Tough times for public institutions

TheGlobeandMail.com – Opinions – Tough times for public institutions:  The public-private gap suggests labour trouble ahead
Published on Tuesday, Dec. 15, 2009. Last updated on Wednesday, Dec. 16, 2009.   Jeffrey Simpson

Suppose you run a business, or are organizing your household budget. You discover two disconcerting trends. First, 70 per cent to 80 per cent of your spending is locked in but still rises at, say, 3 per cent a year. Second, your income has gone in the tank. Next year, revenue might recover somewhat but certainly won’t increase by 3 per cent.

What to do? Since you can’t touch the 70 per cent to 80 per cent, you could cut from the remaining 20 per cent to 30 per cent. You could stop doing things altogether. You could try to increase your revenue. Or you could go to your (un)friendly bank and borrow.

This crude depiction illustrates the dilemma facing hospitals, universities, schools, libraries and all other public institutions today and in the coming period of restraint.

This dilemma is stark. Wages, salaries and benefits account for 70 per cent to 80 per cent of their budgets. Their employees are unionized. Unlike the private sector, where unionized employees have lost jobs or taken real income reductions, public-sector unions (nurses, teachers, municipal employees and transit workers, to name a few) have locked in long-term deals at 2 per cent, 3 per cent or 4 per cent. In the case of Ontario university faculty, adding in promotions means a wage bill increase of 5 per cent to 6 per cent. Teachers are getting 3 per cent a year for three years.

This is the gap plaguing Canada. The private sector has been reeling, so the revenues it throws up to fund public services have declined. But the costs for public services keep rising in large part because public-sector salaries are not tied to the private economy.

The results of this gap are slowly becoming apparent, and they will become much more apparent when governments unveil their budgets early next year. School boards will be cutting everywhere except teacher levels and salaries. Universities will be doing likewise, while increasing class sizes that are already too large. Hospitals will be scrambling to cut wherever they can outside the wage bill.

In other words, those who manage public-sector institutions will be slicing where they can in the 20 per cent to 30 per cent of their budgets that are not consumed by wages, salaries and benefits.

This will necessarily happen – it has already begun – because provincial governments everywhere are in the red. So is the federal government. Municipalities are already living on the fiscal margin, jacking up property taxes in many parts of Canada far beyond the inflation rate.

Public institutions looking for budget increases from their provincial masters will be disappointed. In some cases, they will be shocked, because they won’t be getting any increases; indeed, their transfers might well be cut in absolute terms.

Ontario hospitals, to take one example, are planning for a 2-per-cent increase or no increases at all. Either way, cuts will come in that 20 per cent to 30 per cent of the budget not locked into the wage bill. Smart hospitals should plan for no increase, given the province’s sickening deficit. The same advice applies to school boards, universities and community colleges.

Some provincial deficits are chronic, or at least long term. Ontario’s is a case in point. So is Quebec’s, where a recent study showed that, if spending kept increasing at 4.7 per cent – as it has for the past decade – Quebec would accumulate $36-billion in deficits in the next five years, a huge additional burden for a province already heavily indebted.

The public-private gap suggests labour trouble ahead, since public-sector unions are hostile to any adjustment in contracts that run ahead of the public’s ability to pay. (See last summer’s CUPE strike in Toronto.) And yet, what choice do governments have but to restrain increases, or cut back, in transfers to the institutions they fund when their revenues go in the tank?

They could raise taxes, of course, which is what Ottawa should do to eliminate its deficit, as two former Finance Department officials argued yesterday in this paper.

But just as the Harper government has the opposition parties spooked about even hinting at tax increases, so higher taxes provincially would be a tough sell, although Quebec did announce earlier this year a sales tax increase for 2010.

The public sector’s wage bill versus the private sector’s (in)ability to finance it will be among the defining features of politics in the next few years.

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