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Employers across the country are grappling with their workers’ demands for raises to compensate for the corrosive effects of surging inflation.

Those employers include the Government of Canada, and those workers include the 35,000 employees at the Canada Revenue Agency that are members of the Public Service Alliance of Canada (PSAC) – and whose demands include a 33-per-cent wage increase over three years.

Contrast that demand with the advice from Bank of Canada Governor Tiff Macklem in July that businesses should not agree to multiyear wage increases predicated on the continuation of today’s high inflation rates. “So as a business, don’t plan on the current rate of inflation staying,” he told members of the Canadian Federation of Independent Business. “Don’t build that into longer-term contracts. Don’t build that into wage contracts.”

Unsurprisingly, PSAC is not taking that advice to heart, instead saying in a statement that the governor’s remarks show he is “… protecting the mega profits of his corporate pals while penalizing workers and undermining their bargaining power.”

Undeterred, PSAC is pushing for that 33-per-cent hike in pay. That increase includes an initial 9-per-cent increase, putatively to align CRA pay scales with similar jobs at other agencies, and then annual increases of 4.5, 8 and 8 per cent over three years. (That compounds to an increase just under 33 per cent.)

The outcome of those (currently suspended) negotiations will set the pace not just for other bargaining within the federal civil service, but for the private sector as well, PSAC believes. “As Canada’s largest employer, the federal government needs to lead by example and show they’ll be here for Canadians by setting the bar with wages and working conditions that don’t leave workers behind,” the union said in an e-mailed statement.

The union’s assessment is correct, one suspects. If Ottawa does indeed accede to a 33-per-cent increase, or anything close to it, what basis would it have to take a harder line in other negotiations? And if PSAC is successful in obtaining a wage increase of that magnitude, other public-sector and private unions will have a new benchmark to shoot for in their bargaining efforts.

For the moment, the federal government seems disinclined to set that precedent, with talks breaking off in early September. In a statement, the CRA said it aims to reach a collective agreement that is “fair and reasonable to employees and Canadians.” And in their previous contract negotiations, the CRA and PSAC settled on a much lower wage increase of 10.8 per cent over four years.

But that was before inflation heated up. Will the CRA hold the line now, and heed Mr. Macklem’s advice? Given the Trudeau government’s demonstrated enthusiasm for increasing the size of the federal bureaucracy, there is cause for some concern.

Taxing questions

Responding to a recent Tax and Spend about the rapid expansion of the federal civil service under the Liberals, one online reader noted that the pensions of federal bureaucrats add to the cost to the public purse. Another reader contended that the cost of those pensions doesn’t matter, since they are fully funded.

The first reader is correct; the second is not. According to the most recent accounting from the government, there is an unfunded liability of $162.4-billion related to public-sector pensions. That massive shortfall is a result of Ottawa’s policy, until the year 2000, of writing IOUs for its contributions to the pensions of its employees, rather than actually paying out cash. Since 2000, the government has made actual payments; those pension obligations are fully funded.

But the pre-2000 obligations are not, and have to be paid out of general revenue. Even the (nominally) fully funded obligations could end up costing the government. By statute, Ottawa is obliged to pay out public-sector pensions, even if liabilities outstrip contributions and their investment earnings. A protracted run of investment losses could, in theory, add to Ottawa’s tab.

Hypotheticals aside, there is one decidedly non-theoretical factor pushing up the cost of Ottawa’s pension obligations: inflation. Public-sector pensions are fully indexed to inflation, with a lag. That will, over time, increase the ongoing contributions to pensions, as well as adding to the size of the pre-2000 unfunded liabilities.

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Deconstructing inflation: For a great visualization of what drove inflation in August, check out this Twitter thread from University of Calgary economics professor Trevor Tombe. TL;DR: Energy costs plummeted, and food costs were up.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.

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