Flaherty looked to Liberals for lessons on spending cuts

Finance Minister Jim Flaherty asked for a review of the Liberal government's program cuts of the 1990s a full year before there was any hint the Conservatives might do the same thing, according to documents obtained by CBC News.
Reporters follow Finance Minister Jim Flaherty as he heads to a Conservative Party caucus meeting June 1. Flaherty requested a briefing in 2010 about the mid-90s deficit-busting cuts made by the then-Liberal government. (Adrian Wyld/Canadian Press)

Finance Minister Jim Flaherty asked for a review of the Liberal government’s ambitious spending cuts to programs of the 1990s a full year before there was any hint the Conservatives might do the same thing, according to documents obtained by CBC News.

The briefing note to Flaherty, obtained through the Access to Information Act, examines program review, a massive exercise the Liberal government launched in 1994 to cut $13.3 billion in expenses. When the program was finished, the government eliminated 55,000 positions from the federal public sector and created user fees to help raise revenue.

The Conservatives have tried to distance themselves from the program review, saying that, unlike Jean Chrétien’s government, they will not be making the same kinds of cuts.

When Flaherty announced during the federal election that the government would reduce the deficit one year earlier than expected, he said the initiative would avoid the "slash-and-burn" methods the Liberals used in program review.

But critics say that, like the mid-1990s, Stephen Harper’s government faces a huge task.

"For all we know, [Flaherty] made those statements after he looked at these [program review] documents and said, ‘no, I can’t deal with this,’ says Gene Swimmer, a professor emeritus at Carleton University, who studied the mid-1990s cuts.

"He certainly couldn’t deal with it in a minority government. Maybe now they can. From a policy perspective, it makes sense to know what happened in the past and to keep your options open."

New Treasury Board President Tony Clement says the Liberals relied on cutting program funding for health care and transfer payments to the provinces, but the Conservatives won't.

"We made that clear. The budget will make that clear as well. So it’s an entirely different circumstance than that," he said.

Instead, Clement will lead an effort to find $11 billion in savings by reducing direct government spending. He says that means less severe methods like not replacing retiring bureaucrats and targeting programs that have outlived their usefulness.

The pain of program review

During the 1993 election, the Liberals promised to reduce government expenses by three per cent of the country’s Gross Domestic Product (GDP), an ambitious target that Chrétien had never achieved in the days he was finance minister.

Once installed, the new Liberal regime passed a budget that was roundly criticized domestically and abroad for not doing enough to slay a deficit that was seen to be spiraling out of control. In a particularly stinging rebuke, a Wall Street Journal editorial warned that if Canada didn’t act seriously, it could hit a "hit the debt wall."

The government responded to the criticism with an initiative it called "Program Review." Every expense (except for services to Aboriginal peoples and children), including transfer payments to the provinces for health and social programs, was on the table. Instead of cutting across the board, the government targeted certain departments such as Transport for heavier reductions. The government stopped running airports, turning that task over to the private sector; they also declared an end to a range of business subsidies, which meant a severe reduction in the budget for Industry Canada.

It surprised some of their supporters.

"We worked to try to defeat the Conservatives in 1993," says Nycole Turmel, who was then vice-president of the Public Service Alliance of Canada, the largest public sector union.

"We got the Liberal government, and were hoping that they would come back to having a plan about the future of the government. We never expected that they would present a program review that would cut thousands of jobs and programs."

Though he’s now the CEO of the Canadian Council of Chief Executives, a powerful and influential business lobby group, John Manley also has vivid memories of those days.

Seated in the council’s brightly lit and spacious board room, he recalls becoming the newly minted industry minister, ready to implement an ambitious agenda that placed a heavy emphasis on new technology like the then-emerging internet. Program review put an end to all of that.

"It was personally very, very difficult. I lost not only half my budget, but 25 per cent of my employees, many of whom lived in my constituency in Ottawa," he said. "One of whom was one of my neighbours, who got a pink slip from Industry Canada."

One section in the 2010 background document on program review spells out lessons to keep in mind when embarking on huge cuts. For instance, the document says, it’s important to communicate clearly exactly why you want to cut and where, and it makes more sense to cut certain programs more deeply than others.

The briefing note also outlines mistakes the Liberals made.

"In retrospect, some departments cut too deeply, and reinvestments and course corrections became necessary in subsequent years. It became rapidly clear in the Department of National Defence, for instance, that the rent expected as a result of the end of the Cold War would not materialize. Missions became more numerous, more complex and more costly."

Many people in programs cut too deeply eventually wound up doing their old jobs: they took generous buy-out packages only to return as highly paid consultants. The process was called double-dipping, and provided ammunition to people like Turmel who argued that the government was so intent on cutting that it lost sight of a long-term plan for the federal services that people would receive.

Turmel, now the NDP MP for Hull-Aylmer and the party’s public works critic, says that in order to avoid past mistakes, the government will have to think long and hard about kind of services it wants to offer, and then develop a plan that makes sense.

"Review the kind of service you want to give, where you want to be in 10 years from now, and then you work inside the department. You might have to move people around. You might have a different approach inside the government."

Today’s approach

Like the Liberals, the Conservatives may carve out departments that will be safe from program review.

Even though the Chrétien government declared all services were on the table, there were still exemptions. Services for Aboriginal people and children were not touched. As a matter of fact, the department of Indian Affairs and Northern Development, as it was then called, received a 12 per cent increase between the fiscal years 1994-95 and 1997-98.

The Harper Conservatives have also indicated areas they will not cut – at least for now. During the election, they, like the Liberals and NDP, promised to leave transfer payments for health care alone and even to continue the annual six per cent increases negotiated with the provinces and territories in 2004.

The government has also signaled that it will be spending more money on its so-called tough-on-crime agenda. An analysis Statistics Canada conducted for CBC News shows that since the Conservatives came to power in 2006, the "federal protective services," which includes correctional services, increased 32.5 percent and also experienced the largest growth in absolute numbers. (See chart below)

Critics point to National Defence as a big-ticket expense. The country’s reduced commitment in Afghanistan could result in savings, but the government already seems locked into large expenditures for equipment such as fighter jets. Keeping some departments safe puts extra pressure on the government to find savings in direct program spending in the civil service, agencies and Crown corporations.

Like in 1995, the government will signal its intent on making cuts in Monday’s budget. Clement says once the 2011 budget is passed, they will get down to business and use 2012 budget to indicate which government services will be affected the most.

"We’re going through a process over the next year, and then those decisions will be found in the 2012 budget," he said.

David McKie can be reached at david_mckie@cbc.ca