program review: the government of canada's experience eliminating the deficit, 1994-99 - a canadian...

8/8/2019 Program Review: the Government of Canada's experience eliminating the deficit, 1994-99 - a Canadian case study

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Program review:

The Government o Canadas

experience eliminating the defcit,

1994-99: a Canadian case study

Jocelyne Bourgon


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Program Review 1

Cntnts

abut th insttut 2

abut th uth 3

Fd 4

Suy 5

intductn 5

1. gth, pspty, dcts nd dbts: 1975 - 1984 7

Stagfation 8

Canada pursues a divergent course 10

Learning rom the past: 1975 - 1984 12

2. Chnn cus: 1984 - 1993 13

An early attempt 14

Making progress not enough and not ast enough 14

Structural reorm and agenda overload 17

Learning rom the past: 1984 - 1993 18

3. rnn Cnds scl snty:1993 - 1999 19

The approach 20

The scope 20

The process 21

The machinery three tables and a small secretariat 22

The review chronology step by step 24

Program Review: the outcomes 26

4. Lkn bck lkn d 32

5. Cnclusn 33

acknldnts 34

Bblphy 35


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2 INSTITUTE FOR GOVERNMENT

Th insttut gnnt s h t ct s ctlyst btt nnt.

The Institute or Government is an independent centre ounded in 2008 to help makegovernment more eective.

We carry out research, look into the big governance challenges of the day and ndways to help government improve, re-think and sometimes see things differently.

We offer unique insights and advice from experienced people who know what its liketo be inside government both in the UK and overseas.

We provide inspirational learning and development for very senior policy makers.

We do this through seminars, workshops, talks or interesting connections that invigorate andprovide resh ideas.

We are a place where senior member of all parties and the Civil Service can discuss thechallenges of making government work, and where they can seek and exchange practicalinsights from leading thinkers, practitioners, public servants, academics and opinion formers.

abut th insttut


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Program Review 3

abut th uth

The Honourable Jocelyne Bourgon is a Governor of the Institute for Government,a distinguished ellow at the Centre or International Governance Innovation (CIGI) anda visiting professor of public administration at the University of Waterloo in Ontario.She is also President Emeritus o the Canada School o Public Service. She was appointedto the rank of deputy minister, the Canadian equivalent of the UKs Permanent Secretary,in 1989 and served in various departments: Transport, the Canadian InternationalDevelopment Agency, Consumer and Corporate Affairs, and the Canadian Center forManagement Development.

In 1994, she was appointed Clerk of the Privy Council and Secretary to the Cabinet. She wasthe seventeenth clerk and the rst woman to hold this position. From 1994 to 1999,she led the Public Service of Canada, the Canadian civil service, through some of its mostimportant reforms since the 1940s. In December 1998, she was summoned to the QueensPrivy Council for Canada in recognition of her contribution to her country. From 2003-2007,she served as Ambassador to the Organisation or Economic Co-operation andDevelopment (OECD).


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The effective management of a countrys public nances is a cornerstone of goodgovernment. Following ten years of spending increases on public services, the UK is set fora period of scal constraint to control a rising budget decit. The sharp contraction in GDPand the falling ination of recent years means that the Governments nominal spendingplans now represent a much larger share o economy than was initially planned. As part othe response, all political parties are committed to reducing projected public expenditure asa share of GDP. Planning and delivering high quality public services under these conditionsposes particular challenges and opportunities or government.

As part of its research programme, the Institute is committed to learning from theexperiences of other countries, and in this case increasing understanding of previousexamples of large-scale scal consolidations, whether they occurred here or abroad.Canada in the mid-1990s provides an outstanding example of the sustainable eliminationof a budget decit through expenditure control. Following a seminar by Jocelyne Bourgonand Marcel Mass at the Institute in May 2009, there has been considerable interest in theUKs policy making circles as to how exactly Canada achieved this feat.

In this paper, published jointly by the Institute and CIGI in Canada, the distinguished careercivil servant Jocelyne Bourgon provides a comprehensive insiders account of large-scalestrategic transformation in response to a scal crisis. It covers not only the political andeconomic dimensions but also tracks the strategic choices made by senior public managersand cabinet ministers. It identies some of the most important features of a programme

designed to eliminate a sizable decit including many of the lessons learned from previousunsuccessful budget cutting exercises.

There are some clear differences between Canada and the UK, such as the distinctionbetween the roles o the ederal and provincial governments. And the Canadian case by nomeans answers the many political choices that will conront politicians in the years to come.But overall, the two countries share relatively similar political and governmental institutions.This account of how these institutions were focused on the difcult task of consolidatingpublic expenditure is likely to be required reading for all those involved in the formulation ofsuch policies in the UK.

S mchl BchdSeptember 2009

Fd


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Program Review 5

Suy

Many governments, relying on increased spending nanced by large decits to pull theircountries out of recession, will eventually face the challenge of restoring scal stability.Based exclusively on publicly available information, this report looks at the path theGovernment of Canada followed to improve the health of its public nances in themid-1990s. Over a three-year period (1994-1997), Canada eliminated a sizable budgetarydecit. By 1998-99, all Program Review decisions were implemented. Canada ranconsecutive surpluses until 2007-08. This report reviews historical nancial data andexamines the Program Review exercise of the mid-1990s, describing its development,process, methodology and machinery. It provides an overview of the main results and

identies lessons learned that may be of durable value in Canada and of interest to othercountries as they work to restore scal stability in the future.

Governments around the world have made many attempts to eliminate their decits andreduce their debt. The results have varied widely, with some more successful than others.As the world economy experiences another recession, governments are again relying onincreased spending nanced by large decits and debt. In this environment, it is appropriateand timely to examine previous efforts, assess the results and draw lessons for those whomay face similar challenges and have to restore scal stability in the future.

Fiscal sovereignty allows a country to set an ambitious course for itself with the condencethat it can align the necessary nancial and human resources in support of its plan

without transferring the costs of todays choices to future generations. This report exploresthe experience of the Government of Canada (GoC) in eliminating its decit and improvingthe overall health of its public nances between 1994 and 1999. Over a three-year period,Canada eliminated a budgetary decit of 5.3 percent of GDP. All Program Review decisionswere implemented by 1998-99. Canada ran surplus budgets until 2007-08. As a result othis effort, by 2007-08, Canadas debt-to-GDP ratio was below 30 percent, compared toalmost 70 percent in 1995-96 the best perormance among the G7 countries. This reportidenties some of the lessons learned in the Canadian context that may still be relevant togovernment leaders.

Public policy decisions matter. They aect the overall perormance o countries and thewellbeing of citizens. Over time they can change the course of events, contribute tobuilding a better uture or accompany the decline o nations. These public policy decisionsare characterised by long timelines. Years may pass beore the impact o these decisions isfully understood and any unintended consequences revealed. As each government lays thefoundation on which future governments govern, every decision forms the basis from whichnew decisions will be made.

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To draw lessons from the Canadian experience of the mid-1990s, it is necessary tounderstand how the countrys scal problems arose and how some of the conditions ofProgram Reviews success in the mid-1990s had their origins in earlier events and decisions.

This report reers to the period rom 1975 to 1984. Ater two decades o growth andprosperity, during which the GoC played an active role in the countrys economic and socialdevelopment, Canada entered a period of economic slowdown starting in the mid-1970saccompanied by a rapidly deteriorating scal situation. During most of the slowdown, theGoC combined economic stimulation and anti-ination measures. This strategy enjoyedthe strong support of many of Canadas opinion leaders of the time, whether in business,

academia or politics.

This report makes some general observations about the period 1984-1993, a time ofgrowing public awareness about the impact of large and growing public decits and debton Canadas economic performance and the wellbeing of Canadians. During this period,the GoC introduced ambitious structural reorms and made numerous eorts to reducespending. The lessons learned were put to good use in later years, as these measuresprovided an improved context for future scal reforms.

The Program Review exercise was initiated in May 1994 and implemented over thefollowing ve years. Ten years later, it is time to take stock. On the basis of publicly availabledocuments, this report describes how the exercise came about in terms of its process,methodology and machinery. It provides an overview of the main results and identies

lessons learned that may be o durable value in Canada and o interest to some othercountries as they work to restore scal stability in the future.


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1. Growth, prosperity, decits and debts: 1975-1984 7

1. gth, pspty, dcts nd dbts:1975 - 1984

Canada emerged from World War II with a heavy debt burden. By the end of the war, thedebt-to-GNP ratio was over 100 percent, a gure not approached before or since (Lewis,2003, 29). Following the war, Canada enjoyed 25 years of growth and prosperity, leading to asignicant increase in the standard of living. By 1970, economic growth had allowed the GoCto pay o most o its wartime debt.

During the years of growth and expansion, the GoC played an active role in the economicand social development of the country. It invested heavily in the nations infrastructure,including roads, airports and ports. It assumed increasing social responsibilities byintroducing or expanding a variety of programmes, including old age security (1952),unemployment insurance benets (1956, 1971), the family allowance programme (1964,1973), hospital insurance (1956) Medicare (1966), the Canada Assistance Plan (1966) andthe Canada Pension Plan (1966).

Through the early 1970s, total public sector debt (federal and provincial) was small and,by all accounts, manageable. With a growing economy, rising revenues largely offsetgovernment expenditures. Budgets were more or less in balance. In 1974-75, the GoC hadan operating budget surplus o 0.7 percent o GDP (its eighth operating surplus in 14 years).Prudent scal management was a matter of offsetting small operating decits with smallsurpluses from year to year. For two decades, the GoCs federal debt-to-GDP ratio had slowlydeclined, reaching a post-war low of 18.4 percent in 1974-75 (see Figure 1).1

Fu 1: dl nt dbt, 1961-62 t 1974-75

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tofGDP

Source: Federal Government Public Accounts, 2008.

1 Unless otherwise noted, nancial data used in this report is from the Federal Government Public Accounts, Fiscal Reference Tables, (Ottawa:Department of Finance, September, 2008). There are two methods of p resenting government nancial data: public accounts (used for thepresentation of nancial data to Parliament) and national accounts (used to measure the impact of government activity on the economy).While they provide somewhat different measures, the pattern is about the same over time. Except where making international comparisons,public accounts data is used or purposes o this report. National accounts data is used or international comparisons.


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With a strong economy supporting an expansive scal policy, the country was doing well:strong growth, low levels of unemployment, positive balance-of-trade and rising corporateprots. There was reason to believe the economy would continue to grow well into thefuture, and the GoC could rely on this growth to support an active role in the economic andsocial development o the country.

StftnThe picture started to change in the mid-1970s as Western economies, including Canadas,were conronted with stagfation a combination o low rates o economic growth and highrates o price infation.

Between 1974 and 1978, the average rate of price ination was double what it was in theprevious six years (up from 4.5 percent to 9.2 percent) while the average rate of GNP growthwas almost cut in hal (rom 5.7 percent to 3.3 percent).2

Fiscal year 1974-75 would bring the last operating surplus the GoC would see or another12 years.

By 1975, real GNP growth in Canada had been in decline for two consecutive years andinfation was on the rise (price infation was above 10 percent and new collective wageagreements were in the 20 percent range). Unemployment had risen to seven percent.Pressed to respond to these new economic circumstances, the GoC launched an anti-infation programme (AIP) in October 1975 a three-year plan to control prices and wages.

This attack on ination followed the lead of other countries, including the United Statesexperimentation with price and wage freezes in the early 1970s, and the United KingdomsStatutory Incomes Policy o 1972-74. The GoC agreed with other countries that the prioritywas to slow the rate o infation without impeding economic recovery.

In 1976, the GoC introduced tax cuts to stimulate the economy that were followed by morecuts in 1977 and 1978. As stagation continued to affect an increasing number of people,government spending also increased, in part due to the rising cost of social programmes.The GoC attempted to restrict the growth of spending; these early efforts focusing largelyon reductions in planned spending as well as freezing salary and operating budgets.

With reduced income from taxes, programme spending quickly outgrew budgetary revenue.

The GoC began to run increasingly large operating decits. The budgetary decit reached5.3 percent of GDP in 1978-79 (see Figure 2); and the debt-to-GDP ratio grew to26.7 percent o GDP. The GoC was borrowing against the uture. Slower but still-growingfederal spending was being nanced by increasing decits and growing debt.

Yet, it is important to note that, through most of this period, opinion leaders fromgovernment, business and academia strongly agreed with economic stimulation policies.No strong voice emerged to challenge conventional wisdom or this consensus.

After 1978, decits became chronic. Public debt charges were an increasingly importantfactor in the growth of the decit. As the federal decit became entrenched, it becameapparent that the GoC had little experience with managing major scal challenges.

Prime Minister Pierre Trudeau, leader of the Liberal Party, made one attempt worth notingto limit government spending in 1978. Returning from a Western economic summit in Bonnwith a better appreciation o the measures other countries had taken to reduce theirdecits, he announced a CAN$2 billion cut from current and planned spending to fund newinitiatives. (It was widely reported that most of Prime Minister Trudeaus Cabinet, includingthe Minister of Finance, found out about the planned cuts through the media.)3

2 These calculations were made from Bank of Canada Review, (May, 1979) Table 1. The idea and basic structure for thesecalculations came rom Wage structure and stagation in the 1970s (Simpson 1980, p.2).

3 For example, see Chrtiens view of the event (Chrtien 1985, p 117).


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Fu 2: dl budty suplus dct, 1961-62 t 1984-85

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The Treasury Board Secretariat, effectively the management board for the Public Service,identied the proposed cuts without involving individual ministers or their deputies. Themeasures included reducing planned spending (such as in defence); freezing spending atexisting levels (for example, for the Canadian International Development Agency and theCanadian Broadcasting Corporation); cuts to non-budgetary items (such as Crowncorporations, including Atomic Energy of Canada Limited and the Canada Mortgage andHousing Corporation) and across the board cuts to departmental operating costs. Many

departments, which had to accept the proposed cuts or identify alternatives of an equalvalue, criticized their lack of involvement in the process.

In May 1979, the government of Prime Minister Trudeau was defeated. The ProgressiveConservative Party, led by Prime Minister Joe Clark, formed a minority government andproposed several tax increases to reduce the growth of the decit. The ProgressiveConservative Government was later defeated over these proposed tax increases, and inparticular a tax increase on petrol. In the election, Canadians had signalled they wantedchange; however, they were not convinced that increased taxes were the best way forward.

During its short nine-month tenure, the government of Prime Minister Clark introduced anew expenditure management system that was developed by ofcials following the 1978cuts exercise. For the rst time, policy and expenditure priorities would be decided at the

same time by cabinet committees. This innovation would stand when the government oPrime Minister Trudeau returned to ofce in February 1980. The idea of linking policy andspending decisions was viewed as an important instrument or bringing governmentexpenditure under control.

Cnd pusus dnt cusIn 1980, early signs of concern about the growing federal government decit and debt beganto emerge. Although the Bank of Canada continued to promote large scal decits as aneffective tool to stimulate the economy, in its annual report in 1980 it warned the GoC thata large scal decit would discourage business investment and hold back productivity gainsif the economy did not have the capacity to increase output (Bank of Canada 1980, p.9). A1980 IMF survey pointed out that Canadas decit as a percentage of GDP was disastrously

high in comparison to other industrialised countries, except for Italy (IMF Survey 1980,p.254-255).4

4 Canadas decit as a percentage of expenditures was 22.3 percent for the year 1978, compared to Italys 32.4 percent ofexpenditures (on a national accounts basis).


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This did not convince the GoC of the need to change course. If the decit were to beaddressed, it would be through tax increases rather than spending cuts, an approach thathad led to the demise o the Clark government a ew months earlier. The GoC began topublicly discuss the possibility of tax increases. The Deputy Minister of Finance statedexplicitly before the Senate Committee on National Finances that reducing the decit:

is going to have to be resolved by general tax increases across the board [] I do notbelieve it would be air to suggest the defcit problem is going to be resolved by majorreductions in ederal expenditures.

(Canada, 1980b: 26)

The Prime Minister reiterated this position in the House o Commons a week later:

We cannot cut expenses to the tune o some $14 billion [equivalent to 4.6 percent o GDP].Thereore, i we want to reduce the defcit, at some point there will have to be an increasein taxes.

(Canada, 1980a: 1682)

In October 1980, the GoC introduced the National Energy Policy. It would increase the GoCsshare o revenue rom oil and gas production. This and other revenue-generating measureswould temporarily reduce the budgetary decit to 4.3 percent of GDP by 1981-82.

By 1981, many OECD countries had taken action to aggressively reduce their decits. Inits December 1981 Economic Outlook, the OECD reported that the combined decit of all

OECD countries had been reduced from US$73 billion in 1980 to US$35 billion in 1981(OECD 1981, p.55-57): a remarkable turn-around. Japan experienced a current accountsurplus of US$5.5 billion in 1981, after a decit of US$10.7 billion in 1980. While WestGermany reduced its decit from US$16.4 billion in 1980 to US$8.5 billion in 1981, andexpected that trend to continue.

Despite the progress other countries had achieved, most experts and opinion leaders inCanada continued to question the wisdom of decit reduction for fear of exacerbatingthe recession into which the country was slipping (Gray 1981, p.B7). The Budget ofNovember 1981 ruled out decit reduction by scaling down government expenditures.New tax measures were introduced. Canada pursued a divergent path from most otherindustrialised economies and OECD countries.

In 1982, the Canadian economy entered its second recession in three years. Ination wasover 12 percent and unemployment reached a post-war high o 8.6 percent. Growing publicdebt charges, resulting from rising interest rates, more than expenditure increases, weredriving up the decit. Pressure continued to mount for further stimulation and increasedspending. In June 1982, the GoC introduced new spending measures for infrastructure andindustrial innovation.5 It imposed controls on the salaries o public servants that had apredictably demoralising impact on the Public Service of Canada. In October of that year, theGoC eliminated most of the tax increases introduced in the Budget of 1981 and committedto further infrastructure spending to encourage job creation.6

In its annual review of the economy in 1982, the federally funded Economic Council ofCanada urged the GoC to introduce a moderate dose of stimulus in its upcoming budget,postulating that efforts to reduce the decit could wait until an economic upswing. In

December of that year, the Governor of the Bank of Canada stated that high governmentdecits were not hurting the economy and would only drive up ination if governmentscompeted with the private sector on borrowing markets during an upswing.

By the end of 1982, most provincial governments were calling on the GoC to inject moremoney into capital work projects to stimulate the economy, and they continued to call forgreater scal stimulus and infrastructure development through 1983.7

Business groups called for tax cuts to stimulate the economy, even if this raised thefederal decit. The Canadian Chamber of Commerce proposed a tax cut estimated at

We cannot cutexpenses to the tuneo some $14 billion.Thereore, i we want

to reduce the defcit,at some point therewill have to be anincrease in taxes.

Prime Minister Trudeau, 1980

5 This was comprised of CAN$200 million to the Canada Community Development Program and CAN$300 million over a two-year periodto promote industrial innovation within the Enterprise Development Program, Defense Industry Productivity Program and theLabour Adjustment Program.

6 Some measures included another CAN$500 million in job creation programmes, along with CAN$200 million for the housing industry andCAN$400 million for the modernisation of the railways in Western Canada.

7 For example, an open letter from The Honourable Vic Schroeder, the Finance Minister from the Government of Manitoba, to Marc Lalonde,the Federal Minister of Finance, detailed how capital spending would speed up recovery, which was followed by a series of proposals forinrastructure development in Manitoba.


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CAN$2-3 billion. A powerful committee of business leaders headed by Canadian PacicChairman Ian Sinclair called for public works spending, even if it caused a larger decit.Many economists agreed that a CAN$30 billion decit in 1983-84, 7.6 of GDP, could behandled with ease.

Gradually, the view emerged that the GoC could manage a CAN$30 billion decit with nodetrimental effect on the economy, and that such a decit would provide necessary supportto those the recession had most affected. With a strong and broad consensus amongopinion leaders, the GoC brought down a Special Recovery Budget in April 1983 thatincluded further tax breaks and special recovery measures in the form of job creation and

inrastructure development.

The budget measures of 1982 and 1983, combined with still growing public debtcharges, added substantially to the decit and debt. The budgetary decit doubled toCAN$32.4 billion and rose dramatically to 7.9 percent of GDP (see Figure 2). The debtburden grew to 38.2 percent o GDP (see Figure 3).

Fu 3: dl nt dbt, 1975-76 t 1984-85

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According to a 1983 IMF report on the G7 countries, only the governments of Canada andthe United States were following expansionary policies, and had diverged from Japan andindustrial European nations, even though this meant record budget decits (IMF 1983, p.5).

However, Canada is very different from the United States; a similar policy course led to verydierent results.

In the context of this study, no evidence was found that the GoC assessed the merit andrelevance of other countries actions to Canada. As well, no indication has been found thatthe GoC critically re-examined the policy direction it had pursued over so many years.

The period 1975 to 1983 was characterised by a strong consensus among Canadian opinionleaders in avour o a stimulus policy direction in spite o the mounting evidence indicatingthe adverse consequences of this course of action.

Unlike the United States and some European countries, Canada was not endowed with abroad diversity of views generated by think-tanks, academia or the media. Furthermore,

Canadian society does not have a strong tradition o public debate about public policyoptions (with some notable exceptions such as national unity or Canadian identity). Withlittle public debate, and no strong dissenting voices, Canadian public opinion researchconrmed a lack of concern among Canadians about the decit problem. In 1984, according


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to a Decima Research poll, less than two percent of respondents considered the federaldecit and national debt to be the most important economic problem (Simpson 1984, p.A6).A separate poll by Thompson Lightstone obtained similar results (Simpson 1984, p.A6).

Ronald Anderson, a business writer for The Globe and Mail, a national newspaper, stated withsome oresight in an article that:

I ever the ederal Government makes the hard decision to get its fnances under control,Canadians may be shocked and angered by the measures that will need to be taken; taxesalmost certainly would be raised, some popular spending programs will be slashed, andsome programs may need to be abandoned.

(Anderson, 1984)

Lnn th pst: 1975 - 1984Important lessons may be drawn rom this period:

1. N publc plcy nd s ld ll t. The stimulus policies that servedCanada well in the 1950s and 1960s eroded Canadas scal health in the late 1970sand early 1980s. The challenge or governments is to anticipate emerging trends andadjust public policies to respond to changing circumstances, address emerging needsand seize opportunities. Those governments best able to adjust and adapt stand abetter chance o providing their countries with comparative advantages that translateinto higher standards of living and a higher quality of life. Governing is a never-ending

process o transormation.2. Publc plcy chcs tt. In ten years (1975-84), Canada would go from having

one of the best to one of the worst scal performances among G7 countries.Actions taken today are already part o raming uture decisions.

3. Publc plcy dbt tts. The Canadian experience is a reminder that a strongconsensus among opinion leaders does not guarantee the best policy decisions andthe best policy outcomes. In fact, the stronger the consensus, the more reason tochallenge the status quo and examine different policy choices. Debate elevatespublic understanding of policy options, and improves the likelihood of sound publicpolicy decisions.

4. Publc plcy pncs ust b tpd by dnc. This study ound noindication that the GoC took account of the actions of other countries. As a result,Canada did not change its policy course or ten years. It draws attention to theimportance o sound policy research and evidence-based policy advice.

By the end of this period, Canadians were ready for a change of government but they werenot yet aware of what it would take to eliminate a decit of 8.3 percent of GDP.

I ever the ederalGovernment makesthe hard decision toget its fnances under

control, Canadiansmay be shocked andangered by themeasures that willneed to be taken; taxesalmost certainly wouldbe raised, somepopular spendingprograms will be

slashed, and someprograms may needto be abandoned.

Anderson, 1984


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2. Changing course: 1984 -1993 13

2. Chnn cus: 1984 -1993

When the Progressive Conservative Party, lead by Prime Minister Brian Mulroney, won the1984 federal election, Canada faced the second most serious debt and decit situationamong G7 countries, Italy facing the worst. The GoCs budgetary decit reached 8.3 percentof GDP in 1984-85. With programme spending expanding rapidly and public debt chargesconsuming an increasing portion of revenue, the GoCs public debt was growing by anaverage o 25 percent per year between 1980-81 and 1984-85 and reached 43.2 percent oGDP in 1984-85.8

Most provinces were taking action to cut their decits. In March 1984, the provincialgovernments o Newoundland9 and Nova Scotia10 tabled budgets to cut their provincialdecits. New Brunswick followed suit in April with a budget that would cut its decit byalmost 50 percent. According to Statistics Canada, the national statistics agency, theprovinces and territories were expected to show a combined decit of CAN$4 billion inscal 1985, compared with a decit of CAN$6.7 billion in scal 1984. 11

The agenda of Prime Minister Mulroneys government was ambitious. It included importantstructural reforms such as liberalising trade and reforming the tax system. The Speech fromthe Throne, outlining the governments agenda for the upcoming Parliamentary session, inNovember 1984 committed the GoC to restoring scal responsibility, reducing the decit inan orderly manner and controlling the growing debt. In his speech, Mulroney said:

That we must deal urgently with the defcit is beyond dispute. I allowed to continue to growout o control, it will consume our available fnancial resources, undermine our capacity to

respond to new opportunities, put increased pressure on interest rates, and inhibitinvestment and growth in our economy.

(Journal o the Senate o Canada, 1984)

In the same month, the government tabled its Agenda for Economic Renewal. It posited thatCanada could not spend its way out of its problems; instead it would have to grow its wayto prosperity. This marked a signicant departure from the GoCs previous position and thebeginning of efforts to build public awareness of the impact of growing decits and debt foruture generations o Canadians.

At a rst ministers conference, the annual meeting of the provincial and territorial rstministers with the prime minister, in February 1985, the GoC attempted to collaborate withthe provinces to address Canadas economic and scal challenges. While the rst ministers

agreed on the problem, they did not agree on the solutions. They did, however, agree tohold annual rst ministers conferences on the economy for the next ve years. On thescal side, the focus was on doing more with less, eliminating waste and reducing overlapand duplication.

The GoC hosted a national economic conerence in March 1985 bringing together leadersfrom all walks of society including business, aboriginal communities, womens groups, labourand other levels of government. Although the conference began with much enthusiasm, onceagain participants could not reach consensus on the measures to be taken. The main resultswere a heightened recognition o the seriousness o the situation and a growing awarenesso the importance o the issue.

That we must dealurgently with thedefcit is beyonddispute. I allowed tocontinue to grow outo control, it willconsume our availablefnancial resources,undermine ourcapacity to respondto new opportunities,put increased pressureon interest rates, andinhibit investmentand growth in oureconomy.

Prime Minister Mulroney, 1984

8 Due to a break in the series following the introduction of full accrual accounting, data from 1983-84 onward are not directly comparablewith earlier years.

9 Newfoundlands decit was cut by more than 50 percent.

10 The estimated decit for 1984-85 was 21.8 percent lower than the previous years forecast.

11 This data is on a national accounts basis.


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In May 1985, the GoC started to introduce measures to implement its Agenda for EconomicRenewal. Across the board cuts were introduced to reduce the size of the Public Service, andrestrain operating and capital budgets. The GoC announced the privatisation o some Crowncorporations and the reduction o some industrial subsidy programmes. It also signalled itsintention to adjust future transfer payments to the provinces. At the same time, it introducedcapital gains tax exemptions and other tax measures to promote economic growth.12

The decision to reduce taxes on the one hand and to possibly reduce transfer payments onthe other hand was controversial and criticised as an attempt to shift the decit burden tothe provinces. The Minister o Finance deployed considerable eorts on behal o the GoC to

build public awareness of the impact of sustained large decits. He argued that the problemwas structural, not cyclical, and that, if unchecked, it could deny Canada the investmentneeded to grow and to create jobs, and ultimately reduce the living standards of Canadians(Wilson 1985a, p.1).

The GoC announced more expenditure reductions and more across the board cuts affectingall government programmes in February 1986. It included salary reductions and/or reezesor politicians and senior public servants. It also introduced urther restrictions in thegrowth of departmental operating costs, the further privatisation of Crown corporations,and reduced spending on oreign aid and deence.13

The GoC projected scal stability by the end of the decade. The 1986 budget was thelast scal budget of the government of Prime Minister Mulroney. Further budgets, while

announcing additional cuts and freezes, would increasingly focus on structural reform, withCanada-US free trade and tax reform leading the way.

an ly ttptEarly in the governments mandate, Prime Minister Mulroney announced the creation ofa task orce to review all departmental programmes to be led by Deputy Prime MinisterErik Nielsen (the Nielsen Task Force). The review was modelled on reviews undertaken inthe United States (Grace) and the United Kingdom (Rayner). The Nielsen Task Forceinvolved a partnership between the private sector and government over 100 privatesector participants and nearly as many public servants reviewed some 1,000government programmes.

After 18 months of work, the task force recommended substantial subsidy reductions,spending cuts, machinery changes and privatisation amounting to CAN$7 to CAN$8 billion.However, many, in particular the most ambitious recommendations, would neverbe implemented. One Treasury Board estimate indicated that savings of CAN$500 millionin ongoing expenditures reductions could be attributed to the Neilsen exercise (TreasuryBoard of Canada 1987, Annex 2:2). These recommendations were included in the 1985and 1986 Budgets.

While the work of the task force led to limited expenditure reductions, its most importantcontribution was the lessons learned, which have been documented by various authors(Graves and Beauchamp 1993; Crosbie 1997, p.251). Ambitious reforms require politicalcommitment and political will at the most senior levels; tapping the best availableknowledge in the public sector; and building consensus and the support needed to ensure

successul implementation. Implementation is the true measure o a policy decision. Theselessons would be put to good use in later years.

mkn pss nt nuh nd nt st nuhIn the autumn of 1986, unforeseen circumstances (lower than expected world oil and grainprices) led the GoC to adjust its decit target upward, thus accepting a slower scal track.Management initiatives and tax measures were introduced in February 1987 to achieve thenew target.14 To maintain the new scal track, the GoC once more announced across theboard cuts to the departmental budgets in 1988.

12 Privatisation included the Northern Transportation Company Limited, Teleglobe Canada, Canadian Arsenals Limited and theGovernments interest in the Canada Development Corporation. Subsidy reductions included transportation subsidies, including VIARail as well as certain industrial and agricultural subsidies.

13 Salaries would be cut or members o the House o Commons and Senate and or the Prime Minister and Cabinet and rozen or deputyministers, assistant deputy ministers and equivalent exempt staff. There would also be a two percent reduction in all non-statutorygovernment programs and Canadair and Eldorado Nuclear would be privatised.

14 Management measures included accelerating the remittance of source deductions, deferring defence spending, limiting ofcialdevelopment assistance spending and increasing the air transportation tax. Tax measures included increasing and extending federal salesand excise taxes.


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By 1987-88, the GoC achieved a small operating budget surplus; for the rst time in twelveyears, it did not borrow to cover its operating costs (see Figure 4). The budgetary decit hadbeen reduced from 8.3 percent of GDP in 1984- 85 to 5.2 percent, a major achievement.

Fu 4: dl ptn suplus dct, 1987-88 t 1993-94

2006-072001-021996-971991-921986-871981-821976-771971-721966-671961-62

Year

PercentofGDP

-4

-3

-2

-1

0

1

2

3

4

5

6

Source: Federal Government Public Accounts, 2008

Until 1988-89, the GoC was progressing relatively well in its efforts to reduce the decit. Inthat year, the budgetary decit reached a seven-year low of CAN$27.9 billion and, by1989-90, an eight year low of 4.4 percent of GDP (see Figure 5).


2006-072001-021996-971991-921986-871981-821976-771971-721966-671961-62

Year

PercentofG

DP

-10

-8

-6

-4

-2

0

2



18/44


However, total federal and provincial government decits remained high by historicalstandards. With interest rates on the rise, the GoC faced growing concern that it would fallfurther off its scal track. Calls for the GoC to further cut its decit came not only frominternational organisations such as the IMF and the OECD but also rom the EconomicCouncil o Canada and the Canadian Chamber o Commerce (Economic Council o Canada1988, p.59; Canadian Press 1988, p.B6). Finally, the decit was becoming the top concern ofthe business community.

By early 1990, taking action on the decit was also the number one issue for Canadians. Onepoll by Insight Canada Research showed that Canadians supported spending cuts (oreign

aid and defence). Another, conducted by The Globe and Mail and CBC News, revealed awillingness to accept the goods and services tax (GST) if it were tied to decit reduction. AGallup poll revealed that 80 percent of Canadians were either very or somewhat concernedabout the federal decit. This consensus emerged as the window of opportunity for furtherscal reforms was closing and the country was facing the early signs of recession.

From 1989 to 1993, the GoC resorted to increasingly stringent measures in an attempt tocontrol spending and maintain a small operating surplus. However, as the recession took holdin 1991-92, the government would consistently underestimate interest charges on the publicdebt. High interest rates would thwart the governments efforts to address the decit issue.

In early 1989, the GoC announced more spending cuts and tax increases. This includeddeferring planned spending (defence and, child care), restraining spending growth

(ofcial development assistance, transfers to the provinces and regional developmentfunding), reducing subsidies (passenger rail and business subsidies) and further cuts affectinggovernment operations. This was ollowed in December 1989 with an announcement bythe President o the Treasury Board o additional measures designed to save a urtherCAN$1.4 billion over three years.15

In 1990, the GoC announced expenditure controls affecting a broad range of governmentoperations16 and the Minister of Finance announced that the GST would contribute to decitreduction. In 1991, the GoC extended the expenditure control measures announced in 1990and imposed urther restraints on government spending.17

Within the Public Service, tensions were rising as departments struggled to maintain serviceswith ever-declining resources. In March 1999, the President of the Treasury Board froze public

service salaries. This precipitated the largest ederal Public Service strike in Canadian historyin September 1991.

To cope with the economic downturn, the GoC introduced tax reductions and newspending on infrastructure and training in February 1992, and further spending cutsincluding cuts to a wide range o programmes and an across the board three percent cutto departmental operating budgets, to pay for these measures.18

The GoC announced more across the board cuts in 1992,19 cutting departmental operatingbudgets by another three percent and reezing Public Service salaries or an additional two

years. Later that year, the GoC announced plans to reform the unemployment insuranceregime, changes that would help achieve scal savings down the roadi. It introduced stillurther cuts to departmental operating budgets in April 1993.20 Between 1984 and 1993,

the GoC made a total of 22 budget cuts, each more difcult than the previous and eachmore demoralising or the Public Service.21 But despite these efforts, the budgetary decit

15 Measures included freezes on public service construction in Ottawa, travel restrictions on MPs and public servants, the closure of someparliamentary restaurants, the sale of government jets and the closure or amalgamation of several government agencies.

16 Expenditure controls would affect a wide range of government programmes with the exception of major income support programmesand most transers to lower-income provinces. Measures included capping Canada Assistance Plan payments or some provinces andfunding for other programmes at ve percent, holding EPF nancing constant. Spending on programmes not subject to the expenditurecontrol plan would be reduced by CAN$800 million. Funding was cancelled for OSLO oil sands project and polar icebreaker andPetro-Canada and Telesat Canada would be privatised.

17 The expenditure control measures announced in the 1990 Budget were extended. Additional spending controls were imposed onprogrammes not subject to the expenditure control plan.

18 Other measures included reductions in ministerial salaries, tighter travel guidelines, cuts to departmental communications budgets, cutsin defence spending, restraining the growth of spending on social housing, streamlining or winding up several boards and commissions.

19 Other measures included reezing unding or research councils or two years and reducing ederal grants and contributions by10 percent.

20 Federal programme spending would be held to zero real growth; defence spending was frozen; growth in research council funding andinternational assistance was limited; grants and contributions were fur ther reduced, as was regional development funding subsidies werereduced to CBC and VIA Rail; and social housing payments were capped.

21 In addition to the 12 budget measures mentioned above, there were other internal measures, such as freezing departmental year endoperating budgets or not allowing the normal carry orward o lapsing unds.


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was once again on the rise, reaching 5.6 percent of GDP in 1992-93 (see Figure 5).The ederal debt reached 64 percent o GDP.

Stuctul nd nd ldTo make matters more challenging, the growing decit and debt were not the only issueson the GoCs agenda. From 1984 to the election of 1988, the government pursued aneconomic agenda that extended well beyond restoring the health of public nances,launching a number of major structural reforms, many of which would mature or enter acritical phase simultaneously. While they created more favourable conditions for Canadaseconomic performance and for future public sector reforms, they also caused serious agendaoverload or the government during the last ew years o its mandate. The ollowing is areminder o the critical phases o some o the most important reorms during this period.

F td ntsAt their conference on the economy in February 1985, rst ministers endorsed the cautiousexploration of a free trade agreement with the United States (Lougheed 2004, p.501).The United States Congress approved ast-track legislation giving negotiators until October1987 to reach an agreement. Thus began an intense period o work involving all provincialgovernments and ederal departments. The Canada-United States Free Trade Agreementdominated the 1988 election campaign, just as the early signs of recession began to emerge.Following the election, the government of Prime Minister Mulroney quickly passedlegislation, and the agreement came into effect on 1 January 1989.

In 1990, the Government of Mexico formally asked the United States to open talks on a freetrade agreement between the two countries. The GoC decided to pursue negotiations owhat would become the North American Free Trade Agreement (NAFTA) and negotiationsbegan in June 1991.

Tx In the Speech from the Throne of 1986, the GoC committed to pursue comprehensive taxreform. A White Paper on tax reform was released in June 1987. Proposed reforms were to beimplemented in two stages. The rst phase in 1988, before an election, would lower personalincome tax rates. The second phase, after the election, would reform the federal sales taxsystem. This two-phased approach was criticised as politically motivated. Tax reform becamea contentious issue as the government entered its second mandate.

In September 1990, with Liberal senators threatening to defeat the tax reforms to the GST,the Prime Minister added eight senators to the upper chamber to tip the scales in thegovernments favour. A seven percent GST came into effect on 1 January, 1991.

Cnsttutnl Late in its rst mandate, the GoC decided to open another front. Several rst ministersconerences on constitutional issues led to the signature o the Meech Lake Accord(proposed amendments to the Canadian constitution) in June 1987. This emotionallycharged issue mobilised the attention o cabinet ministers and the Prime Minister or thebetter part of 1987. The accord collapsed when it did not receive ratication in all provinciallegislatures. The consequences for national unity were devastating. A new mega-round ofconstitutional negotiations followed in an attempt to mitigate these consequences and to

nd a modern constitutional compact.

Much of 1992 was consumed by constitutional negotiations. In June, the GoC, all provinces,territorial governments and our aboriginal associations reached unanimous agreement ona vast and complex set of constitutional amendments known as the Charlottetown Accord,which was deeated in a national reerendum in October 1992. This agenda absorbed asubstantial amount of the time of ministers and the Public Service. When met with a globalrecession, an overloaded agenda would spell trouble for the government.

By 1993, Decima Polls showed Canadians concern for the decit at an all-time high andout-ranking job creation (Lapointe 1993, p.7). An April 1993 Gallup poll reported that70 percent of Canadians would cut spending to reduce the decit, rather than increasespending to stimulate the economy (Bozino and Tourcotte 1993). A broad-based societal

consensus or action had emerged.

Even though the budgetary decit (at 5.3 percent of GDP) was some three percentagepoints lower than when the government of Prime Minister Mulroney took ofce in 1984,


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the government was blamed for the lack of progress on addressing the decit and debt issue.The progress achieved over the rst six years of its mandate was long-since forgotten.

The main contribution to restoring the scal health of public nances were the structuralreorms that provided more avourable conditions or the Canadian economy and lay thebasis for future scal reforms. The extent of the benets to the Canadian economy of theGST and the Canada-United States Free Trade Agreement would only become evident inlater years. In November 1993, the government was defeated.

Lnn th pst: 1984 - 1993

Important lessons were learned during this period. The Public Service gained experienceabout scal management, including the merit of various approaches, the conditions ofsuccess, and the risks to be avoided. Lessons included:

1. and ld ncss th sk lu. Eliminating a sizable decit is amajor undertaking. Fiscal reform of the scale discussed in this report affects allgovernment departments and agencies, leaving little room for otherambitious reorms.

2. Publc nss s ncssy ctzns t ccpt th sccs dndd th. The lower the public awareness of the problem, the harder it is to reducegovernment spending and the longer it takes to implement scal reform.

3. acss th bd cuts nd zs tht ct ps nd scs n nundnttd y h sncnt ps cts. Such cuts erode thequality of public services, reduce the quantity of available services for the samelevel of taxpayer contribution, and affect morale in the Public Service. Over time,they erode citizens condence in government, in the public sector and in publicorganisations.

4. ecncy sus dn th lss nt bl slutns tlnt szbl dct. They may help with internal reallocations rom lowerto higher priorities, but there is no substitute for making choices about the relativeimportance of government programmes to eliminate a large decit. It comes down torepositioning the role o the government within the collective means o citizens.

5. actn quckly cn hlp d unsn ccustncs. External factors beyondthe control of government can steer it off course. Each failed attempt makes the nextone increasingly difcult. Once the process has begun, it is preferable to aim for abalanced budget.

This experience would be put to good use in the future when circumstances would onceagain make an attempt at scal sovereignty possible.


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3. Regaining Canadas scal sovereignty: 1993 - 1999 19

3. rnn Cnds scl snty:1993 - 1999

During the election campaign of 1993, all political parties emphasised economic growth andjob creation as priorities, with comparable reference to decit reduction.

The Liberal Party promised to reduce the decit to three percent of GDP by the end of itsthird year in ofce. This commitment was consistent with the approach of other countries,and similar to that which was subscribed to in the Maastricht Treaty. This commitmentwould be achieved through economic growth and some spending cuts such as in defence,consulting services and grants to businesses.

The Progressive Conservative Party promised to eliminate the decit within ve years, by

eliminating waste and inefciency; cutting government operating costs and businesssubsidies; and reducing international assistance and defence spending. It also promised notto shift the decit burden to the provinces.

The Reform Party had the most ambitious proposal: It proposed to eliminate the decit inthree years by cutting government operations and programmes. Transfers to the provinces,business, special interest groups and individuals would be reduced.

The Bloc Qubcois promised, if it held the balance of power in a minority government, toforce the GoC to cut spending by CAN$10 billion in the rst year by eliminating waste,cutting military spending, eliminating duplication of programmes provided by the provinces,and ending tax shelters.

The New Democratic Party had the least ambitious plan. Nevertheless, it recognised theneed to contain the decit and, if elected, stated that it would not increase the decit duringits term in ofce.

A Liberal government, led by Prime Minister Jean Chrtien, was elected to ofce inNovember 1993. By this time, the GoCs debt had reached 67 percent of GDP. Servicing thatfederal debt consumed roughly 35 percent of the revenues of the GOC, up from 11 percentin 1974-75 (see Figure 6).

The Speech from the Throne of January 1994 made little reference to the growing decitand debt burden. The Budget of February 1994 reafrmed the electoral commitment ofreducing the decit to three percent of GDP over three years. It said little about how thiswould be accomplished other than the Minister Responsible or Public Service Renewal

would lead a review o:

all aspects o departmental spending to ensure that lower priority programmes arereduced or eliminated and that the governments diminished resources are directed to thehighest priority requirements.

(Martin, 1994a)

The budget was not well received in nancial circles. This, and several weeks of negativemedia coverage, would convince the government that it had to take the scalsituation seriously.


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Fu 6: dl nt dbt/publc dbt chs

0

10

20

30

40

50

60

70

2006-072001-021996-971991-921986-871981-821976-771971-721966-671961-62

Timeline

Net Debt as Percent of GDP Public Debt Char e as Percent of Revenue

Percen

t


The government o Prime Minister Chrtien used Program Review as its primary vehicle toeliminate the decit during its rst term in ofce. The Privy Council Ofce developed theconcept, modelling it on the approach initiated by the Department of Transport in 1992-93.Program Review drew on the lessons learned from previous attempts to reduce the decit.

The model took shape through various discussions between the Prime Minister, theMinister Responsible for Public Service Renewal, the Minister of Finance and the Secretary to

the Cabinet. The Cabinet Ofce (which is called the Privy Council Ofce or PCO in Canada),the Department o Finance and the Treasury Board Secretariat also played an active role.It was introduced in cabinet by the Prime Minister a clear signal o its importance.Program Review was different from every prior exercise in its approach, the scope of theeffort, the process and the guiding principles.

Th ppchProgram Review rejected the concept of across the board cuts and the view that a sizabledecit could be eliminated through increased productivity. Instead, it posited that noalternative existed other than to evaluate the relative importance of governmentprogrammes and services within the overall scal framework. Once these choices weremade, the GoC could consider the relative efciency of various policy options. As it wasrole focussed, it was not based on performance indicators or performance results, which

are best suited to reallocations and not to reducing a sizable decit.

Seen in this light, the exercise was less about what to cut and more about what to preserveto give Canada the comparative advantages needed to prosper in the future less of a scalexercise and more of un projet de socit undertaken under severe scal constraints.Program Review oered each department an opportunity to:

redesign itsel to ulfl its roles and responsibilities within a ederal government betteradapted to the needs and requirements o the uture and within its constrained budget.

(Mass, 1994)

Th scpProgram Review was a broad-based exercise involving all departments and organisations

reporting to a minister, and through a minister to Parliament, including agencies, Crowncorporations or quasi-judicial bodies. It took a portfolio-based approach and nothing waso the table.


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Soon after the election, the GoC launched a number of policy reviews ranging from defence,foreign policy, science and technology, small business and the efciency of the federation toa review o all ederal agencies. These reviews were progressively rolled into Program Review.The last to be integrated was social security, covering a complex range of social programmesand transers to individuals.

Th pcssOne o the most important characteristics o the Program Review process was the relianceon ministers and deputy ministers, equivalent to the UKs Permanent Secretaries, as thearchitects o departmental reorms. Minister and deputy ministers as a team were giventhe responsibility o coming orward with a common proposal or the uture role o thedepartment in serving Canadians, taking into account the GoCs three-year scal plan.This approach ensured a strong link between policy choice and policy implementation, andreduced the risk o tactical behaviour (ministers arguing that they could do more i it wasnot for the resistance of the Public Service, and public servants arguing that they could domore i there was the political will to take action).

Recognising the diversity of circumstances, missions and mandates, the GoC gaveministers and deputies a free hand on how to prepare their proposals, who to involve, andhow broadly to consult. In some departments, the process was more open and widely sharedwith employees than in others. Some had signicant stakeholder involvement, while othersconducted their reviews internally. Some could rely on strong internal policy research and

years of consultation with key stakeholders, while this was severely lacking in others.Departments were not given individual scal targets until later in the exercise. This wasimportant for several reasons. First, central agencies did not have sufcient knowledge to setreasonable scal targets for individual departments. Second, centrally imposed targets wouldhave made it impossible for departments to put forward proposals that exceeded the target.Third, targeted cuts would deliver cuts, not role realignment.

However, ministers and deputy ministers were given a common set of principles, framed assix interconnected tests (see Figure 7), with which to carry out their review. The tests werean interactive sequence of questioning going from the role to the effectiveness and nally tothe aordability o the overall proposal.

Fu 7: P r tst - dcsn t

Public Interest Test

AbandonTra

nsfer

Role of Government Test

Federalism Test Partnership Test

Efficiency Test

Affordability Test


24/44


These tests served as the conceptual framework for the exercise. They were framed assix questions:

1. Does the programme or activity continue to serve a public interest?

2. Is there a legitimate and necessary role or government in this programme area oractivity?

3. Is the current role o the ederal government appropriate or is the programme acandidate or realignment with the provinces?

4. What activities or programmes should, or could, be transferred in whole or in part tothe private or voluntary sector?

5. If the programme or activity continues, how could its efciency be improved?

6. Is the resultant package of programmes and activities affordable within the scalrestraint? If not, what programmes or activities should be abandoned?

As a result, Program Review was an ongoing process that looped back on itself if the overallproposal did not generate signicant savings.

The tests were used or many years ater the Program Review decisions had beenimplemented to assess departmental proposals or reallocation or or unding new initiatives.

Another important characteristic o Program Review was the opening up o the ederal

budget process. Although details of the budget were kept condential, the Minister ofFinance opened a broad dialogue with private sector experts, Parliament and Canadiansabout planning assumptions and potential scal measures. This contributed to buildingpublic understanding and support or an ambitious reorm programme. The minister alsoopened the process to other ministers, using a cabinet committee to recommend budgetoptions. This approach would be continued for future federal budget initiatives. Within thePublic Service, the Deputy Minister of Finance was the architect of the most open approachto budget planning that the Department of Finance had ever undertaken, working closelywith the Privy Council Ofce and the Treasury Board Secretariat to review assumptions,options and proposals, thus ensuring a seamless approach.

Important innovations would help ensure success. Planning assumptions or growth andinterest rates were more cautious than the private sector average. All policy reserves wereeliminated. A contingency reserve was created to deal with unoreseen circumstances inthe economy that, if not required to hit the spending targets, would contribute to lower thedecit. The Treasury Board Secretariat reduced restraints on departments, making it easier toreallocate unds and implement decisions.

Th chny th tbls nd sll scttThe decision-making process was crucial in Program Reviews success. Each department wasrequired to submit a strategic action plan containing their ministers and deputy ministersproposals or reorm.

Three committees reviewed the departmental proposals:

A stn ctt dputy nsts, operating as a peer review committee

A spcl cbnt ctt nsts to vet the proposals and build politicalconsensus

Full cbnt to arbitrate major issues and ensure overall balance and cabinet solidarity.The Prime Minister ensured discipline and the political support of ministers, caucus andthe governing party.

Th Dputy mnsts CttThe Clerk o the Privy Council and Secretary to the Cabinet chaired the steering committeeof deputy ministers. In Canada, the Secretary to the Cabinet plays a key role in managingthe community of deputy ministers in support of government-wide priorities. With directaccess to the Prime Minister, the clerks commitment to chair the steering committee sent

a strong signal of the importance of the exercise. This committee served as a peer reviewpanel, a clearing house for all departmental proposals and the primary source of advice todepartments and to the special cabinet committee on the plans o departments.


25/44


The Deputy Ministers Committee included experienced deputy ministers representing thePrivy Council Ofce, the Department of Finance and the Treasury Board Secretariat, as wellas large and small departments. The members were:

Jocelyne Bourgon, Clerk of the Privy Council and Secretary to the Cabinet (Chair)

David Dodge, Deputy Minister of Finance

Robert Giroux, followed by V. Peter Harder, Secretary of the Treasury Board

Mel Cappe, Deputy Minister of the Environment

Suzanne Hurtubise, Deputy Secretary, Plans and Priorities, Privy Council Ofce

Ranald Quail, Deputy Minister of Public Works and Government Services Canada

Janet Smith, Deputy Minister of Western Economic Diversication

Wayne Wouters, Executive Director, Program Review Secretariat, Privy Council Ofce.

The committee operated in an open and transparent manner. All assessments preparedassessments were shared with the minister, the deputy minister and members of thecabinet committee. The committees ndings were presented to the cabinet committeeby the Deputy Secretary to the Cabinet, Plans and Priorities. This gave sponsoring ministersa full voice in the discussion, freeing them from defending or opposing the proposals.It allowed them, and their colleagues on the cabinet committee, to focus on forging apolitical consensus.

Th Cbnt CttThe special cabinet committee provided the political oversight to the exercise.Its membership was careully selected by the Prime Minister. From an institutionalperspective, besides the chair, it included the Minister of Finance, the President of theTreasury Board, the Chairs of the Economic and Social Cabinet Committees and theLeader o the Government in the House o Commons. It also included ministers whoprovided strong, balanced regional representation and a diversity of political perspectives.The members were:

The Honourable Marcel Mass, President of the Privy Council, Minister ofIntergovernmental Aairs and Minister Responsible or Public Service Renewal (Chair)

The Honourable Paul Martin, Minister of Finance

The Honourable Art Eggleton, President of the Treasury Board

The Honourable Sheila Copps, Deputy Prime Minister, Minister of the Environment andChair o the Cabinet Committee on Social Development Policy

The Honourable Herb Gray, Leader of the Government in the House of Commons andSolicitor General o Canada

The Honourable Andr Ouellet, Secretary of State for External Affairs and Chair of theCabinet Committee on Economic Development Policy

The Honourable Anne McLellan, Minister of Energy, Mines and Resources

The Honourable Sergio Marchi, Minister of Citizenship and Immigration

The Honourable Brian Tobin, Minister of Fisheries and Oceans.

The choice of chair was an important decision. With no department of his own, but access tothe Prime Minister, the chairs primary responsibility was to build a strong political consensuson behal o the government.

Assigning this role to the Minister Responsible or Public Service Renewal gave more reedomto the Minister of Finance to argue for greater scal discipline and encourage an aggressive

approach to decit reduction. It also gave the Minister of Finance more time for broad publicconsultations, such as with the nance and business communities, interest groups, citizensand parliamentarians.


26/44


The cabinet committee relied heavily on the important principle that nothing is agreeduntil everything is agreed, which deected tactical behaviour by those who hoped theycould be exempted and, at the same time, protected those who came forward early withambitious proposals.

Th P mnst nd ull cbntThe third level of oversight was full cabinet, the most important decision-making forumo the GoC. Cabinet is comprised o all ministers and is chaired by the prime minister. Itprovided the political leadership to the review, ensured ministerial solidarity, and assessedthe overall balance and impact o the proposals. The role o cabinet and the leadership o the

prime minister were critically important to the success o Program Review.

The Prime Minister played a key role in ensuring the discipline o the governing party andthe participation of all. No department was exempt, no minister was allowed to step asideleaving the burden to others, no exceptions or special cases were allowed until after theollowing election.

This undertaking would not have been possible without the resolve o Prime MinisterChrtien and his strong collaboration with the Minister of Finance. Whatever differencesthey might have had, on this matter they were determined to stay the course. This was anessential condition or success.

The collective and inclusive nature of this process, the transparency of the exercise and the

discipline provided by the Prime Minister built condence and trust, and encouragedministers to bring forward increasingly ambitious proposals. It was a dening characteristicof Program Review and one of the most impressive and modern Canadian examples ofcabinet government.

Th P r ScttA small secretariat consisting of an executive director, ve ofcers and two support staffwas created in the Privy Council Ofce. Available to facilitate liaison among departmentsand central agencies and responsible or ensuring a coordinated presentation to the deputyminister and minister committees, it reported to the Deputy Secretary to Cabinet, thesecond most senior deputy in the Canadian public service. Since it was not a permanentinstitution, staff were seconded for the period of the review.

Th chnly stp by stpProgram Review was formally launched on 18 May 1994. That day, the President of thePrivy Council and Minister Responsible or Public Service Renewal wrote to his cabinetcolleagues to outline the general approach and the guiding principles for the exercise.The letter inormed ministers that they and their departments were responsible orreviewing and assessing their own programmes and activities against a common set oguidelines. At the same time, the Secretary to the Cabinet briefed all deputy ministers onwhat was expected of them over the coming months. Departments were given threemonths to develop their plans.

In June 1994, the Program Review Secretariat issued a short presentation on organisingfor Program Review. It insisted on the need to modernise the work of the GoC, noting thatacross the board cuts were not a desirable way to manage scal restraint. It drew lessonsfrom the Neilsen Task Force exercise of 1984 and lessons from other countries, and remindeddepartments that meeting the overall scal target would require real cuts, not justreductions in planned spending increases.

Departments were advised to designate a Program Review coordinator to help managedepartmental coordination and ensure timely liaison with the Program Review Secretariat.As it was anticipated that a number of horizontal reviews would be required in the autumnto address cross-cutting issues common to several departments and agencies, ProgramReview coordinators would also contribute to government-wide coordination.

In early July, the secretariat issued more detailed guidelines for the development of strategicaction plans dealing mainly with issues o common ormat and data. It reiterated that thecentral objective was to identify core federal roles and responsibilities and provide modern,affordable government. Program Review had to proceed expeditiously under a tight timelineas the work had to be completed in time or the Budget o February 1995. Strategic actionplans were to be submitted to the Program Review Secretariat by 31 August.


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In September 1994, at a Speech to the Canadian Chamber of Commerce, Prime MinisterChrtien reiterated the importance and objectives of Program Review. He said that hisgovernment did not believe in cutting and slashing simply or the sake o cutting andslashing, and continued:

We believe that government can and must be a orce or good in society. Thereore we mustget our priorities right.

(Chrtien, 1994)

The Committee o Deputy Ministers started to review departmental proposals in

mid-September, meeting every two weeks for a full day. To facilitate the review, thecommittee agreed that departments and agencies with similar roles and responsibilitieswould be reviewed as a cluster during the same session. For instance, the Cabinet Ofce, theDepartment of Finance, the Treasury Board Secretariat and the Public Service Commissionwere reviewed together. In this particular case, the committee decided to review them rstto reinforce the message that no organisation would be exempted, not even those reportingto the Prime Minister and the Minister o Finance.

The Chairs o the Cabinet Committee and the Deputy Minister Committee agreed thatthe Committee o Deputy Ministers would perorm a challenge unction. It would share itsassessment notes and recommendations with all members o the Cabinet Committee andwith the sponsoring minister and deputy minister. As noted above, the Deputy Secretary toCabinet would present the assessment notes at the cabinet committee.

The cabinet committee held its rst organising meeting on 30 August 1994. It started itssubstantive work in late September and met weekly through November. In early December,it met twice weekly to address cross-cutting issues in order to identiy additional savings.

The Prime Minister was brieed regularly and ull cabinet received regular updates. DuringProgram Review, the Prime Minister expanded the practice of ministers retreats (all-dayevents that allow ministers to look ahead and ocus on government-wide priorities) thatexisted under previous governments to integrate the governments budget planning cycle.During Program Review, the Prime Minister used ministers retreats to build and consolidatepolitical support or proposals.

The rst retreat took place in late October 1994, following which departments were given

targets with which to nalise their action plans. The targets had the benet of the ministerand deputy ministers own thinking about possibilities, taking into account the results ofthe deputy minister peer review and cabinet committee discussions. Even then, the notionaltargets were designed to be challenging.

Through the autumn, ministers developed an ambitious package of reforms sufcient toeliminate the decit over three years and, therefore, exceeding by far the overall targetinitially set in Budget 1994.

In the late autumn, the Mexican peso crisis clearly demonstrated the vulnerability of nationsto international nancial markets and underlined the loss of control that a government canexperience from carrying too much debt. Canadas scal problems concerned internationalinvestors, resulting in signicant pressure on the Canadian dollar and upward pressure on

interest rates. This led Moodys to issue a prebudget credit warning (Chrtien 2007, p.65).In January 1995, Bankrupt Canada?, a Wall Street Journal editorial, stated if Canada did nottake dramatic action to address its debt problem, it could hit the debt wall (Editorial 1995,A14). The seriousness of the situation shook Ottawa and Canadas nancial community tothe core (Chrtien 2007, p.65).

The Program Review recommendations were tabled at a cabinet retreat on 17 January 1995,as part of cabinets consideration of Budget 1995. Canadas deteriorating economic situationand vulnerability to international nancial markets increased the determination of ministersto resolve Canadas scal situation and consolidated the consensus to move ahead with anambitious plan.

Program Review decisions were announced in Budget 1995 and conrmed in the budget

legislation, affording them legal protection. Protecting those decisions meant that it wouldbe difcult to undo any single decision, thus preventing erosion. The decision to incorporateProgram Review decisions in the budget legislation required a detailed discussion amongdepartments and central agencies to conrm what had been agreed upon. A team

We believe thatgovernment can andmust be a orce orgood in society.Thereore we must get

our priorities right.

Prime Minister Chrtien, 1994


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consisting o the Program Review Secretariat and departmental Program Review coordinatorswas established to oversee implementation.

A second round of Program Review took place in 1995, focusing largely on horizontalissues that cut across departments. This would yield some additional measures that wereannounced in Budget 1996.

Program Review would result in the most important realignment of the GoCs role sinceWorld War II and it was achieved peacefully, without the social unrest that some othercountries experienced.

P r: th utcs

an unpcdntd ductn n p spndnAs a result of Program Review, programme spending (which includes all spending exceptinterest payments on the public debt) declined in absolute terms by over 10 percentbetween 1994-95 and 1996-97. Hal o these reductions were the result o changes tostatutory programmes, including employment insurance benet payments to individualsand scal transfers to the provinces. Relative to the size of the economy, the decline waseven more dramatic. Programme spending ell rom 16.8 percent o GDP in 1993-94 to12.1 percent in 1999-2000, its lowest level since 1949-50 (see Figure 8). These reductionsresulted in signicant progress in addressing structural spending problems.

Since the exercise focused on the GoCs role, different departments were called upon tomake very dierent contributions (see Figure 9).

Some programme spending, such as for aboriginal peoples and children, was increased.Some departments made modest reductions in light o their importance to the wellbeingof Canadians, for example, those in the health and justice sectors. Some used theopportunity to fundamentally redene their mission to better respond to the changingneeds of Canadians in the twenty-rst century. This was the case for Transport, Industry,Fisheries and Oceans and, to a lesser extent, Agriculture. In retrospect, some departments cuttoo deeply and reinvestments and course corrections became necessary in subsequent years.It rapidly became clear in the Department of National Defence, for instance, that the rentexpected as a result of the end of the Cold War would not materialise. Missions werebecoming more numerous, more complex and more costly.

Fu 8: p spndn

0

5

10

15

20

1999-001998-991997-981996-971995-961994-951993-94

Year

PercentofGD

P

16.8

16

14.9

13.313

12.7

12.1



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Fu 9: chns n dl dptnt spndn 1997-98 lt t 1994-95

-80 -70 -60 -50 -40 -30 -20 -10 0 10 20

Regional AgenciesIndustry (Department)

Transport

Natural Resources

Human Resources Development

Environment

Fisheries and Oceans

Industry (Science and Tech)

Heritage and Culture

Agriculture

CIDA (International Assistance)

Foreign Affairs and International Trade

Public Works and Government Services

Defence

Veterans Affairs

Parliament and the Governor General

Citizenship and Immigration

Canada Mortgage and Housing

Justice

Solicitor General

Health

Indian Affairs andNorthern Development

Percent reduction

Departments

Source: Martin, 1995

elntn th dctAs a result of favourable circumstances (no recession), the benets of previous structuralreorms (economic growth precipitated by ree trade agreements and a growing revenuebase resulting from tax reform), as well as sustainable expenditure reductions resulting fromProgram Review, the GoC eliminated its decit in three years, leading to its rst surplusbudget in 28 years in 1997-98 and to 11 consecutive years o surpluses. The surplus would

reach 1.8 percent of GDP in 2000-2001, despite a worldwide economic downturn(see Figure 10).


2006-072001-021996-971991-921986-871981-821976-771971-721966-671961-62

Year

PercentofGDP

-10

-8

-6

-4

-2

0

2



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By 2007-08, the federal debt-to-GDP ratio was down to 29.8 percent from a high of almost70 percent in 1995-96 (see Figure 11).

Fu 11: dl nt dbt, 1995-96 t 2007-08

0

10

20

30

40

50

60

70

80

2006-072001-021996-971991-921986-871981-821976-771971-721966-671961-62

Year

PercentofGDP


a sll Publc ScProgram Review had a signicant impact on the size of the Public Service. Over ve

years, Public Service employment declined by 45,000 employees, a reduction of 19 percent(see Figure 12). This included 8,000 employees whose positions were transferred to theprivate sector, the not-for-prot sector or to other levels of government. It does not include

employment reductions in the Royal Canadian Mounted Police, Canadian Forces militarypersonnel or in separate employers, such as Crown corporations. Total federal public sectoremployment declined by about 55,000 when these reductions were taken into account.

Fu 12: Publc Sc plynt

0

50,000

100,000

150,000

200,000

250,000

199919981997199619951994

231,400225,619

207,977

194,396

187,187 186,314

Year

Numberofemployees

Source: Treasury Board of Canada, 1999


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When it embarked on Program Review, the GoC realised that many employees would beaffected so it introduced, for a limited time, clear and consistent downsizing assistancepackages that ensured air treatment or those aected. A combination o specialprogrammes and exible administration (allowing affected employees who wished toremain in the Public Service to easily ll vacant positions) allowed for a smooth transitionunder difcult circumstances.

Early Retirement Incentive (ERI) was a three-year programme or permanent employeeswho were declared surplus rom any department or organisation or whom the TreasuryBoard was the employer. Under ERI, employees who took early retirement within 60 days of

being declared surplus would not have their pension reduced as a result o retiring early.

Early Departure Incentive (EDI) was a three-year programme or permanent employeeswho were declared surplus rom most aected departments (where the employmentimpact of Program Review decisions was beyond what could be managed through existingmanagement methods). Aected employees received a cash payment i they resigned romthe Public Service. The amount of the payment varied based on salary, age, years of serviceand pension eligibility.

As a result of these measures, large personnel reductions were accomplished with fewinvoluntary departures rom the Public Service and without the labour unrest or serviceinterruptions characteristic of other countries efforts to reduce the size of theirpublic services.

rpstnn th gCs lThe overall outcome o Program Review was captured in Getting government right: a progressreport, prepared by the Privy Council Ofce and tabled in the House of Commons by thePresident of the Treasury Board on 7 March 1996 (Privy Council Ofce 1996). This report ledto the annual publication o Results or Canadians, a management ramework or theGovernment o Canada, by the Treasury Board Secretariat, beginning in 2000.

Program Review decisions amounted to a profound realignment of the GoCs role, and itsactivities now concentrated around ve core roles:

To stnthn th cny nd th cnc unn to ensure a prosperouscou

program review: the government of canada's experience eliminating the deficit, 1994-99 - a canadian...

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