Salaries and benefits often account for more than half of all provincial government spending

Even before the recession, the federal government and several provinces were facing significant budget deficits. Now due to COVID-19, the estimated federal deficit will eclipse $250 billion this year while the provincial deficits combined will reach a projected $63 billion. To help slow the flow of red ink and move towards balanced budgets, governments can rein in compensation for government workers who (on average) enjoy a wage premium over their private-sector counterparts.

A new Fraser Institute study found that government workers in Canada at all levels (federal, provincial and local) received 9.4 per cent more (on average) in wages than their counterparts in the private sector (in 2018, the latest year of comparable data). This analysis controls for factors such as age, gender, education, industry and type of work.

In addition to the wage gap, the study also found that government workers enjoy greater job security, earlier retirement and more generous pensions than in the private sector.

Of course, doctors, nurses and first-responders worked tirelessly on the frontlines of the COVID pandemic—their work will continue to be crucial as society returns to normalcy. And governments should provide competitive wages and benefits to attract high-quality employees to administer and deliver government services.

But at the same time, governments must be conscious of the fact that government resources are scarce, and of the need to maintain sustainable finances. When the COVID crisis ends, governments across the country must repair their finances.

So what’s the best way to do that?

Research by late Harvard economist Alberto Alesina and colleagues has shown that if governments try to reduce deficits by increasing taxes, they wind up hurting the economy more than if they attempt to reduce deficits by reducing government spending. Put simply, if governments want to achieve balance without unnecessarily harming growth prospects, they must rein in spending.

Considering that the salaries and benefits of government workers represent a significant share of expenditures for every government in Canada (provincially salaries and benefits often account for more than half of all government spending), serious plans to get spending under control must necessarily address the size of the government wage bill.

Again, governments could find substantial savings by bringing the compensation of government workers more in line with comparable workers in the private sector—without necessarily reducing the quality of services for Canadians.

It’s also again worth noting that government debt was already rising well before the COVID recession. Due to persistent deficits, total federal and provincial net debt (total debt minus financial assets) has grown approximately 45 per cent since 2007/08 (inflation-adjusted) to an estimated $1.5 trillion last year—crucially, before the economic impact of COVID-19. Deficits this year will add to the already growing debt burden.

A large debt burden can have negative effects on economic growth, diverts billions of dollars way from important services such as health care, and can lead governments to raise taxes to pay off the resulting debt interest payments.

Clearly, the salaries and benefits of government workers represent a significant share of spending for every government in Canada. As such, bringing the compensation of government workers more in line with the private sector is one of the most important ways governments can help control spending, slow the accumulation of debt and put their finances on a more sustainable path.