Toronto’s spending watchdog has balked at following a directive from the city manager to all departments to slash their spending five per cent — and council’s audit committee has backed him up.

But Coun. Doug Holyday, who chairs the audit committee, said the move signals how difficult it will be to deal with the $500-million shortfall expected in next year’s operating budget.

City manager Joe Pennachetti instructed city departments in October to trim their 2010 budget proposals by five per cent, but some city agencies such as the board of the Toronto Zoo have already said they won’t follow the directive in budget proposals.

Auditor general Jeffrey Griffiths acknowledged the directive in submitting his budget proposal to the audit committee. But he nonetheless requested a 2.9 per cent increase over his 2009 budget, which would bring his department’s projected spending for 2010 to $4.5 million.

Griffiths notes in his request that 97 per cent of his spending goes to salaries, once the fees of the city’s external auditors are subtracted.

Chopping his budget five per cent would mean cutting his spending by $219,000, and laying off two of his staff, Griffiths said.

He noted that the mayor’s fiscal review panel, which reported nearly two years ago, recommended increasing the auditor general’s budget. And he said his office has saved the city about $91 million over the past five years by identifying wasteful or fraudulent activity, and proposing efficiencies.

Holyday said he agrees that cutting Griffiths’ budget would be unwise. But he warned that other departments and agencies will also resist the five per cent directive.

“They can all make a case to make themselves special in their own eyes, or in somebody’s eyes,” Holyday said. “I don’t know how that’s going to help us with the problem that we don’t have enough money to pay our bills.”

Coun. Mike Del Grande said the auditor general would be better funded if his office were allowed to keep all or a portion of the money it saves the city.

The audit committee recommended approving Griffiths’ budget proposal, without dissent.

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