A prudent planning assumption is that revenues will hover
> at about 16.0 percent of GDP and grow at an annual real rate of about
> 3.0 percent. The Liberal Grey Book suggests that revenues will grow by
> 7.5 percent in 1995-96 and 4.5 percent in 1996-97. Our assumption
> regarding the growth in revenues is very conservative by comparison.
> These assumptions imply that we can expect, over a period of three
> years, federal revenues to grow by about $16 billion dollars.
> 
> The sensitivity of our fiscal situation to interest rates requires
> that we must accumulate reserve funds, that we plan prudently and that
> we recognize that any deficit at all will increase interest payments
> on the national debt. As long as Canada runs an annual deficit, annual
> interest payments will increase in the following year. Under the
> Reform Plan, the federal deficit would be balanced in three fiscal
> years. There would still be two annual deficits_and increased costs.
> Even our plan will add about $40 billion to the debt. If the rate of
> interest on this new debt is around eight percent we can expect annual
> interest costs to increase by $3.2 billion. In addition, some existing
> debt will come due at lower rates. Of course, this assessment assumes
> that the Reform Party's deficit reduction strategy is implemented and
> that upon implementation the average interest rate on the federal debt
> will continue to fall slightly.
> 
> If Canadians fail to get our budget deficit under control this can
> only mean higher interest rates and larger interest expenditures. On
> balance, this means that over a period of three years, annual interest
> costs will increase by about $3 billion dollars.[18]
> 
> The Prime Minister asserted recently that the deficit for 1994-95 will
> come in under the proposed target. Most economists predict that the
> deficit will come in somewhere between $37 billion and $39 billion
> dollars. This means that Canadians will likely enter 1995-96 with a
> deficit of about $38 billion dollars.
> 
> If the budget is to be balanced without raising Canadians' overall tax
> burden, and assuming $16 billion in revenue growth in real terms then
> this and $3 billion in increased interest expenditures imply that we
> will require $25 billion dollars in spending reductions, spread over
> three years in order to balance the federal budget over that period.
> 
> In summary, our planning assumptions are as follows:
> 
>           1994-95 Deficit for planning purposes                                $38 billion
>           (PLUS) Increase in annual interest payments over three years        + $3 billion
>     ------------------------------------------------------------------------
> 
>                                                                                $41 billion
>           (MINUS) Increase in annual revenues over three years based on
>           3 percent real growth in revenues                                  - $16 billion
>     ------------------------------------------------------------------------
> 
>           Required spending reductions to reduce the deficit to zero
>           in three years:                                                      $25 billion
>     ------------------------------------------------------------------------
> 
> 
>     ------------------------------------------------------------------------
> 
> 
> Employment Impact
> 
> What would be the negative and positive employment impact of Reform's
> deficit reduction measures? How do they compare with the employment
> impacts of current government policies? Neither the government or
> Reformers can predict these impacts with absolute certainty. What we
> do know is that leaving the debt and deficit at current levels will
> cause significant, negative effects on Canada's economy. As is noted
> in the 5-R Jobs Plan, these negative effects are compounded by
> Canada's overly-generous social safety programs.
> 
> Short-Term Effects
> 
> The most recent academic analysis of the short-run costs of deficit
> reduction acknowledges that there would be some short-term costs
> associated with fiscal retrenchment.[19] These costs would come
> primarily in the form of adjustments that economic sectors and regions
> of our economy most dependent on government transfers would have to
> make.
> 
> Yet, there are a number of indicators which suggest that such
> adjustments could be less severe and of shorter duration than many
> might expect. First, our economy is experiencing a strong recovery.
> This recovery holds the potential of limiting economic dislocation
> over the short-term as economic growth minimizes the impact of
> government retrenchment.
> 
> Second, Canada's current fiscal uncertainty is adding a hefty risk
> premium to our interest rates. Canada is perceived by the
> international community as running on an unsustainable debt and
> deficit path. Furthermore, international commentators and investors