We can’t fix the public sector in one budget

TheGlobeandMail.com – Opinions – Co-operation, not confrontation, is the path to fiscal salvation
Published on Wednesday, Mar. 03, 2010. Last updated on Monday, Mar. 08, 2010.   Karim Bardeesy

For a hint of the turmoil to come between Canada’s public-sector workers and government, look to Europe.

The centrepiece of Ireland’s recent budget was salary cuts across the board: Nurses, the national police force and parliamentarians were all caught in the dragnet. The British government is trying to trim its public payroll, while austerity measures aimed at resolving a debt crisis in Greece have led to riots.

These governments are tackling public-sector pay, something Canadian governments at all levels, in the face of entrenched, enduring structural deficits, are starting to eye. The public sector, which has had it relatively good during the recession, should take its lumps – or so the thinking goes.

It makes for an attractive target. By most estimates, 70 per cent to 80 per cent of provincial government spending goes on salaries and wages. Public-sector work features benefits that have withstood the recession, including defined benefit pension plans, which are fading from the private sector. Public-sector wage settlements have outpaced those in the private sector for seven of the past nine years.

But asking whether public-sector workers are paid too much is not the question. Cutting the wage bill in the short term, even if it could be justified, would be tough, yield few savings and come at considerable political cost. Moreover, it distracts attention from the more important question: How do we pay for public services a generation from now?

It’s not clear whether there’s a public-sector wage premium requiring redress. Studies show that public-sector workers do get paid more, all things considered, but lower skilled workers and women benefit the most, says University of Toronto economist Morley Gunderson. Moreover, average private-sector salary settlements in Canada exceeded those for public-sector workers during the 1990s.

Nevertheless, cash-strapped governments feel the need to lead by example and reduce program spending, of which salaries make up a significant part. If they want to cut their pay bill immediately, they can try to: cut pay for workers directly; use the back door and contract out services to private-sector providers; reduce transfers to lower levels of government, hospitals, school boards and universities and colleges, and have them carry out the cuts by proxy; ask or force workers to take unpaid days off; or lay off workers or reduce their numbers through buyouts, retirement and attrition. Each measure, of course, involves more pain than gain.

Wage restraints for senior employees not covered by collective agreements (such as the salary freezes for MPs announced in yesterday’s Throne Speech) are part of any government’s deficit-cutting cookbook. But they don’t generate many savings.

More work is being contracted out, removing a lever that governments once had to reduce costs. Collective agreements between public-sector workers and governments often limit a government’s ability to contract out work. And most include pension benefits and obligations that are almost impossible to reduce.

Governments may damn the contracts and legislate pay cuts, but that’s a political last resort, and a 2007 Supreme Court decision recognizing a limited constitutional right to collective bargaining makes it a legal gamble.

For those agreements up for renegotiation, a government can try to go to arbitration. But arbitrators rarely make the government’s ability to pay the only consideration.

Governments can cut transfers to those institutions such as cities and hospitals that deliver public services but aren’t allowed to run deficits. That may force layoffs, but the public may recoil at any decline in service quality.

Finally, some governments have already locked in wage increases. In Ontario, contracts with relatively generous pay increases have been signed with nurses until 2011, and with most teachers until 2012.

So, in the short run, an immediate focus on salaries won’t help governments solve their fiscal challenges. There will be large deficits for years, regardless of how governments treat public-sector pay.

But the need for cost control is clear. Even if economic growth returned to previous levels, government expenditures are still on a pace to permanently exceed revenues.

And even a modest pay increase in the broader public sector can be dear: Ontario says it would cost $150-million to give every school worker a 1-per-cent salary increase.

In addition to structural deficits, governments face a demographic challenge that forces them to provide services for more retirees, while having access to fewer tax revenues because the proportion of working-age people is falling.

This puts the future of public-service provision at risk.

So the failure of the short-term wage-cut path doesn’t absolve union leaders and other public-sector workers. To the contrary, they should feel a new sense of urgency.

Older public-sector workers will need to ask themselves whether they’re prepared to pay more into their pension plans, accept less generous wage settlements or change the way they provide services in order to keep these services going and ensure that their successors still have the promise of career advancement and a secure retirement.

Governments and taxpayers also need to revise their assumptions. They must ask whether tax increases are necessary to keep funding for public services adequate. Or they’ll need to start choosing which services they no longer expect to be publicly funded.

It’s easy to focus on politically expedient short-term battles between government and the public sector. The future of services that Canadians value will depend on those who’ll start the larger conversation.

kbardeesy@globeandmail.com

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1 Comment

  1. It is time for all levels of government in Canada to start valuing public servants and stop wasting money by squeezing their salaries. Let me give you my case as an example.
    I was a senior analyst with the federal government making slightly under $70,000 in 1996 when my department was downsized and my job was cut. I was given the option of taking a lower paid job at $60,000. I decided to leave and open my own consulting business.
    Since 1996 I have been doing virtually the same work that I did when I was employed by the government, but I have earned an average of $350,000 a year. In other words, taxpayers have already pay me $4.5 million over the past 13 years .If the federal government had kept me and given me an abnormally high increase of 5% per year, it would have taken 45 years for the government to spend the same amount of money on my salary as it has already paid me. Even worse for the taxpayer is that I expect to earn another $4-$5 million over the next 10 years in contracts. It has been a great deal for me but awful for the taxpayer. I have to pint out there were five people in my former unit and all of us left the government and opened our businesses and continue to earn similar incomes.

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