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The reason cutting public sector wages hurts the economy so badly is that, like almost all low- and middle-income earners, public sector workers spend what they earn in their communities. The bulk of what public sector workers earn goes to businesses providing items like groceries or housing. When you take that money out of the community, everyone feels the pain.
Ottawa (21 May 2020) — If Canadians want the economic problems caused by the COVID-19 pandemic to get worse, conservative think tanks are ready with suggestions. All too predictably, they are using the financial impact of the COVID-19 pandemic to justify calls for drastic cuts to government spending, including public sector wage rollbacks and retroactive cuts to pensions.
Based on past experience, wage rollbacks and other austerity policies will make the economic situation even worse. The most recent example is the impact of the austerity policies that were implemented as countries began to emerge from the 2008 economic downturn.
Austerity policies implemented over the last 10 years are widely seen to have damaged the economy, even by some organizations that were previously proponents of austerity. This is only the most recent example. In the late 1990s in Ontario, a combination of the federal spending cuts introduced by Paul Martin and provincial spending cuts introduced by Mike Harris sent the province into a double dip recession.
Wage cuts take money out of the economy
The reason cutting public sector wages hurts the economy so badly is that, like almost all low- and middle-income earners, public sector workers spend what they earn in their communities. The bulk of what public sector workers earn goes to businesses providing items like groceries or housing. When you take that money out of the community, everyone feels the pain.
Even conservative voices, including Shiu-Yik Au — an assistant professor at the University of Manitoba’s Asper School of Business, and a Manitoba Progressive Conservative Party member — have challenged this thinking. In a recent opinion piece, he said that austerity measures could trigger a further economic slump. He also noted that a provincial budget is not the same as a household budget, saying that “every dollar that the province saves is a dollar (or more) that someone else in the province will not earn.”
Pension cuts a form of theft
The suggestion that the federal government unilaterally cut pension plans is even worse. Pensions are deferred wages that people have already earned. In that respect, they are no different than money in a savings account. When pensions people have already earned are cut because employers don’t want to pay their share, whether those employers are in the public or private sectors, it is a form of theft.
Like a cut in wages, cutting pensions will harm the economy by taking money out of communities. Seniors who previously had enough to get by will find themselves living in poverty.
Austerity policies can increase government deficits
The irony of using austerity policies to reduce government deficits is that they often do the reverse. When austerity policies like wage rollbacks cause an economic downturn, government revenues can drop by far more than what was saved by cutting spending.
What’s needed is decent pay and working conditions for everyone
While conservative think tanks use wages and working conditions in the private sector to justify their attacks on workers in the public sector, they don’t actually care about private sector workers. If they did, they would be pushing for very different policies.
They would be pushing for stronger labour laws so workers speaking out about unsafe working conditions couldn’t be fired. They would be pushing for increases in the minimum wage so people working full-time aren't living in poverty. They would demand a dramatically expanded Canada Pension Plan so everyone could live in dignity after they retire.
But conservative think tanks are doing none of those things. Instead they push for austerity policies that will hurt the overwhelming majority of Canadians so that the handful of wealthy corporations and individuals that fund those think tanks can get even wealthier.