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analysis

Finance Minister Chrystia Freeland and newly minted Conservative Leader Pierre Poilievre were duking it out in the Commons a couple of weeks ago, each accusing the other of ripping off Canadians with onerous contribution rates for Employment Insurance.

“Mr. Speaker, it is never the right time to raise taxes on the working poor, yet that is exactly what the minister admits she will do,” Mr. Poilievre said, adding that increases to EI premiums will “take $2.5-billion extra out of the hands of Canadian workers, and not to fund EI.”

In response, Ms. Freeland said the EI contribution rates for this year and for 2023 are lower than “for every single year when Stephen Harper was prime minister.” She went on to say someone making $49,500 a year in 2015 (the final year of the Harper government) paid $931 in EI premiums, while that same income will incur only $807 in EI deductions in 2023.

Ms. Freeland’s math is impeccable. But her implication that the Liberals should get the credit is on much less solid footing. As for Mr. Poilievre, his claim is misleading and true only in the narrowest sense.

First, the math. In 2015, the contribution rate for employees into the Employment Insurance program (outside of Quebec) was 1.88 per cent. That equates to a maximum employee contribution of $931, for those earning $49,500. Earnings after that point did not result in additional EI deductions.

Flash forward to 2023. Next year, the contribution rate will be lower, at 1.63 per cent. And that does mean that someone earning $49,500 will pay less – $807 as Ms. Freeland stated.

But there are a number of caveats on those calculations. One is that the income ceiling at which deductions stop has risen, reflecting gains in average earnings over time; in 2023, that maximum is set at $61,500. That means that the maximum EI deductions someone could pay has risen to $1,002 in 2023 from $931 in 2015.

More important, the contribution rate will likely increase substantially in coming years to make up for the two-year freeze in rates put in place to offset the economic impact of the coronavirus pandemic. In 2023, the contribution rate rose by its legal maximum of 0.05 percentage points. It will need to keep doing that for years in order to make up for the deficits incurred in 2021 and 2022.

The most recent EI actuarial report said the contribution rate would have to jump immediately to 1.74 per cent to eliminate the accumulated deficit over the next seven years. But contribution rates will ultimately have to rise more than that, because of the limit in annual increases.

That’s where Mr. Poilievre’s $2.5-billion comes in. It’s true that EI contributions are projected to be $2.5-billion greater than payments in 2023. But that surplus will only be a small down payment on the accumulated deficit in the EI fund, which is forecast to fall to $25.1-billion from $27.3-billion. (However that deficit is just an accounting entry. All the contributions from EI go into general revenue and all payments are made out of general revenue.)

Still, Ms. Freeland is correct in asserting that contribution rates have been lower under the Liberals than in the final years of the Conservative government.

Unsurprisingly, the Finance Minister did not go on to say why that is the case. In 2015, EI contributions were generating huge surpluses, which should have triggered reductions in contribution rates. Instead, the Harper government chose not to reduce rates, with the resulting billions of dollars reducing the federal deficit.

But the Tory government also put in place a framework that would set rates at whatever would result in a zero balance in the EI fund over seven years. In theory, that would eliminate political considerations from the setting of rates. However, that change did not come into effect until 2017 – which, as it turned out, was after the Liberals had come to power.

That formula gradually decreased EI contribution rates in the years that followed, to 1.58 per cent in 2020 from 1.88 per cent in 2015 and 2016. The Liberals did not veto that Tory decision, but it was not their action that led to the decline.

So, Ms. Freeland is right in saying that EI contribution rates are lower under the Liberal government. But she has Mr. Harper to thank for being able to make that claim.

Taxing questions

Responding to last week’s lead newsletter item about the debate over the cost of carbon pricing, one online reader wrote that the analysis from the Parliamentary Budget Officer ignored the jobs and investment that the green economy would generate.

That is not the case, although the article did not make that explicitly clear. The PBO’s analysis was of the net costs to households, including projected benefits. However, PBO Yves Giroux has said that it would be “wildly optimistic” to believe that there would be a significant benefit from new green jobs and technologies by 2030.

Beyond that point (which is beyond the reference period of the PBO study), there could certainly be benefits. But the idea that a transition from carbon will be cost-free or a money maker is plain wrong in the short term, and yet to be proven beyond that.

A more important factor, which the reader did not mention, are the costs of inaction. In other words, the relative cost of carbon pricing (or regulatory measures that accomplish the same end of reducing emissions) will be lower than shrugging our shoulders and letting climate change accelerate.

But that doesn’t mean a carbon transition will be pain-free.

Line Item

Tax code: For years, the Financial Consumer Agency of Canada’s website has included payroll deductions for the Canada Pension Plan on the list of taxes that Canadians pay. Until Sept. 30, that is, when the agency amended that list to “taxes and contributions.” That rewrite came in the wake of the Conservatives pressing the Liberal government to freeze taxes, including CPP contributions. The Liberal rebuttal that CPP payments weren’t actually taxes was undermined a titch by its own website, which the Conservatives gleefully pointed out. The timing of that editing (of wording that has been around since at least 2017) was not coincidental. The department said it made the changes after a Sept. 29 exchange during which the Tories again pressed the point that CPP payments are taxes.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.