Canada's Housing Bubble

Mar 12, 2010 Grant Robertson and Barrie McKenna theglobeandmail.com

Out to cut costs, the government is drawing a bead on the public sector. Will it avoid mistakes made in the past?

Parliament Hill, with its iconic Peace Tower, is the picture-postcard embodiment of Canadian government. But to see where the country is actually run, you must venture to places much less majestic, such as Place du Portage, a hulking grey mass just across the Ottawa River in Gatineau.

Nothing like its regal counterpart, Place du Portage's four concrete buildings contain a maze of drab offices that house thousands of public servants in several federal departments. But this is where government unfolds. And it was here that, this week, a series of meetings began that may send ripples through the bureaucracy for years to come.

Illustration by Jay Taylor for The Globe and Mail

On Tuesday, about 75 employees of Public Works and Government Services were summoned to a conference room and given some bad news. As the government looks to slash costs in the public service over the next five years, part of a plan Finance Minister Jim Flaherty unveiled in last week's budget, everything is under scrutiny.

First to go: perks. Rank-and-filers who enjoyed discount parking were told that was over. This upset some of those in the room; others breathed a sigh of relief. The news could have been a lot worse.

And there is little doubt that it soon will be. After a mass recalibration of the private sector that resulted in tens of thousands of layoffs, lost benefits and in some cases the destruction of pension plans, the pain is shifting to the sprawling public sector, which includes the three levels of government as well as health care, education and public enterprises. It encompasses almost 3.6 million workers, whose ranks have risen almost 30 per cent in the past decade. They represent more than 21 per cent of Canada's labour force of 16.8 million and earned $176.5-billion last year.

Ottawa is looking to cut its public-sector spending by $8-billion over the next five years. After dipping into its coffers to provide unprecedented stimulus to an ailing economy – $30-billion last year alone – it's time to pick up the tab.

With revenues falling and costs rising, the Stephen Harper government faced going $170-billion more into debt by 2015 if something serious wasn't done. Now, the federal payroll, which alone has swollen by 29,000 since Mr. Harper took office, is the target of belt-tightening not seen since the nineties when Paul Martin wielded the axe as finance minister for Jean Chrétien.

No longer wondering if cuts are coming, public-sector employees now are afraid of just how far they will go. The government has tried to play down its plans as mere nip and tuck, a bit of trimming here and there. But as anyone in that session at Place du Portage surely realized, you don't save $8-billion in the parking lot.

In fact, Queen's University public-policy specialist Tom Courchene thinks there will be an even bigger hit if the Conservatives win their majority. “I wouldn't be surprised,” he says, if they went “to the polls on this [budget] – and then the real cuts will come.”

Stockwell Day is the man holding the knife. Recently appointed Treasury Board President, the one-time auctioneer has been charged with stripping $17.5-billion from federal spending in the next five years, including the $8-billion from the public-service ranks.

It is not the first time he has been in this position. Twelve years ago, Mr. Day was the architect of cost-cutting in the government of Alberta premier Ralph Klein. As provincial treasurer, he used ballooning oil revenues and deep cuts to public spending to pull Alberta out of the red. The public-sector money he now must find includes $6.8-billion in cuts announced in the budget plus an additional $1.26-billion that was part a strategic review last year, which asked federal departments to chop 5 per cent from their budgets.

Groups such as the Canadian Federation of Independent Business, which pushes for tax cuts and smaller government, argue that public-sector wages are on average higher than in the private sector. A CFIB study last year stirred controversy in Ottawa by suggesting the gap ranges from 8 to 17 per cent, with federal wages proportionately higher than those for other levels of government. (However, the disparity has narrowed since the 1990s. A study by Statistics Canada in 1997 showed the average man working in the public sector earned 34 per cent more than in the private sector.) Yet, to avoid angering its unions and the millions of voters who may be affected by cutbacks – Mr. Harper doesn't have a majority, after all – the government has been treading carefully. Wage increases negotiated for next year will remain, although departments will simply have to find the money somewhere.

Afterward, however, the thinking in Ottawa is that a legislated wage freeze will be necessary if the $8-billion figure is to be reached – and even that may not be enough. There are also fears the cutting will attack the pension plans the public service holds dear and Mr. Flaherty has described as “handsome.”

Freezing wages and fiddling with pensions could set the stage for serious labour strife.

“I guess it's the easiest way for governments to try to deal with it, or try to show the public they're doing something,” says Ken Georgetti, president of the Canadian Labour Congress. “But it sure is frustrating to think that this crisis is going to be paid for on the backs of people … working for us in the government. It's not going to do enough, and it's not fair. It's patently unfair.”

Attrition will be relied upon heavily to save money. The 400,000-plus federal employees alone lose 10,000 to 14,000 people every year. As employees retire or move on, the vacancies they cause just won't be filled. But if that's not enough, politicians and administrators may be betting that voters who lost their jobs in the private sector over the past two years won't really mind stronger measures, especially if the only option seems to be raising taxes.

Which is why civil servants such as Donna Lackie and Larry Rouseau feel like they have a target on their backs.

“As of right now, nothing's trickled down,” says Ms. Lackie, a Public Works employee in Ottawa. She has been in the public sector for 22 years and knows her $70,000 salary may be modest in comparison with other industries. But the job security and gold-plated pension outpace what her private-sector friends enjoy.

“It's like anything else,” she says of the cuts. “You don't want to talk about it too much because then it becomes real.”

The 53-year-old Mr. Rouseau works in the translation department of Statistics Canada. When the public sector was slashed under Mr. Chrétien and Mr. Martin, he lost his stomach for government employment and left for the private sector, only to return seven years later, lured back by the benefits and the chance to retire early.

Protesting against federal job cuts, members of the Public Service Alliance of Canada march on Parliament Hill in 1986. Will the scene soon be repeated?

Charles Mitchell

Protesting against federal job cuts, members of the Public Service Alliance of Canada march on Parliament Hill in 1986. Will the scene soon be repeated?

On average, a public servant stops working at the age of 58, four years before private-sector employees. But fearing the worst, federal employees across the country have taken to decorating their workplaces with green stickers that read: “Hands off our pensions.”

With tough times ahead, it is difficult to shake the feeling that more is yet to come. Labour agreements in government do not allow for mass job cuts without first negotiating costly buyouts, so the savings must come from somewhere, and cutting though attrition will mean departments get smaller and workloads increase.

Ottawa has already mandated that over the next five years, any savings found will go toward fighting the deficit, rather than be allocated or reinvested into other programs.

“Right now, we're in a situation where people are stressed out, they're tired,” Mr. Rouseau says. “People who don't even have their full 35 years of service are saying, ‘To hell with it. I've got 30 years, I'm getting out.' “

Police officers in Athens stand in front of banner saying,

Milos Bicanski/AFP/Getty Images

Police officers in Athens stand in front of banner saying, "They are taking us to dead end," on Thurs., March 11.

Worldwide crunch

In these austere times, Canada is by no means alone in putting the public service under the microscope in an effort to spare tax increases. Cash-strapped governments around the world are putting civil servants on the front line in the battle against the enormous deficits they ran up during the recession.

Similar tales of austerity can be seen in Britain, Ireland, France, Germany, Italy and – the worst-case scenario – Greece, which is trying to stave off bankruptcy. In the United States, at least 42 state governments have cut jobs, frozen new hires, slashed wages or forced workers to stay home without pay as they strive to close gaping holes in their budgets.

Britain's austerity measures are expected to target what is seen as its bloated public sector with “sharp” job cuts, according to the London-based Chartered Institute of Personnel and Development. Because the public work force is nearly two-thirds female, the institute said this week, the end result could be Britain's “worst employment prospects for women in a generation.”

But the deficit-fighting is most acute in the United States, where nearly 200,000 state and local government jobs have vanished since the recession began. Because virtually all state administrations can't run deficits, they have moved quickly to trim the ranks, with tens of thousands more expected to go.

In the country's most dire deficit crunch, California has opted for measures that hark back to the “Rae Days” of 1990s Ontario. Just as the recession-plagued government of premier Bob Rae saved money by telling employees to stay home, without pay, a few days a month, the Golden State yesterday marked another of its “Furlough Fridays” for tens of thousands of government workers. Californians keen to renew a driver's licence, to apply for jobless benefits or to tap into countless other state services were simply out of luck.

So far, they have, grudgingly, accepted the three down days each month as a necessary evil. “It's a more humane way to contain costs and spread around the pain,” says Gary Burtless, a former top official with the U.S. Labour Department who is now a senior fellow at the Brookings Institution in Washington. “A lot of taxpayers and voters are probably asking, ‘Is this enough?'“ Pay freezes and cutting through attrition have become strategies common to most countries. France has cut 100,000 jobs over the past two years, and was beset by a strike of public workers in January after the Nicolas Sarkozy government said it would replace only every second employee who retires. Ireland has taken some of the most dramatic steps of any European nation, saying it will roll back pay for civil servants instead of merely freezing it and imposing a pension “levy” that equals a 7-per-cent drop in wages.

And in Greece, which has been scrambling to control costs, riots erupted after the government approved an 8-per-cent pay cut and chopped 30 per cent off the annual bonuses public employees have enjoyed for decades.

Cuts, of course, are not a bulletproof solution. Just as job losses in the private sector left people with little cash to prop up consumer spending, less public spending leaves governments walking a tightrope in their bid to avoid stifling the economic recovery they so desperately need.

This is a particular concern in the U.S., where consumer spending is the largest single engine of the economy.

“When states cut their work forces, that takes demand out of the economy, and this has an impact on the pace of the recovery,” says Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities in Washington. “The irony is that the need and demand for government services goes up during a recession, but revenues are going in the opposite direction.”

At a glance, the $8-billion over five years Canada wants to take out of the public sector seems meek in comparison with what other countries are doing. But that's at the federal level alone – provincial and local governments are also cutting back with varying degrees of success – and, of course, it may just be the beginning.

Some federal jobs have been cut already – most notably the 245 vacant political appointments that Mr. Day said this week would not be filled. The savings will be slim – about $1-million a year – but it was an easy way to act quickly and send a message.

“They've got to start with something quantifiable, so that's what they've done,” says Ms. Lackie, the Public Works employee. “But at the end of the day, that will have no impact. None of us even interact with those positions. If somebody took a big giant eraser and rubbed them out, nobody would even know that they had been there.”

The big question now is whether there is much more easy money to retrieve. The man who engineered Canada's last big downsizing of the public sector doesn't think so.

Peter DeVries was the Finance Department's director of fiscal policy under Mr. Martin, and cut costs significantly in 1994, chopping 10 per cent from department budgets and converting a deficit equal to nearly 7 per cent of gross domestic product into a surplus by 1997.

He now says that finding $8-billion in savings in the next five years is no mean feat, although it may be possible with a legislated wage freeze, no new hires when people retire and a buoyant economy. “I don't believe that there's a lot of slush money sitting in the system because departments' budgets have been strained over the years,” he explains.

“The problem is if it's done with attrition, what you're basically saying then is that ‘I have a number of people looking after this program, I am now trying to do with less.' First of all, why did you have that many people in the first place if you can do it with a lot fewer people? And if you can't, then you're going to have to cut the program, or cut the services offered.”

How to cut Today's government offers few details on how exactly it will trim, but in the 1990s, Finance officials reviewed all programs so they knew where money could be saved. Various departments were given 10 per cent as a target to eliminate from their budgets, not knowing that Mr. DeVries and his colleagues had drafted a list of programs they figured could lose some weight.

“We just used it in the event that they came back to us and said, ‘Well, we looked at everything, and we can't find anything,'“ he recalls. “We basically said, ‘Well, that's fine. Here's a list of everything we think you can look at, and go from there.'“ The strategy worked, eliminating 40,000 federal jobs, many through attrition, and saving the money needed to get the budget back on track. And yet it was flawed.

Canada still enjoys international acclaim for what it achieved back then – Mr. Martin is especially popular on the European speech circuit these days – but Mr. DeVries argues that the job could have been done better.

First, each department looked only hard enough to meet its target, and went no further. Agriculture subsidies, defence contracts and unemployment benefits took the big hit, but some programs that could have been cut altogether were only trimmed.

“If we said ‘$50-million,'“ he says, “they went and looked for $50-million. … There were some programs that were eliminated, but not anywhere near what I think they could have done.”

As a result, when the good times returned about 10 years ago, and the government wanted to make amends with voters by loosening its purse strings again, programs on life support bounced back with a vengeance.

No one seemed to realize what that would mean down the road, Mr. DeVries says. The cuts “did get us through the crisis,” he adds, “so on that basis it was a success. … But when you look at it years later, we didn't really achieve lasting savings.”

Has the Harper government learned the lesson that short-term pain should lead to long-term gain? At the moment, it's hard to see just how a minority government can cut much of anything when faced with opposition parties that don't support its budget.

But with average Canadians still dogged by money worries and the Conservatives itching to get serious about their austerity drive, government employees are less than optimistic.

“We see nothing but doom and gloom on the horizon for the public sector …,” says John Gordon, president of the Public Service Alliance of Canada, even if “we don't know how severely, or from what angle, it's going to come.”