Alberta wage freeze good first step in getting province’s finances back on track

Alberta Finance Minister Joe Ceci recently announced a wage freeze for public-sector managers and non-unionized public employees. The freeze will maintain 2015 salary levels for 7,000 employees until “at least April 2018.” While this is a welcome first step, the estimated $57 million in savings over two years is less than one tenth of the $624 million of new spending the government introduced upon taking office last year. The government will need to take further, much bolder steps to reform and reduce provincial spending in the months ahead to get the province’s finances back on track.

The government’s current predicament highlights a central budgetary challenge perpetually facing Alberta: it’s a lot easier to increase spending during good times than it is to ratchet spending down when times are hard.

Consider that between 2004/05 and 2015/16, the government increased program spending by roughly 100 per cent, more than double the combined rate of inflation plus population growth. As a result, even as oil prices averaged $88 per barrel between 2008 and 2015, the provincial government managed to run operating deficits in all but one year. Now that oil prices are down, the hangover from the spending binge is particularly painful.

To get Alberta’s fiscal house in order, the government will need to follow up the recently announced wage freeze for non-union public-sector employees with much bolder actions that strike at the root of Alberta’s spending problem. For instance, the province will likely need to extend spending restraint beyond management, and apply it to the much larger group of public-sector employees who belong to unions. With 175 public-sector collective agreements covering 50,000 public employees expiring soon, the government will have ample opportunity to trim spending on wages and benefits. Given that public-sector workers earn 6.9 per cent more than comparably educated and experienced private-sector counterparts in Alberta, it would be hard to justify further increasing their wages while private-sector employees face salary cutbacks and layoffs.

Some may argue that it’s unrealistic to expect a newly elected NDP government to exercise significant restraint on spending—particularly when it comes to public-sector wages. This argument, however, ignores some relevant recent history.
 
For an example of how to turn around a difficult fiscal situation, Alberta’s government needs look no further than the experience of its NDP cousins in neighbouring Saskatchewan. During the 1990s, the Romanow government faced an even more daunting fiscal situation. Provincial net-debt had climbed to 28 per cent of GDP by 1991/92—an 11 percentage point increase over the previous year—leaving the province teetering on the brink of insolvency. The government responded by reducing nominal program spending  10 per cent over a three-year period, returning the government to budget balance by 1994/95.

The Chretien Liberals of the 1990s provide another illuminating example of how to fix a bad fiscal situation. While the Liberals ran on an ambitious platform of spending promises, the economic reality of the mid-1990s got in the way. The newly elected government inherited a $42 billion deficit for the 1993/94 fiscal year. To get the deficit under control, a government-wide program review was undertaken in 1994. Over a three-year period, the government was able to eliminate the deficit primarily through spending reductions. Sharp spending reductions weren’t part of the plan when the Liberals came to power, but they became a central and salutary component of the Chretien-Martin legacy.

After a rocky first year of spending increases and tax hikes, the recently announced wage freeze for non-unionized employees is hopefully an indication that the Alberta government is now willing to take concrete actions to get spending under control and tackle the province’s fiscal challenges. If the province fails to follow up with increasingly bold steps to reform and reduce provincial spending, we will face still greater fiscal challenges down the road.