The Government of Canada’s employee spending is projected to climb to $76.2 billion by 2029-30, representing the largest federal personnel cost burden in Canadian history, according to a new Parliamentary Budget Officer report. With personnel expenses already accounting for $71.1 billion in 2024-25—the largest component of federal operating spending—the government faces mounting pressure to address rapidly growing compensation costs as Prime Minister Mark Carney calls for 15 percent cuts in day-to-day spending in the next three years.
The Hub spoke with Charles St-Arnaud, chief economist at Alberta Central, to better understand the fiscal implications and broader economic challenges posed by rising federal employee costs.
Here are four key takeaways from the conversation:
1. Federal employee costs reach historic highs: The projected $76.2 billion in personnel spending, an average of over $172,000 per full-time employee, by 2030 would represent the biggest federal payroll burden in Canadian history.
2. Deep program cuts will be necessary: Meaningful spending restraint will require eliminating entire programs rather than across-the-board percentage cuts to departmental budgets.
3. Public-private compensation gaps create mobility barriers: The generous federal pension system creates “golden handcuffs” that limit talent mobility between sectors and reduce private sector experience in government.
4. Productivity challenges extend beyond government: Canada’s broader productivity crisis stems from decades of underinvestment in productive capacity across the entire economy.
Federal employee costs reach historic heights
The scale of federal personnel spending has reached unprecedented levels, with projections showing continued growth despite government promises of fiscal restraint. The PBO estimates that full-time equivalent positions will reach almost 442,000 by 2029-30, with average compensation per employee exceeding $172,000 when including pensions and benefits.
“It would be one of the big items in the budget and probably also the biggest it has been in history in terms of how much we’re paying for federal employees,” St-Arnaud noted. The projection represents a $1.5 billion increase from the PBO’s March 2025 outlook and doesn’t include Carney’s August announcement of pay raises to members of the military, adding another $2 billion per year in federal personnel costs.
Deep program cuts will be necessary
St-Arnaud emphasized that achieving meaningful fiscal restraint will require more than superficial budget trimming. The government faces the challenging task of identifying entire programs for elimination rather than implementing uniform percentage cuts across departments.
“[They] really need to go in and do cuts, but not just cutting 10 percent of each budget. You really need to go through and look at individual programs and decide, ‘Do we keep it or not?’ And it’s whole programs that will need to disappear,” he explained. This approach reflects the reality that personnel costs are largely fixed once positions are created, making targeted program elimination more effective than broad-based reductions.
Public-private compensation gaps create mobility barriers
The generous compensation packages in the federal public service, particularly defined benefit pension plans, create significant barriers to talent mobility between sectors. St-Arnaud highlighted how this system disadvantages both government and private sector efficiency.
“You have kind of what has been often called the golden handcuffs of the public sector, where it’s very hard for them to move and it’s very hard for anyone outside to want to move in,” he observed. This dynamic limits the federal government’s access to private sector expertise while preventing public servants from pursuing opportunities elsewhere, ultimately reducing overall economic efficiency.
Productivity challenges extend beyond government
While federal employee costs represent a significant fiscal challenge, St-Arnaud cautioned against viewing this as solely a public versus private sector issue. Canada’s broader productivity crisis reflects decades of underinvestment in productive capacity across the economy.
“We know in Canada, we’ve been under-investing in productive means for decades, and until recently, we were spending more on investment in renovation and homeownership transfer costs than spending on machinery, equipment, and intellectual property,” he explained. This suggests that addressing federal spending alone won’t solve Canada’s underlying economic competitiveness challenges.
The challenge for policymakers lies in balancing fiscal sustainability with economic growth, particularly as the PBO projects that indeterminate federal employees will reach 87 percent of all positions by 2025-26—the highest percentage since 2015.
This commentary draws on a Hub interview. It was edited using AI.
