Tax & Spend: Ottawa’s bargaining with CRA employees could start a wage-spiral spinning

Employers across the country are grappling with workers’ demands for pay rises to offset the nagging effects of rising inflation.

Those employers include the government of Canada, and those workers include Canada Revenue Agency’s 35,000 employees who are members of the Public Service Alliance of Canada (PSAC) – and whose demands include a 33 percent wage increase over three years .

Contrast that call with Bank of Canada Governor Tiff Macklem’s advice in July that companies should not agree to multi-year wage increases based on a continuation of today’s high inflation rates. “So as a company, don’t plan for the current rate of inflation to persist,” he told members of the Canadian Federation of Independent Business. “Don’t build that into longer-term contracts. Don’t build that into collective agreements.”

Not surprisingly, PSAC doesn’t take that advice to heart, but says in a statement that the governor’s comments show he “…protects the mega-profits of his corporate friends while punishing workers and undermining their bargaining power.”

Undeterred, PSAC is pushing for that 33 percent pay rise. That increase includes an initial 9 percent increase, ostensibly to align CRA pay scales with similar jobs at other agencies, and then annual increases of 4.5, 8, and 8 percent over three years. (That’s an increase of almost 33 percent.)

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The outcome of these (currently suspended) negotiations will set the pace not only for other negotiations within the federal public service but also for the private sector, PSAC believes. “As Canada’s largest employer, the federal government must lead by example and show it’s here for Canadians by setting the standard for wages and working conditions that don’t leave workers behind,” the union said in an emailed statement.

The assessment of the union is correct, one suspects. If Ottawa does agree to a 33 percent hike, or anything close to that, what basis would it need to have to take a harder line in other negotiations? And if PSAC succeeds in pushing through a wage increase of this magnitude, other public sector unions and private unions will have a new benchmark to aim at in their bargaining efforts.

For now, the federal government seems reluctant to set that precedent as talks stall in early September. In a statement, the CRA said it seeks to reach a collective bargaining agreement that is “fair and reasonable for employees and Canadians.” And in their earlier contract negotiations, the CRA and PSAC agreed to a much lower pay rise of 10.8 percent over four years.

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But that was before inflation started to heat up. Will the CRA now hold the fort and heed Mr. Macklem’s advice? There is cause for concern given the Trudeau administration’s apparent enthusiasm for the increase in federal bureaucracy.

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Responding to a recent issue of Tax and Spend on the rapid expansion of federal public service among Liberals, an online reader noted that federal civil servant pensions are putting an additional strain on public coffers. Another reader argued that the cost of these annuities doesn’t matter since they are fully funded.

The first reader is right; the second not. According to the most recent government accounts, there is an unfunded liability of US$162.4 billion related to public sector pensions. This massive shortfall is the result of Ottawa’s policy of writing promissory notes for its contributions to its employees’ pensions by the year 2000, instead of actually paying out cash. Since 2000 the government has made actual payments; these pension obligations are fully funded.

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But the pre-2000 commitments are not and must be paid for out of general revenue. Even the (nominally) fully funded commitments could cost the government. By law, Ottawa is required to pay out public sector pensions even when liabilities exceed contributions and their investment returns. A protracted string of asset losses could theoretically add to Ottawa’s bill.

Hypotheses aside, there is one decidedly non-theoretical factor driving up the cost of Ottawa’s pension obligations: inflation. Public sector pensions are fully indexed to inflation with a lag. This will increase current pension contributions over time and increase pre-2000 unfunded liabilities.

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Deconstruct inflation: A great visualization of what drove inflation in August can be found here Twitter thread by Trevor Tombe, Professor of Economics at the University of Calgary. TL;DR: Energy costs have gone down and food costs have gone up.

follow me on twitter @PatrickBrethour or ask your tax question here.

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