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Local government wages and the CFIB's municipal manipulations

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After analyzing "research reports" issued by the Fraser Institute or the Canadian Federation of Independent Business (CFIB), I usually end up shaking my head in disbelief.

Do they really need to so grossly distort and manipulate the statistics to make their arguments?

The answer is invariably "yes". That's because the underlying facts are often so at odds with their claims, the only way they can make these claims is with gross manipulation, highly selective use of numbers, misrepresentation and sometimes also erroneous calculations.

The CFIB's "Big City Spenders" report released today (after being showcased by Pierre Poilievre in the House of Commons this week) is yet another example of this.

They claim that operating spending by municipalities has increased at unsustainable rates in Canada and in Canada's largest cities because it has increased at rates above inflation and population growth.

They blame this increase in spending on local government compensation for municipal employees which they claim is significantly higher than for comparable jobs in the private sector.

Every single one of these claims is wrong if they are considered in any sort of reasonable way.

Let's look at each of their claims in turn:

1. The CFIB says municipal government operating spending increased by 55 per cent after adjusting for inflation from 2000 to 2011 compared to population growth of 12 per cent.    

They also report on similar trends for Vancouver, Toronto and Montreal -- although for Montreal for some reason they start in the year 2006 and don't factor out a pension adjustment that caused a large spike in expenses on paper in 2011.

Why did the CFIB use the year 2000 as a starting point?  In another example of selecting statistics to fashion your claims, they chose 2000 because that was a recent relative low point for municipal spending.

And why compare municipal operating spending to population growth and inflation to judge whether it is sustainable? That's because the only suitable measure of whether this level of spending is sustainable -- GDP, economic output or income -- doesn't support their claims.

If we compare operating spending by municipalities to GDP, which is a broad measure of ability to pay, it remains within historical averages of close to 3 per cent of GDP. In 2012, operating spending by all municipalities in Canada amounted to just 3.1 per cent of GDP, the same that it was 20 years ago, and down from the 3.3 per cent reached in 2009 during the depths of the recession. This ratio was higher during the recession because GDP had dropped and governments sensibly embarked on stimulus spending to prevent a depression. This was before their misguided adventures in austerity (which presumably the CFIB supports, but have caused devastation to small businesses in countries elsewhere).

Municipal operating spending has also increased because of further downloading of responsibilities by federal and provincial governments onto municipalities. The biggest increases in spending by municipalities over the past two decades have been for housing, health, social services and environment -- all areas where federal and provincial governments also have responsibility, as the FCM's recent State of Canada's Cities and Communities report demonstrated.

Is an increase from 2.6 per cent of GDP in 1981 to 3.1 per cent of GDP in 2012 unsustainable?   Yes, I suppose so, if this rate of increase continues for another few centuries. The same argument the CFIB makes for municipal spending could be made for corporate profits but far moreso. After adjusting for inflation, corporate profits have increased by 245 per cent since 1992, doubling as a share of GDP and growing at a rate of 10 times Canada's cumulative population growth of just 23 per cent since 1992.

At this rate of growth, corporate profits will overwhelm our economy and constitute more than 100 per cent of GDP within 60 years. Is this an absurd claim? Yes, but far less than the CFIB's claim that municipal operating spending is unsustainable because it has grown faster than population growth during past decade.

And as far as spending by big cities growing too fast, their operating spending has increased at a slower pace than overall municipal government spending while their responsibilities have arguably grown at a faster pace.

The chart above shows just how local and municipal government operating spending and spending on employee compensation has changed over the past two decades as a share of the economy. There have been some bump-ups during recessions, but otherwise they've remained pretty stable. However, at the same time there's been a decline in the trend of overall total government spending from a high of 50 per cent of GDP during the 1990s recession down to below 40 per cent recently. There have been increases during recessions but otherwise the trend has been steeply down over the past two decades. Sources are listed at the bottom of this blog post. I'd be happy to provide the Excel data files if anyone wants them.

2. The CFIB claims this increase in spending by municipalities is a result of excessive spending on employee compensation.

Statistics Canada does have figures on total employee compensation by local governments but the CFIB chose to ignore these figures, no doubt because it doesn't suit their claims. Total compensation figures by local governments the data is only available from 1991 and also includes aboriginal governments and school boards, without separating them out.

These statistics show that total employee compensation by the local government sector amounted to 5.5 per cent of GDP in 1991 (and 5.8 per cent of GDP in 1992) and then has pretty much declined since then, dropping down to 4 per cent of GDP in 2007. It increased as a share of GDP during the recession as the underlying economy itself shrank, but has declined since then and was 4.26 per cent of GDP in 2012 -- a drop of 23 per cent since 1991. Is this unsustainable growth? No at all. More like unsustainable decline if we assume these trends will continue.

The same is true of other measures of government finance, at the local government or total government level:

-  Local government taxes as share of the economy are down from 3.8 per cent in 1991 (and 4 per cent in 1992) down to 3 per cent in 2012 -- a decline of over 20 per cent.  In fact, local government taxes as a share of the economy at 3.04 per cent are now close to their multi-decade low of 2.9 per cent reached in 2006, and they've declined as a share of economy since 2009.

-  And total government (federal, provincial, local and FN) spending as a share of the economy has dropped by over 20 per cent: from 50.6 per cent in 1991 down to 40.4 per cent in 2012. Total government spending and particularly local government spending bottomed out in the past decade as a share of the economy to the lowest it had been in at least 30 years.

3. Now onto the claim that local government wages and salaries are the cause of this increase. 

The CFIB doesn't provide any evidence on this beyond its own previous flawed studies (see CUPE's Battle of the Wages report for a critique of the CFIB Wage Watch report and a replication of their study with more credible results). However, Statistics Canada's figures from actual payroll data show that average wages paid by local governments have increased at a lower rate than overall average wages and at rates above the rate of inflation over the past 20 years:

-  Average weekly wages paid by local, municipal and regional government rose from $622.67 in 1991 to $952.86 in 2012, a compound annual increase of 2 per cent a year, barely above the average inflation rate of 1.9 per cent during that period.

-  This works out to annual pay of $49,549 in 2012 -- hardly excessive. Average pay for those paid by the hour at the local government level was considerably lower: an average of about $40,000 in 2012.

-  In comparison, overall average weekly earnings increased at an annual average rate of 2.3 per cent since 1991, rising to $871 weekly in 2012 ($45,292 annually).

-  Local government wages have also increased at a slower pace than the overall average (industrial aggregate) since 2000: by an annual average rate of 2.5 per cent compared to 2.9 per cent for the overall average.

It's really unfortunate the CFIB and the Fraser Institute persist in putting out research reports with such misinformation and distortions of the underlying facts. It's even more disturbing when these are produced by people who reportedly are trained as economists. They are doing a disservice to the public, to their small business members and to the economics profession by putting out material with such misinformation and gross manipulation of the real underlying facts.

Sources for these Statistics:

-  Revenue, expenditure and budgetary balance -- General governments and local general governments. Statistics Canada Cansim Table 380-0080 (data available from 1981). Consumer Price Index Cansim table 326-0020.  Estimates of population July 1, Statistics Canada Cansim Table 051-0001.

-  Government finance statistics, Statistics Canada Cansim Table 385-0032 (data only available from 1991 for these series) and Gross domestic product income based, Cansim Table 380-0063

-  Average weekly wages for all workers Statistics Canada Survey of Employment, Payrolls and Hours Cansim table Table 281-0027 (data above for all workers, w/o overtime: trends similar for all variations; data also only available in this series from 1991); Consumer Price Index Cansim table 326-0020.

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