OTTAWA -- The federal Conservative government will find it extremely difficult to cap program-spending growth at the sustained level required to bring the budget back to balance, says an independent analysis Monday from a long-time fiscal policy watcher.

Dale Orr said the government’s timetable and method -- in which growth in transfers to provinces and individuals remain intact, and taxes are not raised -- is “not realistic on either the revenue or the spending side. Furthermore, it is misleading, and beyond that, it is not the best route to deficit elimination.”

Plus, political sensitivities will make it difficult to cut from high-price programs such as defence and aboriginal affairs. As a result, the public service is bound to be a major target for spending restraint -- although such moves would contradict recent initiatives aimed at “renewal” of the federal bureaucracy.

As of now, the federal government’s plan has it reducing its deficit, scheduled to clock in at $56-billion this fiscal year, to roughly $5-billion in 2014-15. This will be done, the government says, by targeting roughly $100-billion in program spending for savings.

He said if the government could keep growth of program spending to the 3% pace as it plans, it might be able to balance the budget in the 2016-17 fiscal year.

However, Mr. Orr said the government’s track record says otherwise.

In the 2006 to 2008 period, in essence pre-recession, the average pace of annual growth in the program spending was greater, 8%, than that in either the transfers to persons, 5.2%, or to other levels of government, at 6.5%.

To compound the government’s plan, Mr. Orr said more than a quarter of all program spending is allocated toward the military and aboriginal affairs. Attempts to pare back spending in those areas would elicit much opposition within the government caucus and other key constituencies that the Conservatives are looking to for votes.

This is why the federal public service is bound to be one of the big losers in any spending restraint scheme. Personnel costs account for 27% of program spending, the analysis estimated. Freezing public servant salaries until the budget is balances is one cost-saving move, although Mr. Orr calculates that would only net roughly $500-million a year.

“The only way to make serious saving in this category is to leave upcoming vacancies unfilled and or to layoff public servants,” he said.

Yet, such a move would run contrary to the agenda toward public service renewal, which in recent years was championed by former clerks to the privy council Kevin Lynch and Paul Tellier (who also happens to be the former chief executive of Bombardier and Canadian National Railway).

Jim Flaherty, the Finance Minister, said in a recent interview with the Financial Post that the government might refrain from filling pending public sector vacancies that are expected from the wave of retirements.

Further, Ottawa might find it difficult to collect enough revenue should economic growth stagnate in the latter part of the decade due to moribund productivity, as Bank of Canada governor Mark Carney warned last week. He said unless productivity improved growth of more than 2% was “unrealistic” at this stage.

Mr. Orr concurs, and has penciled annual growth of 2.4% in 2015 and thereafter.

Under the 3% spending scenario the deficit is eliminated in 2016-17, with the federal debt peaking at $640-billion. Mr. Orr said that under a scenario in which program-spending growth is capped at 4%, then the deficit isn’t eliminated until 2020, with thee debt peaking at $680-billion.

The $40-billion in extra debt would result in annual debt charges of almost $3-billion being passed on to future generations, Mr. Orr’s analysis said.

“This would require our children to pay $3-billion more in taxes and/or forego $3-billion in program benefits every year or some combination there of.”

In recent months, Mr. Orr has recommended a temporary hike to the GST, back to 7%, to foster a quicker return to budget balance. However, Mr. Flaherty has rejected this option outright.

Nonetheless, a number of prominent observers, including former central bank governor David Dodge, said tax increases would likely be required as part of any budget balance plan as the spending restraint required would be “disruptive.”

Financial Post

pvieira@nationalpost.com