Canada's small-business community is bracing for a federal budget that will likely contain little support for the sector, while unveiling a sharp increase in employment insurance premiums that will take effect in 2011.
Government officials have said there will be no new spending or tax measures for 2010. However, Ottawa is expected to outline its plan to rein in the burgeoning deficit in coming years, partly through hikes in Employment Insurance premiums. Increasing premiums – for both workers and their employers – is seen by small businesses as a direct attack on profitability, and a disincentive to hire.
Given Ottawa's huge deficit position and the fact that EI funds have been depleted by burgeoning claims during the recession, “we're not unrealistic enough to think we're not going to see increases [in premiums],” said Catherine Swift, president of the Canadian Federation of Independent Business.
She notes that surpluses in EI premiums have helped the government shore up its finances in the past, and Ottawa now has a moral obligation not to use the program as a cash cow to reduce the deficit.
“Employees and employers contributed very significantly to the general revenue coffers and in an ideal world would see that money returned to them. We're not dreaming in Technicolor, we know that's not going to happen, [but] we don't want to see an excessive premium increase that merely disappears into general revenues.”
The big problem, Ms. Swift said, is that higher EI premiums hurt new-job creation because they make small businesses reluctant to hire more people.
Under current rules, Ottawa could boost the annual EI premiums paid by employers by about $90 per employee per year, starting in 2011– for employees making more than about $43,000. (Employees themselves would see hikes of about $65 per year.)
While that hike appears modest, a CFIB analysis based on macroeconomic labour elasticity theories suggests it could indirectly result in companies hiring 200,000 fewer workers than they would have otherwise, over the next five years.
If Ottawa does lay out a plan for boosting EI premiums, CFIB would like to see some mitigating measures, such as a break for small companies that add new employees. Their proposal would give employers a one-year “holiday” from paying EI premiums for new workers they hire and train. This would be paid for by transferring funds from other EI training programs.
It is a mistake, Ms. Swift said, for the government to launch any measures that will depress job growth when the economy is starting to recover. “The notion that just as it is coming out of the hole you give it a whack again is not our idea of a good way to approach things.”
The apparent shift in Ottawa's attitude to a tight-spending, anti-deficit mindset worries Michael Legary, founder of Seccuris Inc., a small Winnipeg-based consulting firm that helps clients deal with information security issues.
He said he is disappointed that the government is not maintaining its stimulus of the economy through a longer period. By signalling that it will begin the planning process for reducing deficits, “this budget is the mental shift to the long haul,” Mr. Legary said, adding that is premature.
“I believe the federal government can afford another year of reasonable spending to get stimulus to where it needs to be,” he said. “We're not out of the woods yet, and I'm really fearful of another dip [in the economy].”
If Ottawa's restraint is infectious, other governments and all sizes of businesses will also cut back, slowing the economy in its tracks, he said. “No one will continue that stimulus and growth mentality when we've changed to that reduce-the-deficit kind of approach.”
In eastern Canada, many businesses share similar concerns, said Mike Hachey, president of Egg Films, a production company based in Halifax.
The economy in Atlantic Canada has experienced a “delayed reaction” from the recession and it is now feeling its effects more strongly than last year, he said, so it will be hard for small businesses to swallow any extra costs, such as higher EI premiums.
“Right now is not the time to take a little bit of a grab, when people are trying to recover,” he said.
Mr. Hachey said he thinks many Maritimers have a “lack of trust” in the federal government, and thus have low expectations for the budget.
Becky Reuber, a professor of strategic management at University of Toronto's Rotman School of Management, said small business concerns about possible EI premium increases are significant, because anything that slows job growth can affect the overall economy. If small firms balk at hiring more people – and shift their sights to other ways of growing, such as productivity improvements – it can be bad news for the broader recovery.
Trent University professor Jim Struthers, an expert on the history of employment insurance, said boosting EI premiums is essentially a regressive form of taxation that applies only to workers and businesses.
“If you want to encourage employment, investment and job creation – and the small business sector is a key source of jobs in today's economy – then you don't want to [put in place] hidden taxation that is a disincentive to hiring people,” Prof. Struthers said.
If Ottawa wants to cut the deficit, it should put in place taxes that are spread over a much wider revenue stream, he said. “In this case [the small business community] has a good point.”
