NORTH AMERICA : Canada’s Leader Takes Aim at National Debt : Prime Minister Jean Chretien vows to cut the deficit and tells citizens they must adjust to ‘realities.’ The welfare state may be trimmed, and tax hikes have not been ruled out.

OTTAWA —  Nearly a year after taking office and with his popularity at an all-time high, Prime Minister Jean Chretien is making his first moves toward attacking Canada’s mountainous public debt, among the largest in the industrialized world.

In two days of hearings before a parliamentary committee this week, Finance Minister Paul Martin set deficit-cutting as the government’s top fiscal priority. While declining to provide many specifics, Martin called for sacrifice across the spectrum of Canadian society, which has developed an extensive welfare state over the last 30 years.

Martin said he is determined to reduce the federal budget deficit to 3% of gross domestic product within two years “come hell or high water” and set an ultimate goal of zero deficit. He refused to rule out tax increases but noted that “Canadians believe that they already are taxed to the hilt.”

Chretien followed up with an appearance on “Canada A.M.,” a morning television news show.

“We have to adjust the system to the realities of today,” he told anchorman Keith Morrison. “Too many people have become too dependent on government.”

These comments came less than two weeks after Human Resources Minister Lloyd Axworthy released a “discussion paper” of proposed reforms for Canada’s social services, including reduced federal support for welfare, unemployment insurance and university education.

The question now is how--or whether--Chretien will follow the rhetoric with action. The anti-deficit hard line is a sharp turnaround for his Liberal Party. In last year’s election

campaign, which swept them to power and ended the nine-year reign of the Progressive Conservatives, the Liberals emphasized job creation, suggesting that the economy could grow out of the deficit.

But once in office, Chretien, like President Clinton, found hoped-for programs to reshape the national economy and diminish child poverty held hostage by the increasing share of federal revenue used to pay interest on the debt.

Canada’s public debt is about $700 billion, nearly equal to its gross domestic product. By contrast, the U.S. debt is about 70% of GDP.

The most persistent criticism of Chretien in his first year was that he did little to tackle the deficit or Canada’s other significant problems. Nonetheless, the economy has improved, and Chretien’s approval ratings in the polls are above 60% and rising.

Jeffrey Simpson, a columnist for the Globe & Mail national newspaper and one of the country’s leading political analysts, believes that Chretien’s unquestioned integrity and low-key style account for much of his popularity. But, Simpson said, the prime minister’s unambitious agenda also helped; Canadians may have been looking for an interregnum after more than a decade of aggressive, often controversial leadership by former prime ministers Brian Mulroney and Pierre Elliott Trudeau.

“For a year now, they’re consulting, they’re reviewing, they’re preparing, they’re quarter-mastering themselves for the battles to come,” Simpson said of Chretien’s team. “We’ll see how many battles they’ll actually fight.”

And there figures to be a battle if the government goes ahead with cuts. Business leaders, economists and anti-poverty advocates are already raising the decibel level over whether the deficit should be closed by tightening programs or increasing taxes.

As the debate plays out, Chretien will have to balance it with his campaign to keep Quebec’s separatist government from winning a referendum on independence in the province some time next year. Serious cutbacks in popular programs will be used by the separatists to try to persuade Quebeckers they have little to lose by leaving Canada.

Climbing Government Debt

Interest on Canada’s federal debt is accumulating at $85,000 per minute, 24 hours a day. Spending cuts and/or tax increases are the nation’s main alternatives to promote growth and decrease debt.

Note: 1993-94 provincial data are estimates

Source: Canadian Department of Finance