OTTAWA - Paul Martin is expected to break up the unwieldy department of Human Resources, create a new Homeland Security department and launch an extensive program review to find new sources of funds to pay for an ambitious agenda.

The Liberal leader and his transition team have been holding secret discussions on the make-up of a new Cabinet and the transfer of power to a Martin-led government, which faces the challenge of smaller surpluses and heavy spending commitments made by Jean Chrétien in his last weeks in office.

Sources say Mr. Martin is likely to split up Human Resources Development Canada, which was the subject of a damning audit in 2000 that exposed $1-billion of questionable spending in Liberal-held ridings.

Details of how the department will be broken up are being kept under close wraps by the Martin team, but sources say a new agency could be created to run the Canada Pension Plan, tax credits and Employment Insurance. There had also been some talk of having those functions handled by Revenue Canada.

All social policy functions that fall under HRDC will be part of a new department.

There is also likely to be a separate labour department. Other parts of HRDC that involve grants and contributions could be transferred to an expanded Industry Department, likely to be headed by either Anne McLellan, currently the Health Minister, or Ralph Goodale, the Minister of Public Works.

"There are a number of things the department does well in terms of policy, such as the doubling of parental benefits, but the problems have been in administration, particularly the difficulties of those managing the programs," said a senior official.

"Its unwieldy size has been a difficulty that has persisted since it was melded together."

Government insiders also say Treasury Board officials are preparing a plan to create a new security department that would be in charge of Canada Customs, the Coast Guard, emergency preparedness, the RCMP and Canadian Security Intelligence Service.

Sources said the Homeland Security plan must be approved by Mr. Martin's transition team and it is possible the new department may not be created until after the next election, expected in April.

Mr. Martin made it clear in a policy agenda document released at the Liberal leadership convention that he wants to cluster security-related responsibilities into a single department, similar to the U.S. Department of Homeland Security.

There are also indications Mr. Martin will create a new urban affairs department, an area he has vowed to make a priority. The department would also be responsible for housing and the homeless.

It has been suggested Mr. Martin may eliminate the Heritage Department, turning over the communications aspects to a beefed up Industry Ministry and put cultural programs in another department or even an agency.

It is expected the Industry Department would become a much more powerful ministry that would be responsible for international trade, communications and commerce.

To pay for his agenda, including $2.5-billion for cities, the incoming prime minister plans to launch a sweeping program review in the upcoming federal budget.

Insiders say the economy is not growing quickly enough to bring in the tax revenues necessary to pay for Mr. Martin's plans and he must look for savings in existing programs.

With a forecasted surplus of only $300-million and billions of new spending commitments made by his predecessor, Mr. Martin has to cut spending department by department.

Officials say he will announce a far-reaching program review in the February budget but any spending cuts will be unveiled in his second budget if the Liberals win another majority government.

Sources say Mr. Martin will assign specific responsibilities to MPs who are left out of the new Cabinet, which is expected to number between 25 and 30 members.

An inner core of 10 or 12 powerful ministers would review all major government initiatives.

MPs left out of Cabinet could be put in charge of special files, such as a white paper on national defence or ideas to combat child poverty.

They could even be sworn in as Privy Councillors so they could attend Cabinet meetings.

Mr. Martin also intends to use parliamentary committees for policy studies that can then be taken to Cabinet for final decisions. It is part of plans to reform the way government works, which one Martin official stressed "is not a slogan invented for political purposes but will be a defining aspect of the new government."

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