Alberta must target government wages, benefits in post-COVID world

Due to the economic fallout from COVID-19, Alberta’s government finances will face significant challenges. As such, the Kenney government must carefully review all spending, including compensation for government workers. Indeed, Alberta spends a substantial portion of its budget on the wages and benefits for its employees who (on average) enjoy both a wage and benefit premium over their private-sector counterparts.

Specifically, a recent study found that government workers in Alberta (federal, provincial and local) received 9.3 per cent more (on average) in wages than their private-sector counterparts 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 earlier retirement, higher job security and more generous pensions than the private sector.

Of course, doctors, nurses and first-responders are working tirelessly on the frontlines of the COVID pandemic. Their work has been, and will continue to be, crucial as society works toward a return to normalcy. With that said, the return to normalcy will also mean coming to terms with enormous fiscal challenges—namely, sizeable budget deficits.

At a basic level, there are three ways governments can tackle their deficits—spending cuts, tax hikes or some combination of the two. Research by Harvard economist Alberto Alesina and his colleagues has shown that spending cuts are a less-economically harmful way to tackle deficits compared to tax hikes. Put simply, governments should focus on spending reductions to lower deficits.

In Alberta, when reviewing spending to move towards a balanced budget, it’s difficult to ignore government-worker compensation since it accounted for 55 per cent of Alberta’s operating expense in 2018-19. Bringing government-sector compensation in line with the private sector at the provincial level would be a good start. Let’s take a closer look at the province’s fiscal outlook.

The COVID recession will lead to lower tax revenues for government as individuals and businesses earn and spend less. The recession will also result in higher spending as the province spends directly in response to the pandemic and existing social programs adjust to the changing economic conditions.

A recent forecast by RBC estimated that the Alberta deficit will reach $18 billion in 2020/21—more than twice what the government projected in its recent budget.

Unfortunately, Alberta’s government debt levels were already high before the pandemic. Due to persistent provincial budget deficits, net debt (total debt minus financial assets) has grown approximately 205 per cent since 2007/08 to an estimated $36.6 billion last year—that’s before the economic impact of COVID-19. A high 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.

To minimize the economic costs of further debt accumulation in the wake COVID-19, the government in Edmonton should bring provincial government compensation more in line with the private sector to control its spending and lessen the deficit, without reducing services for Albertans.