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Finance Jim Flaherty speaks to reporters in the foyer of the House of Commons on Sept. 29, 2010.Adrian Wyld/The Canadian Press

The Harper government is scaling back an increase to employment insurance premiums in the face of warnings that hiking payroll taxes would cost Canadian jobs and damage the Conservatives' tax-cutting reputation as an election looms.

A two-year freeze on EI premiums is scheduled to expire on Jan. 1, with premiums set to rise by the maximum amount allowed under a new process that empowers an independent Crown corporation to set rates.

However, The Globe and Mail has learned the federal cabinet will override the independent panel. Finance Minister Jim Flaherty is expected to announce as early as Thursday that the premium increase on Jan. 1 will be less than the maximum amount.

Economists warn Canada's job market is not ready to absorb higher premiums this winter. There are also political factors. Dipping into the paychecks of Canadians just weeks ahead of what many expect will be a spring federal election call could prove costly for the Conservatives. The price of avoiding that will be a tougher battle over the medium term to balance the books.

A report by economist Dale Orr calculated that extending the freeze on premiums by one year would increase the government's deficit by about $1.5-billion.

The move to soften the blow on premiums will come after Mr. Flaherty revealed on Wednesday that last year's deficit may exceed $53.8-billion, attributing this to payments to provinces that harmonized their sales tax with the federal goods and services tax.

Mr. Flaherty would only say Wednesday that he's been listening to concerns regarding EI premiums and will have an announcement soon.

"I've had discussions, as other ministers have had, with some of the major participants in the economy and I would say stay tuned on that. We'll have more to say," he said.

While the impact of a maximum increase in premiums may seem small - an extra $64.80 a year for workers making $43,200 plus an additional $90.72 payment by employers - business groups warn that even those amounts would influence companies' decisions about whether to hire new workers.

The Canadian Federation of Independent Business is one of the groups that has met with Mr. Flaherty, Human Resources Minister Diane Finley and Prime Minister Stephen Harper.

Dan Kelly, vice-president of the CFIB, said it is clear from those meetings that the campaigns against the premiums increase have had an effect in recent weeks.

"There is a serious rethink going on in Ottawa," he said. "This has been a massive, massive lobbying effort on our part to try to convince them that the economy's not ready to withstand a payroll tax hike ... This has a real possibility of affecting their brand and reputation as tax fighters if the full bore increase is allowed to go through."

Mr. Kelly said the key question is where the government's imposed increase will come in between zero and the maximum. Mr. Kelly indicated the CFIB would not oppose a "tiny" increase.

All three opposition parties have called for the premiums freeze to continue.

Meanwhile, Liberal Leader Michael Ignatieff reversed his support for a wide range of enhancements to EI benefits, saying they are too expensive and are no longer required.

The Liberal Leader attempted to provoke a federal election around this time last year over some of the very reforms that came to a vote on Wednesday in the House of Commons, but he now says he no longer supports them.

"This bill is not fiscally responsible," he said of a Bloc Québécois private members bill that was defeated 147-127 on Wednesday evening. The Liberals and the NDP had supported the bill at second reading and in committee, but Mr. Ignatieff declared Wednesday's decision a free vote. The bill was defeated because, while most Liberals in the House voted for it, many abstained and five voted against it.

The legislation, introduced by Bloc MP Yves Lessard, called for a reduction in the qualifying period for EI to 360 hours from the current minimum of 420 hours. It would also increase the weekly earnings to 60 per cent of past earnings from 55 per cent and increase the length of time that benefits could be collected.

The Liberal Leader argued that his support for such measures last year was at a time of economic crisis.

"We were in the middle of full crisis with a much higher unemployment rate," he said. "The situation has changed."