More compensation restraint would help ease Ontario’s budget troubles

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Appeared in the Waterloo Region Record, April 9, 2015

Amid a gathering fiscal storm, the Ontario government will soon table its budget for the coming fiscal year and beyond. There’s a lot riding on getting things right.

A recent study found that debt is growing at an unsustainable rate and there are real concerns about the government’s ability to deliver on its plan to eliminate the deficit by 2017/18. Further credit downgrades and higher interest payments could be on the horizon if the government fails to fix its financial troubles.

Fundamentally, Ontario’s financial woes stem from the provincial government consistently spending more than the revenues it collects. Paring back spending is therefore an important step towards a balanced budget. And because spending on the compensation of government workers (including wages and benefits) consumes more than half the provincial budget, it’s a key place to find savings.

In 2013/14, the latest year of available data, compensation spending totalled $60.2 billion (or 52 per cent of government program spending), up from $40.9 billion in 2005/06.

That’s an increase of 47 per cent on compensation spending for Ontario government workers, outpacing the growth in all other program spending (39 per cent) and the combined rate of inflation (15 per cent) and provincial government job growth (11 per cent) during the same time period.

The fact that compensation spending grew faster than the number of government jobs suggests that a portion of the new compensation spending is to pay for higher wages and benefits for existing government workers—as opposed to hiring more workers such as nurses, doctors, and teachers.

Even after accounting for both inflation and provincial government job growth, compensation spending still increased by 12 per cent from 2005 to 2013.

All of that suggests increased compensation spending may not be translating into more or better public services for Ontario taxpayers. This is particularly the case if the compensation spending is simply to pay for ever higher wages and benefits for government workers.

Consider a recent Fraser Institute study—reinforced by decades of academic research—that found government workers in Ontario enjoy 11.5 per cent higher wages, on average, than comparable workers in the private sector. (This wage premium accounts for a worker’s education, length of time in the workforce, type of job, and other relevant factors.)

And the overall compensation premium is likely greater after accounting for the more generous non-wage benefits (such as pensions, earlier retirement, and job security) that the government sector also enjoys.

Despite recent steps by the provincial government to restrain compensation spending growth, compensation spending is still responsible for nearly three-quarters of new program spending from 2009/10 to 2013/14. It also now consumes a larger share of government resources.

Had compensation spending remained at its 2009/10 share, the province would have spent and borrowed $14.7 billion less. In 2013/14 alone, the budget deficit would have been $4.4 billion lower than what was actually the case.

Indeed, further restraint on compensation spending would help ease the pressure on Ontario’s finances. Ensuring that the wages and benefits of provincial government workers are in line with private-sector norms for similar positions would be a good first step towards getting things right.

The upcoming budget is an opportunity to take that step and help calm the fiscal storm.

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