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A lesson from fiscal consolidations around the world is that spending restraint is necessary. It may not do the trick alone, but no program can succeed without it – and especially when a government is a major employer, controlling public-sector compensation will be front and centre in the effort. So provinces seeking balanced budgets must control spending – the question is whether Ontario's approach can deliver the lasting improvements and efficiencies in public services that will make the savings sustainable.

Ontario's current efforts are controversial not just because the employees affected would like more money, but because they emphasize freezes and controls that leave service-delivery models fundamentally unchanged. One risk is court battles in front of judges who may see a government job as an entitlement rather than payment for a service that should be valuable to taxpayers. Get past that, though, and the approach in Queen's Park may still yield only temporary relief. Over-rides such as essential-services designations typically raise costs over time. And compressing compensation without reforming services sets the stage for a rebound when public sector unions convince the public to blame a stingy finance minister for indifferent service quality.

While Ontario's recent deal with the province's doctors highlighted some payment reforms – doctors who refused to e-mail their patients since they weren't paid for it will presumably finally start doing so – more fundamental changes that would foster better and more cost-effective services in the future are largely missing. Paying doctors more per patient and less per procedure would likely improve overall care. Simply cutting hospitals' global budgets rather than promoting alternative treatments won't improve outcomes. Schools and post-secondary institutions also need both the incentives and the freedoms to educate students better – including power to reward good employees and encourage bad ones to find other lines of work. Provinces such as British Columbia have been more innovative in both health and education, and reforms elsewhere in the world make Canada look almost static.

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Battles over compensation of public-sector employees will be a chronic condition for years to come, as an aging population slows the growth of the tax base and boosts demands for seniors' benefits and health care. We are now learning, moreover, that government employees are far more expensive than they look – governments have not properly pre-funded their post-retirement health benefits and pensions, and those large and partly invisible bills are now falling due. Holding the line on those payments is a vital short-term task, but only fundamental reforms that reduce the role of central planners and empower local managers and the citizens they serve can produce the gains that will make provincial programs sustainable into the future.

William Robson is president and CEO of the C.D. Howe Institute.

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