Employment Data Shows Canada’s Public Sector Getting Fatter

Commentary, Economy, Matthew Lau

The most recent employment data from Statistics Canada shows a troubling trend. In Q3-2018, the ratio of private sector to public sector employees (excluding the self-employed) dipped to lows that – except for the period of massive “stimulus” spending by the federal and provincial governments in 2009/10 – have not been seen since Canada’s fiscal crisis of the 1990’s.

Outside of the 2009/10 government spending boom – during which the federal government grew nominal program spending by 17 percent and posted a $55.6 billion deficit – you have to go back to 1996 to find a time when government employment was as high as it is today, relative to private employment.

The first half of the 1990s was marked by unsustainable big government. Many Canadians will recall a prominent Wall Street Journal editorial in 1995 which – under the headline “Bankrupt Canada” – suggested that Canada had become “an honorary member of the Third World in the unmanageability of its debt problem.”

To be sure, Canada’s public finances today are in better shape than during the fiscal crisis of the 1990’s. But the latest Statistics Canada job numbers ought to be a warning signal to politicians and taxpayers that the size of government is rising far too quickly. Public sector growth is headed in the wrong direction.

By contrast, in the mid-1990s Canada was actually climbing out of a fiscal hole dug by decades of government over-spending. The ratio of private employees to government employees sunk below 2.90 in the early 1990s, but rose to 3.40 by 1998 and hovered around that level for close to a decade.

That decade was one of great prosperity for Canada. As the government cut taxes and spending, the private economy boomed – hence the strong growth of private employment relative to government employment during this time. Notably, from 1997 to 2007, Canada led the G7 in business investment growth and GDP growth. The poverty rate significantly declined.

Over the same time period, Canada’s employment growth rate was nearly double that of the OECD, and significantly stronger than employment growth in the United States. Harvard political economist Alberto Alesina, a top expert on fiscal policy, cited this Canadian success story as an example of “expansionary austerity” – the economy expanded rapidly as the size of government shrank.

Importantly, public finances improved quickly as well. In 1994/95, the federal deficit was $36.6 billion (equivalent to about $57 billion today, after adjusting for changes in consumer prices). Just three years later, the deficit was erased and the government turned a surplus of $3 billion. The federal debt-to-GDP ratio fell by more than half, from 72 percent in 1994/95 to just under 33 percent in 2007/08.

Today, Canada is headed in the opposite direction, with big government deficits and a public sector that is expanding much too quickly. The current Liberal government inherited a balanced budget in 2015 and promptly sent the country into annual deficits of almost $20 billion, with no end to deficits in sight. The recent decline of private employment relative to government employment is most pronounced in Alberta.

Alberta’s public sector in Q3-2018 was 70,000 higher than in Q3-2014, an increase of 20 percent. Over the same time period, the private sector lost around 30,000 jobs, which represent a two percent decline. The oil price drop in the second half of 2014 and bad government policy – including higher taxes and stricter regulation of workers – are to blame for this unhappy result.

The federal and provincial governments should be shrinking the public sector instead of making it fatter. In the 1990s, cutting government spending resulted in less debt, more growth, and greater prosperity. Cutting government spending today would deliver similar positive results.