Matthew Lau: To Reduce Provincial Deficits We Must Shrink the Public Sector

This is the second of two prize winning essays by Matthew Lau, 1st place winner of the AIMS on Campus 2015 Essay Competition. Here Matthew argues growing provincial debt in Atlantic Canada is a problem in need of urgent addressing, and has been driven by a bloated — and still growing — public sector. 

public sector chart

With the federal government’s daunting $616 billion in net debt hanging over the heads of taxpayers, it is easy to forget that for many Canadians, their province’s finances are in even worse shape.  In fact, of the four Atlantic provinces only Newfoundland and Labrador has a lower debt-to-GDP ratio than the federal government.

Combined, the provincial governments of the Atlantic provinces hold $40 billion in net debt and there is little reason to believe this number will go down.  In 2014-15, Nova Scotia ran its fourth consecutive deficit, New Brunswick its seventh, and Prince Edward Island its eighth.  Newfoundland and Labrador, which will increase its debt by over $1 billion in the 2015-16 fiscal year, doesn’t plan to balance its budget until 2019-20.

A primary reason for the dismal financial state of affairs in the Atlantic provinces is the excessive cost of government.  Newfoundland and Labrador spends more per capita on government programs than any other province – in fact, its program spending per capita will exceed the thriftiest province’s, Quebec, by 70% in the 2015-16 fiscal year.

Overspending isn’t isolated to just one Atlantic province, unfortunately.  Program spending relative to GDP ranged from 20.2% to 26.0% in the Atlantic provinces in 2014-15.  For the other six provinces, it ranged from 14.3% to 19.4%.

While some have suggested that a lesser ability to take advantage of economies of scale (for example, in the area of infrastructure spending) may account for the poor financial performance of Atlantic provinces relative to the rest of Canada, this cannot fully explain away the excessive costs incurred by Atlantic provincial governments.

A report published in March 2015 by the Canadian Federation of Independent Business, which examined government wages in 2010, found that the average provincial government employee in Canada received a 21.2% premium over comparable private sector workers when both salaries and benefits were taken into account.

In each of the four Atlantic provinces, the premium received by provincial government employees exceeded the national average of 21.2%.  The largest discrepancy existed in Prince Edward Island, where compensation spending on provincial government employees was 28.6% higher than the cost of comparable private sector workers.

The high premiums paid by Atlantic provincial governments to public sector workers is only half of their problems when it comes to compensation spending.  According to the Atlantic Institute for Market Studies, in 2013, every Atlantic province had a higher number of government employees per capita than the Canadian average.  “The Average across Canadian provinces is 84 employees per 1,000 and Nova Scotia has 99 (85 for NB; 95 for PEI and 109 for NL),” noted AIMS president Marco Navarro-Genie earlier this year.

Compensation for government employees is becoming a hot topic in Canada.  Earlier this month, the Fraser Institute found that across all three levels of government in Canada, government workers received a 9.7% wage premium over comparable private sector workers despite enjoying much better pensions (almost all defined benefit), retiring several years earlier on average, being absent much more often, and enjoying significantly better job security.

If politicians in Atlantic Canada are serious about repairing the state of their provinces’ finances, they should take a serious look at compensation spending.  The fact that in each Atlantic province, both the number of government employees per capita and the cost premium per employee is higher than the national average, suggests that there exists a lack of fiscal restraint from Atlantic provinces when it comes to compensation spending.

By Matthew Lau

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