Conservatives to cut EI premiums in response to sluggish job market

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The Conservative government will announce Thursday that it is lowering Employment Insurance premiums in an effort to boost hiring at a time of sluggish job growth – the first of an expected series of tax cuts as Ottawa moves out of deficit and prepares to face voters in next year's federal election.

The cut in payroll taxes for workers and small business marks a key decision for Finance Minister Joe Oliver ahead of a crucial budget, since it shows he's confident he can sacrifice some revenue from EI premiums and still balance the books, a key Conservative promise.

A senior government official confirmed to The Globe and Mail that the cut will be "significant" and will be called the Small Business Job Credit. The decision to lower EI premiums will take effect Jan. 1, 2015. Mr. Oliver is scheduled to make the announcement at a hardwood flooring company in Toronto.

The Parliamentary Budget Officer had accused the government last year of planning to balance the books by keeping premium rates "higher than necessary," something Ottawa had rejected. Still, the decision is the culmination of years of back and forth on a key policy question that the Conservatives have struggled with in the face of an economic downturn and slow recovery. In 2011, Ottawa said it was scaling back earlier plans to raise EI premiums in response to concerns over rising unemployment. Then, in 2013, the government announced that it would freeze premiums for the next three years, noting that the program's finances were improving as more Canadians were working and paying premiums, while fewer Canadians were claiming benefits.

Business groups have been calling for a cut, arguing that higher premiums are payroll taxes that serve as a disincentive to hiring new workers. A survey this week from Manpower Canada, a staffing firm, found the hiring outlook fell to its lowest level in four years, an indication that employers are reluctant to add permanent new staff.

"Employers are cautious in this environment, so they're using variable labour, part-time labour and not putting people full time on their payrolls because of that caution," said Byrne Luft, vice-president of operations for Manpower Canada told The Globe this week.

The survey results were in line with the latest jobs report from Statistics Canada, which reported a decline of 11,000 jobs in August. A major increase in self-employment masked Statscan's finding that private companies shed a record 111,800 jobs that month.

The government's decision to cut premiums appears to be a response to these increasing signs of a weak labour market. And with just over a year to go until the next federal election, the Conservative Party is making clear that job creation will be part of its re-election strategy, releasing a new ad this week that focuses on the government's job creation record under Prime Minister Stephen Harper.

Mr. Oliver signalled over the summer that the Conservative government is also considering personal income-tax cuts for the 2015 budget, although he didn't elaborate on what such tax breaks might look like.

While employers are expected to embrace the announcement, lower premiums will fuel concern among some that the EI program is increasingly inaccessible to many Canadians due to recent policy changes approved by the Conservatives.

The EI program is meant to provide short-term income support for unemployed Canadians while they search for a new job. In addition to direct transfers to the unemployed, the program also funds a range of training options.

The percentage of unemployed Canadians who receive EI dropped to 36.6 per cent in June, when only 501,900 of the country's 1,369,500 unemployed qualified for benefits.

Labour economists, including Angella MacEwen of the Canadian Labour Congress, have argued these trends should justify the need for more generous benefits, not lower premiums.

At this time last year, the federal government announced a three-year freeze on EI premiums, setting the contribution rate at $1.88 per $100 of insurable earnings for employees. Employers must contribute 1.4 times the amount that employees pay into the program.

At last year's announcement, the government said the rate would be set "no higher" than $1.88 for 2015 and 2016. The government source would not confirm what the new, lower rate for 2015 and 2016 will be when it is announced Thursday.

The impact of lower premiums on federal revenue and Ottawa's bottom line won't be known until Mr. Oliver releases a fall fiscal update. Premiums from EI go into the government's general revenues, but they are accounted for separately as an EI operating fund.

Federal rules around EI premiums have been the subject of several reforms in recent years.

The Conservative government announced in 2008 that a new independent Crown corporation called the Canada Employment Insurance Financing Board would set rates so that revenues and expenses balance over time. However, the government regularly overruled the board's work following the economic crisis and then ultimately shut down the corporation.

The 2012 budget announced a new approach that would set rates to achieve balance in the fund over a seven-year period. However, that new policy is not scheduled to take effect until 2017.

The government will soon release an updated actuarial report on the EI account. Last year's report said there was a $5.8-billion cumulative deficit in the account as of Dec. 31, 2013.