A decidedly conservative Paul Martin spoke recently to the Montreal Board of Trade and promised tax relief and debt reduction. This stands in stark contrast to the Paul Martin who promised a slew of new spending over the past little while. You name it and Mr. Martin has basically promised it. The issue for Canada is which Paul Martin will show up at the cabinet table when the next budget is being presented.

His Montreal speech featured a trio of fiscal objectives for his soon-to-be formed government: tax relief, spending restraint and debt reduction. More specifically, he plans to reduce the size of our national debt relative to gross domestic product (GDP) from its current level of roughly 40% to 25%. However, Mr. Martin's policy objectives will be much more difficult to achieve than his ascendancy to Sussex Drive.

Using private sector forecast data from the Toronto-Dominion Bank's Economics Department, we constructed estimates of Mr. Martin's policies. Our baseline for analysis is the status quo: keeping spending and taxation at currently planned levels, as TD Bank forecast. In addition, since it's inappropriate for Mr. Martin to articulate goals beyond a first mandate, we assume a full five-year first term. Under those assumptions, the debt-to-GDP ratio will reach 29.5% in 2008 if he directs all surplus funds to debt relief.

For Mr. Martin to achieve his 25% target by the end of 2008, he would have to cut spending by $12.5-billion annually or $62.5-billion in total, an 8.9% reduction in program spending in the first year alone. Obviously, the same results could be achieved through tax increases, or if Mr. Martin were lucky enough to enjoy lower than expected interest rates. It seems doubtful that interest rates will be substantially lower than they are today; more probably, they will increase modestly over the coming years. Add the fact that Martin has already committed himself to tax relief and the balancing act will have to be done through cutting spending.

The problem is that Mr. Martin has already announced a plethora of new spending programs, including more money for health and education, increased defence spending, more monies for research and development, a new mechanism for municipal infrastructure, and a national home care program, among others.

The story worsens when a modest tax relief initiative is included in the mix. If we assume that Mr. Martin pursues a five-year, $50-billion tax relief program, half the purported value of his 2000 tax cuts, spending would have to be reduced by a whopping $105-billion over five-years. Put differently, the $10-billion annual reduction in revenues would require $21-billion in annual spending reductions to achieve the 25% debt-to-GDP target.

He could find some monies in redundant and counterproductive programs like regional development and corporate welfare, but finding between $12.5-billion and $21-billion would require reductions in core programs, including income support.

Now, we're all in favour of substantially clipping the federal government's wings. By all estimates, the size of government in Canada is well above the optimal. The problem is that Mr. Martin promises everything to everyone. More spending for those who prefer larger government; less taxes and debt for those more fiscally minded.

Hopefully when the real Paul Martin stands up, he will choose a set of policies that improve Canadians' economic and social lives. By that measure, Ottawa's only course of action is to reduce the size of government through spending reductions and tax relief. Never mind the debt payments; increases in economic growth generated by smaller, smarter government will reduce the effective burden of the country's accumulated debt.