By Howard Schneider
Washington Post Foreign Service
Wednesday, February 25 1998; Page C12

Canadian finance officials said today they would propose the first balanced budget in 30 years, declaring victory over deficits that threatened the country's solvency at the start of the 1990s.

"Canadians said when we took office, 'Clean up this mess,' and that is what we have done," Finance Minister Paul Martin said as he prepared to present a fiscal 1999 budget that, after years of austerity, includes tax relief for students, the poor and middle-income families; a new scholarship program; and a fund to begin paying down the national debt.

As a sign of the buoyant mood among Martin's Liberal Party colleagues, Prime Minister Jean Chretien teasingly presented him with a bottle of black ink to fill in the bottom line of the current budget, joking that the use of that color, as opposed to red, "is very rare" in public finances.

The latest budget caps Canada's climb from the financial basement of the Group of Seven of the world's most developed nations to one of its economic leaders.

Partly through painful spending cuts, partly through tax increases, and partly through the luck of an economic boom that has married growth with low inflation and low interest rates, the country overcame deficits that hovered around $30 billion annually when the current government took office in 1993.

Though small in dollar terms by U.S. standards, that level of deficit spending was so high as a percentage of the Canadian economy that analysts compared the country's public finances to that of the Third World and wondered whether a Mexican-style currency devaluation was in the offing.

That didn't happen. Instead, Martin and Chretien embarked on a deficit-cutting program that tested the popularity of their Liberal Party even as it produced positive financial results.

They reneged, for example, on campaign promises to eliminate a national sales tax – the government wanted to keep the money for deficit reduction – and they also slashed some of the country's most cherished social programs, including Medicare, and benefits for seniors, welfare and unemployment insurance. Defense spending, likewise, was cut so low that critics said the country was approaching a situation where it could no longer offer much help in international peacekeeping or meet its existing obligations to NATO and other organizations.

Politically, the spending cuts nearly cost Chretien's party its majority status during last summer's federal election, and they remain a sore point among those who feel the austerity measures ran counter to the Canadian consensus on social spending. Whether from patients waiting longer for emergency-room care or unemployed workers left with reduced benefits, anger over the cuts has run high.

In recent months, Martin and Chretien have faced a problem of a new sort: how to divide the spoils of financial success without going overboard and making too many promises.

With critics on the left arguing for more social spending, and those on the right advocating that more be applied to tax relief and debt reduction, the Liberals decided to split the difference.

Part of the money earlier cut from health care has been restored, and the spending plan released today included the first installment of a "Millennium Scholarship Fund" that by the end of the year is supposed to provide more than $2 billion to help Canadians pay for higher education.

There also are increases in tax credits for child care and care for the elderly, and other tax cuts for low- and middle-income families. In addition, more than $2 billion is set aside in a contingency fund that will be used for emergencies or, if it is not spent, be applied to the outstanding federal debt. Canada's ratio of outstanding debt to the size of its economy is a staggering 68 percent, the second worst among the G-7 nations.