The economic fallout from COVID-19 will pose significant challenges to government finances in each of the four Atlantic Provinces. As such, governments must carefully review all spending, including compensation for government workers. Each provincial government spends a significant portion of total spending on 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 Atlantic Canada at all levels (federal, provincial and local) received 11.9 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 front lines 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 require coming to terms with enormous fiscal challenges—namely, sizeable 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 late-Harvard economist Alberto Alesina and colleagues has shown that spending cuts are a less economically harmful way of tackling deficits compared to tax hikes. Put simply, governments should focus on spending reductions to lower deficits.

In the Atlantic provinces, when reviewing spending to move towards a balanced budget, it’s difficult to ignore government-worker compensation. Compensation is the single largest expense for all governments in the region, exceeding 50 per cent in some provinces. Bringing government-sector compensation in line with the private sector at the provincial level would be a good first step in the fiscal recovery.

Let’s take a closer look at the region’s fiscal outlook.

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

Nova Scotia, New Brunswick and Prince Edward Island had all been projecting balanced budgets this year, a situation that’s no longer realistic. A recent forecast by RBC projects significant provincial deficits across the region, topping $2 billion in Newfoundland and Labrador.

Unfortunately, provincial debt levels were already high before the pandemic. A recent study demonstrated that all provinces in the region have significant debt loads. Until recently, persistent deficits have been driving increased net debt (total debt minus financial assets). Indeed, since 2007/08, debt loads have increased between 26.1 per cent in Nova Scotia to a high of 95.6 per cent in New Brunswick. And this is 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 interest payments.

To minimize the economic costs of further debt accumulation following COVID-19, governments in Atlantic Canada should bring provincial government compensation more in line with the private sector to control spending and lessen deficits, without reducing services to residents.