Ontario government should not give government workers large pay increases

This is the third installment of a blog series examining the fiscal challenges Ontario continues to face following the recent surprise announcement of an operating surplus in 2021/22.

The Ford government recently received some positive news about its finances for 2021/22. After forecasting a $13.5 billion operating deficit for 2021/22 in the spring budget, Ontario actually ran a small operating surplus last year.

But the end of Ontario’s nearly decade and a half of uninterrupted deficits should not be a cause for complacency. In reality, Ontario’s finances will be under pressure on both the expenditure and revenue side of the ledger and will almost certainly require spending restraint and frugal public management to prevent the re-emergence of large budget deficits.

Let’s start by looking at government spending. As is widely known, there has been substantial inflation over the past year. A recent report from RBC forecasts that inflation will hit 6.8 per cent in Ontario in 2022. If this persists, the government will be under intense pressure to give government workers large pay increases.

Resisting this pressure is key to improving Ontario’s fiscal future. Recent research shows that government workers in Ontario enjoy substantially higher wages and benefits compared to similar private-sector workers. If it can keep the growth of the government wage bill in check, the Ford government can reduce this wage premium and help protect the province’s bottom line in future years.

More generally, government spending will also be under pressure due to an aging population. All else equal, per-person spending on health-care costs will continue to increase as more Ontarians enter their 60s, 70s and 80s. Age-related health-care spending is another headwind that will make it harder for the government to maintain balanced budgets in years ahead.

And crucially, Ontario’s present and future governments shouldn’t count on help from the revenue side to offset these challenges. Partly due to the aging population, Canada and Ontario’s long-term growth projections are dismal. In fact, the OECD forecasts Canada will have the weakest inflation-adjusted per-person economic growth among all advanced economies between 2030 and 2060.

Government revenue growth is closely connected to economic growth. Even though projections over such a long time period are by their nature imprecise, the OECD’s warnings about weak long-term growth suggest that in the absence of significant pro-growth policy reform, it would be unwise for governments across Canada including Ontario to count on long-term revenue growth to offset spending pressures.

Despite a surprise surplus last year, Ontario continues to face long-term fiscal pressures that will make it hard to maintain balanced budgets and prevent debt accumulation in the future. Unless the government adopts policy reforms to help drive growth and exercises spending discipline, the province will likely fall back into deficit.