Canada Should Follow New Zealand’s Fiscal Lead

New Zealand may be kicking off a fiscal trend: boldly downsizing its public-sector payrolls to trim unwieldy government deficits. Its new coalition government, elected last October, is moving to eliminate 15,000 […]

New Zealand may be kicking off a fiscal trend: boldly downsizing its public-sector payrolls to trim unwieldy government deficits. Its new coalition government, elected last October, is moving to eliminate 15,000 civil service jobs. David Seymour, ACT Party leader, minister for regulation, and a Frontier Centre policy director in Saskatchewan from 2007-2011, notes that the cuts will only return staffing to its level in 2017, when Jacinda Ardern’s Labour government was elected. There were 63,117 full-time equivalent (FTE) staff in New Zealand in 2023, an increase of 33.6 per cent since 2017 — compared to population growth of only 9.4 per cent over the same period. 

New Zealand’s public-sector growth under Jacinda Ardern parallels the growth in this country’s federal civil service after Justin Trudeau’s government took office in 2015. Canada’s population has grown 12 per cent since then. But the federal employee headcount is up 100,213 or 39 per cent.

Recent figures from the Parliamentary Budget Office put Ottawa’s direct personnel cost at $60.7 billion in fiscal 2021-22, which averages out to $170,000 per employee (there were at last count 357,247 employees). If that’s what the extra 100,000 civil servants hired since 2015 are costing per head, total spending on them is $17 billion annually. Cutting back to pre-Trudeau levels would thus substantially eliminate Ottawa’s “primary deficit” — its revenues minus its non-interest spending — which currently stands at $23 billion annually.

Many economists argue that as government spending, civil servant numbers and deficits all grow and regulations proliferate, a crowding-out effect can reduce a country’s future potential output. It seems more than likely that rapid expansion of the federal government has added to the economic malaise Canada is facing, with investment, real wages and per capita GDP all falling. Over the last eight years Canada’s real economic growth has been 0.98 per cent per year, compared to a population growth rate of 1.4 per cent — which means per capita GDP has declined.

Recovery from civil service bloat is not without precedent. In the Greek debt crisis of 2007-08 an almost bankrupt Greek government had to reduce the cost of its civil service by 31 per cent (which it did by reducing numbers by 18 per cent and compensation by 13 per cent). GDP declined 20 per cent and there was a financial bailout from the European Central Bank. Since 2015, however, Greece’s economy has grown by 25 per cent, its bonds have returned to investment grade and it has a primary budget surplus of 2.1 per cent.   

There is ample Canadian precedent, as well, for seeking to slash our recently swollen federal civil service. In the final half-decade of the Harper government, from 2010 to 2015, the total federal employee headcount fell 9.2 per cent. Cutbacks in the early Chrétien years were even more aggressive: 40,000 jobs representing 11 per cent of the total. According to a 2019 Fraser Institute Bulletin, within five years, the government turned a five percent of GDP deficit into modest surpluses.

Rapid reduction of federal government employment — if only toward historical norms — is the most obvious first step in returning to budget balance and helping end Canada’s economic stagnation.

 

Ian Madsen is senior policy analyst at the Frontier Centre for Public Policy, where Peter Holle is president.

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