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For a while, inflation was a heady stimulant for the federal Liberals, and their spend-and-then-spend-some-more ways.

Just before inflation began to accelerate in 2021, the government projected revenues of $2-trillion over five fiscal years, starting in fiscal 2022 and ending in 2026. By this spring’s budget, that five-year tally had soared to $2.3-trillion – a $300-billion upside. Much of that extra revenue resulted from inflationary growth in nominal gross domestic product.

Of that, the Liberals spent $220-billion and $80-billion went to reducing deficits over that period. For the most part, the government has chosen to spend, including committing to permanent programs such as the federal dental benefit.

That was the fun part, while it lasted. The party is over, and the fiscal hangover has finally (and painfully) arrived as last week’s settlements with public sector unions make clear. The entirely predictable costs of the inflation spike, including a higher wage bill, are now landing on Ottawa’s bottom line.

The question is – what, if anything, will the Liberals do about it? Or more precisely, what can they do, given they have already spent the large majority of their inflation-driven windfall and locked in higher program spending?

The bill is still being tallied, but so far the government has said that the tentative settlement with core public-service workers will cost an additional $1.3-billion a year (plus $300-million for one-time lump-sum payments). There hasn’t yet been similar figures for the tentative settlement with Canada Revenue Agency workers, largely identical on wages. Hundreds of millions of dollars more in annual costs are certain.

Set against that is the government’s forecast that its operating expenses will be flat over the next five years, at $123.7-billion in the current fiscal year and in fiscal 2027. The Liberals profess that they will achieve that feat (a U-turn from the significant run-up in the costs of government during their tenure) largely by paring back spending on external consultants and the most modest of constraints on travel and other non-core expenses.

If the Liberals have a plan to offset the sharp increase in salary costs, they haven’t shared it with the public. During the budget lockup briefing for journalists in March, a senior government official did say that any settlement costs beyond projections used to prepare fiscal forecasts would simply be added on to the deficit.

That’s a woefully insufficient, indeed irresponsible, response. Civil servants themselves could hardly be blamed for wanting to protect their paycheques from the corrosive effects of inflation. They mostly succeeded, which will add to operating costs. If that is more than the government anticipated – so far the Finance Department isn’t saying – then it needs to do more than simply shrug its shoulders and add the tab to the national debt.

In isolation, the nearly 13-per-cent bump in pay over four years isn’t an insurmountable problem. But that increase is layered on top of the 30-per-cent (and counting) increase in the head count of the civil service, and a massive expansion in the use, and cost, of external contractors.

Adding to Ottawa’s problems is language in the tentative agreement with PSAC that limits the ability of the government to lay off civil servants. PSAC has secured language that allows it to contest layoffs and that members “will not lose their job if they can perform the duties of a contractor already working with the federal government.”

There might not be a perfect skills overlap between the MBA-heavy team at McKinsey & Co. and CRA staff. But that language is an obvious impediment to layoffs, particularly given the recent expansion in contractor expenditures.

One thing is for certain: Ottawa should stop hiring. The reflex when any problem pops up, on display last summer with the passport fiasco, is to flood the zone with new employees. Any private sector employer would recognize the impulse – we need more people – and equally realize that such an impulse is an admission of a failure of imagination and of basic managerial competence.

Instead, the Liberals need to downsize the civil service. With layoffs made much more difficult, a hiring freeze is the next-best option. Unfortunately, it would take at least the rest of the decade to unwind the Liberals’ hiring spree, given current rates of attrition.

So best to get started. The spending party is over, and the Liberals’ fiscal headaches have only begun to inflict pain.

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