Feb 20, 2009

Government wage freeze damages economy


One more sign as to how out of touch the February 17 BC Budget is with the rest of the world.

The BC Budget includes a two year wage freeze for people who get their pay from the provincial government. The Budget documents say:

No funding is included in the fiscal plan for the next round of public sector wage negotiations.

This wage freeze sets the BC government apart from – well – pretty well every other country in the world. Other countries are spending far more to get their economies moving without taking it out of public employees.

Unlike most governments, many companies have been pushing their employees to accept wage cuts. Sherry Burns, the Executive Vice President for the BMO Financial Group, says that is a really bad idea. Her thoughts are summarized in the 23 January 2009 edition of the publication, The Bottom Line.

Not since the 1930s have we seen this phenomenon. The last time salary freezes were popular was when we attempted to reduce government budgetary red ink. Lower personal income means lower personal consumption, which in turn leads to reduced production, sales, and revenue for business. In consequence, capital spending plans are shelved and prices fall. This wage-price deflationary spiral is very difficult to stop and it points to continued weak economic activity.

Page eight of the Budget and Fiscal Plan explicitly outlines government plans to remove $400 million per year from spending for 2010/11 and 2011/12 categorized as “Remove allocation for future wage increases.” The $800 million to be taken from public employees is actually more money than the entire deficit the government plans to have for the next two years. In other words, over three years this government is actually taking money out of the economy rather than providing stimulation.

The damage will not just be to public employees, it will be to the economy.

Topics: ,