Ottawa cancels EI premium hike, freezes rates for three years

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The Conservative government is giving a small boost to Canada's uneven jobs market, scrapping unpopular plans to raise employment insurance premiums in favour of a three-year freeze.

The Conservatives say EI premiums will be "no higher" than the current rate of $1.88 per $100 earned, which leaves the door open for a potential rate cut between now and the 2015 federal election.

Monday's announcement from Finance Minister Jim Flaherty is being viewed by some as a sign that the government wants to get back to its winning political message of tax cuts and focusing on the economy.

The government's approach to EI has been a frequent target for opposition MPs, who regularly note that Ottawa has been raising premiums while cutting benefits.

The 2012 budget laid out a plan to raise EI premiums by five cents a year until 2015-16, leading to accusations from the opposition – particularly the Liberals – that the Conservatives were implementing "job-killing payroll-tax hikes."

That criticism also came loudly from small-business owners, a key political constituency for the Conservatives.

Dan Kelly, the President of the Canadian Federation of Independent Business who joined Mr. Flaherty Monday to welcome the announcement of a freeze, said it appears the government is returning to its economic message.

"With Senate-gate and all sorts of other stuff, they kind of moved off the discussion about tax reductions, and for a Conservative government that has branded itself as economic stewards, they had been increasing taxes for the last several years and we had been reminding them of that regularly," he said after the announcement. "Whenever a government is cancelling a tax hike, that's good news from my perspective."

The government said Monday's announcement means Ottawa will collect $660-million less in premiums for 2014 than it would have if the originally planned hikes were implemented.

"There are two things going on," said Mr. Flaherty, in explaining the decision. "One is more people are working, so more people are paying into the operating account of the Employment Insurance plan, and fewer people are claiming. It's two sides of the same coin. And the result is the account will get to balance earlier than we had anticipated."

Several bank economists contacted by The Globe and Mail Monday said the change fits with recent economic data and predicted it will have some positive effect on employment, though the impact is likely to be marginal.

"This isn't a stimulus plan," said Avery Shenfeld, chief economist of CIBC World Markets. "It's more of an adjustment to this particular program in light of the trend in both revenues and expenditures."

BMO Capital Markets chief economist Doug Porter said the trend is such that Mr. Flaherty could soon be in a position to cut premiums.

"I would not at all be shocked if we didn't see a trim by 2016," he said.

Erin Weir, a labour economist with the United Steelworkers, notes that the reduced EI claims are connected to the government's new limitations introduced to the program.

Among a series of changes, Ottawa has introduced a system in which benefits become less generous the more frequently an individual turns to EI.

"Freezing premiums effectively locks in those benefit cuts," he said in a note, predicting the change will mean unemployed Canadians will have a harder time accessing benefits.

Opposition MPs – including the NDP's Jinny Sims and Liberal MP Rodger Cuzner – said Canadians are often showing up in their constituency offices citing new problems in accessing EI.

The government says it sets rates so that EI premiums cover all costs of EI benefits over a seven-year cycle. A promised 2008 reform to make the EI-rate-setting process more independent of government never materialized.

Monday's move by Mr. Flaherty is also stirring debate over what it might mean for two coming decisions facing the minister. Late this year, Mr. Flaherty is expected to meet with provincial and territorial colleagues to discuss a potential increase to Canada Pension Plan benefits, which would require higher payroll premiums. Some observers are wondering if Mr. Flaherty is signalling a harder line on payroll taxes.

Secondly, Mr. Flaherty has been announcing annual extensions to an EI hiring credit for small business, in part to offset the cost of the now-cancelled premium increases. The minister's office did say whether the premium freeze will mean the end of the hiring credit.