The Conservative government is talking up the possibility of much deeper cuts than originally planned as they push federal departments to cut billions in annual spending.
Ottawa's relatively healthy finances have earned plaudits for Canada internationally, but preserving that reputation will be an increasing challenge.
Fear that Europe's credit troubles will spread remains a concern and Bank of Canada Governor Mark Carney warned this week that risks to Canada's financial system have "increased markedly" since June.
The 2011 federal budget launched a process in which all federal departments would work toward a goal of reducing Ottawa's $83-billion direct program spending budget by at least five per cent.
As the deadline for that work approaches, Conservative MP Brent Rathgeber told The Globe and Mail that he and other members of the Conservative caucus are urging cabinet ministers to cut more aggressively.
"Everything should be on the table," he said, listing federal funding for the CBC and the Royal Alberta Museum as areas where savings can be found.
A committee of cabinet ministers led by Treasury Board President Tony Clement is currently reviewing reports from all federal departments. The departments were asked to submit two reports: one outlining what a five-per-cent cut would like and another describing a 10-per-cent cut. The final decisions will be announced in the 2012 budget.
"I'm hoping for closer to 10 than to five," Mr. Rathgeber said. "I'm not alone."
The Edmonton-St. Albert MP recently made headlines by using a Parliamentary process to ask the CBC to provide the salaries and expenses of Peter Mansbridge, George Stroumboulopoulos and Rick Mercer.
While the government faces some internal pressure to cut more deeply, in Parliament the opposition benches urge the government to focus on jobs via new spending. Back-to-back months of job losses in Canada have fuelled those opposition demands for new stimulus measures like infrastructure spending and a freeze on Employment Insurance premiums – which are scheduled to rise on Jan. 1.
One of Ottawa's main challenges in eliminating the deficit – estimated at $31-billion for the current year – is that the Conservatives have pledged to keep increasing health transfers to the provinces by six per cent a year until at least 2015-16.
That is also the year Finance Minister Jim Flaherty now says the government will return to balanced budgets, a target that is a year later than what the Conservatives promised during the 2011 election campaign.
Speaking Friday in Toronto, the minister was non-committal as to whether the government is leaning more toward a five- or 10-per-cent cut. He insisted that Canadians are less concerned with the year the deficit is erased as long as it is on track to be eliminated.
"It's possible we could get there in 2014-15. Right now the numbers would show a small deficit that year and a surplus in 2015-16. I'm not alarmed by that," Mr. Flaherty said.
But TD chief economist Craig Alexander says even with the government's November decision to push back the time-line in light of slower economic growth, Ottawa will need be aggressive in cutting program spending.
"I still think it's going to be more challenging than people think," he said.
Similarly, BMO deputy chief economist Douglas Porter noted that while Canada is currently enjoying "economic golden child" status in light of its banking sector, strong AAA credit rating and a central bank Governor with "near-rock-star status," reality isn't so rosy.
In a research note, he pointed out that Canada now lags the U.S. in some key indicators like retail sales and employment.
"Not to snow on anyone's parade, but is it so obvious that Canada's economy is exceptional these days?"
With a report from Janet McFarland in Toronto