Ontario must align government compensation with private sector

The economic fallout from COVID-19 will pose significant challenges to Ontario’s government finances. As such, the Ford government must carefully review all its spending, including compensation for government workers. The province spends a significant portion of its budget on the wages and benefits of 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 Ontario at all levels (federal, provincial and local) received 10.3 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 private-sector workers.

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 include 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 Harvard economist Alberto Alesina and colleagues has shown that spending cuts are a less economically-harmful way to tackle budget deficits compared to tax hikes. Put simply, governments should focus on spending reductions to lower deficits.

In Ontario, when reviewing spending to move towards a balanced provincial budget, it’s difficult to ignore government-worker compensation since it accounts for about half of Ontario’s program spending. Bringing government-sector compensation in line with the province’s private sector 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 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 changing economic conditions.

In its March fiscal update, the Ford government projected a revised budget deficit of $20.5 billion in 2020/21. However, the economic assumptions behind this estimate were quite optimistic. Indeed, our colleagues estimated that the deficit could easily reach closer to $30 billion this year.

Unfortunately, Ontario’s debt levels were already high before the pandemic. Due to persistent deficits, net debt (total debt minus financial assets) has grown approximately 121 per cent since 2007/08 to an estimated $353.7 billion last year, before the economic impact of COVID-19. A high debt burden can have negative effects on economic growth, divert billions of dollars away 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, the Ontario government should bring provincial government compensation more in line with the private sector, to control spending and reduce the deficit without reducing services to Ontarians.