Controlling government wages crucial to Ford’s deficit-reduction plan

It’s no secret that Ontario faces challenges with its annual operating budget deficit and growing government debt. Last year, the deficit clocked in at $7.4 billion. Another deficit is forecasted for 2019/20, which would make 12 straight years in the red. Largely as a result of all these deficits, Ontario’s net debt (a measure that adjusts for financial assets) now stands at a whopping $24,000 per person.

The Ford government has promised to eliminate the deficit and significantly slow the pace of debt accumulation in Ontario over the next five years. But the government’s ability to shrink the deficit over time, and eventually eliminate it, will hinge largely on its ability to control the compensation of government employees, as salaries and benefits of government workers consume about half of all provincial spending.

But there’s good news. A recent Fraser Institute study suggests there’s room for savings in this area. In this study, my colleagues measured the wage differential between similar government-sector and private-sector workers, using a somewhat-wonky statistical technique called “multivariate regression.” This approach, essentially, allowed us to compare workers in the two sectors of the economy who were similar with respect to age, education, industry and full time/part time status—an “apples to apples” comparison between workers in the government sector and the private sector.

The result? Government-sector workers enjoy a wage premium of 10.3 per cent compared to similar workers in the private sector.

And of course, wages are just one component of total compensation. Across other dimensions of compensation, government workers (on average) have an advantage over workers in Ontario’s private sector. Government workers retire two years earlier (on average), experience job-loss less frequently, and take more days off for personal reasons than workers in the private sector.

Of course, it’s important for the government to be a good employer and competitive on compensation to attract and retain talented people to deliver high-quality government services. However, decisions about hiring and compensation levels also must be made with an eye on Ontario’s challenging fiscal circumstances.

The Ford government’s plan to balance the budget over the next five years relies on an extended period of spending restraint. Whether or not the government’s plan is successful will depend on some factors outside its control. A bad recession halfway in, for instance, would likely derail the government’s deficit-reduction plan.

Even if the economy cooperates and there is, for instance, no recession, the government will still need to follow through on the spending restraint laid out in its first budget, to shrink and eventually eliminate the deficit.

So, because government compensation represents roughly half of provincial government expenditures, gradually reducing the government-sector wage advantage (again, a substantial 10.3 per cent) is one crucial way the Ford government can stick to its timeline and keep its promise of eliminating Ontario’s deficit and slowing the accumulation of debt, which weighs heavy on Ontario taxpayers.