The Harper government’s plan to erase the deficit now has a hole approaching $5-billion after Finance Minister Jim Flaherty announced that Ottawa will not raise Employment Insurance premiums as high as originally budgeted.
The move was welcomed by business groups, the Canadian Labour Congress and Bank of Canada governor Mark Carney, who said the measure will help create jobs. With the Canadian economy showing signs of slowing down, the government said it is listening to widespread warnings that a steep increase in payroll taxes would cost jobs.
Rather than raising premiums by the maximum amount allowed on Jan. 1, Ottawa will limit the hike to five cents per $100 of insurable earnings for employees and seven cents for employers. Mr. Flaherty also announced premium increases will be capped at 10 cents for employees in “subsequent” years.
The government had budgeted to receive higher EI revenues over the next several years, which would have meant accepting the recommendation of an independent board created in 2008 to raise premiums by the legal maximum of 15 cents per $100 per year. Mr. Flaherty on Thursday essentially sidelined the board for several years, even though he said it won’t be shut down. The decision also means the minister will have to find about $5-billion to make up for the lost revenue from EI, according to estimates from economist Dale Orr, who tracks EI premium revenues closely.
Speaking at a fireplace store in Ottawa where he announced the change, Mr. Flaherty said the government’s deficit plan is still on track. He promised to explain the numbers in detail in his fall economic statement.
“But if you look out into the medium term, the effect [of lower premiums] is okay so that we can balance the budget in the medium term – and that is around 2014-2015 or so, depending on the degree of economic growth,” he said.
The government may have some extra room. In July, the Conference Board of Canada noted that because government revenues were higher than expected, Ottawa might be able to balance the books a year ahead of schedule. Conference Board chief economist Glen Hodgson said on Thursday that he intends to downgrade his projections when he and other private sector economists meet next week with Mr. Flaherty.
Mr. Hodgson said the government’s move on premiums was the right thing to do, but will force the Finance Minister to find the money somewhere else.
“Whatever the impact fiscally, they’re going to have to find offsets in the budget,” he said.
The Canadian Federation of Independent Business and the Canadian Chamber of Commerce will be among several outside groups that will advise the government on improving the process for setting EI premiums.
Opposition MPs noted that payroll taxes will in fact go up for the first time in years under the new plan even though the government says it opposes higher taxes.
“It’s still a payroll tax increase, and we have to question whether it makes sense to increase payroll taxes when unemployment remains high,” Liberal finance critic Scott Brison said.
NDP leader Jack Layton said it is “outrageous” that successive Liberal and Conservative governments refuse to acknowledge a nearly $60-billion surplus built up in the federal EI account, meaning higher premiums should be unnecessary.
With a report from Jeremy Torobin
EI financing board overruled – again
They are the Maytag repairmen of the federal bureaucracy.
The Canada Employment Insurance Financing Board is a Crown corporation created in the 2008 budget. Its mandate is to set EI premiums to ensure that money raised covers the cost of the program over time.
The government named a board of seven part-time directors, including securities lawyer David Brown as chairman, to do the job – but they have yet to be given the chance. Their work was overruled in 2009 and 2010, when the government opted to keep premiums frozen during the recession. This fall was to have been the board’s first chance to set premiums.
On Thursday, Finance Minister Jim Flaherty announced the government will once again override the board by setting premiums for 2011 and “subsequent years.” Mr. Flaherty also announced consultations to find out how the rate-setting system can be improved “to ensure more stable, predictable rates going forward.”
Evolving deficit forecasts
Finance Minister Jim Flaherty said this week that the government’s deficit for 2009-2010 may come in higher than the $53.8-billion forecast in the budget of March, 2010. This would be the latest of several revisions as the recession and stimulus spending ravaged Ottawa’s bottom line.
Mr. Flaherty’s evolving estimates – made with advice from private forecasters – for the 2009-10 fiscal year:
- Nov. 28, 2008, economic update: Projects a $0.1-billion surplus and a continuing surplus for the next five years.
- Jan. 27, 2009, budget: Projects a $15.7-billion deficit.
- Sept. 10, 2009, economic update: Projects a $55.9-billion deficit.
- March 4, 2010, budget: Projects a $53.8-billion deficit.
- Sept. 29, 2010, Mr. Flaherty tells reporters: “It may be slightly higher than [$53.8-billion], yes,” citing accounting issues related to paying Ontario and B.C. to harmonize their sales tax with the goods and services tax.
