Finance Minister Jim Flaherty announced some good news for employees and employers this week – employment insurance (EI) premiums rates would be frozen at their 2013 levels for 2014 and would be no higher for 2015 and 2016. . Rates paid by employers (1.4 times the employee rate) would be adjusted downwards correspondingly.

This is especially good news for small business and low-income working Canadians who rarely claim benefits.  The EI premium rate is a payroll tax and increases in the rate have a negative impact on job creation. For lower-income workers, the EI rate is extremely regressive, as proportionally more of their wages and salaries are directed to the paying of EI premiums than higher income Canadians.

The freezing of the EI premium rate, however, does not mean that employees and employers will not be paying more in EI premiums in 2014 than they did in 2013. Total premium revenues are affected by both changes in the EI premium rate and also changes in maximum insurable earnings.  In 2013, the maximum insurable earnings increased by 3.27 per cent and an increase of about 3 per cent is expected for in each of the next three years.

Why did Mr. Flaherty make this announcement now, especially given the government’s absolute commitment to eliminating the deficit in 2015-16? Given the government’s record of missing their stated fiscal targets, one would have expected them to keep as much fiscal flexibility as possible in order to ensure that the deficit elimination target would be met. If this announcement had been made in a budget it would have been reported as a major tax change costing $300 million in 2013-14, $700 million in 2014-15, $1.3 billion in 2015-16 and $700 million in 2016-17. In other words a tax cut costing $3 billion over four years. As it turned out the media hardly even noticed it or reported it.

This week’s announcement tells us two things. First, the government is very confident that it will eliminate the deficit in 2015-16. This means the government knows something that we don’t. By now, the Government is in receipt of the final financial results for 2012-13. They could, and probably do, indicate higher revenues and lower costs related to the EI program.  Some of this improvement will likely carry forward into 2013-14 and beyond.  In addition, results for the first three months of 2013-14 already indicate than EI expenses are running well below what was expected in the March 2013 Budget.  These factors would provide the Government with the flexibility to lower EI premium rates.

The second reason for freezing the EI rates to 2016 is that the government is becoming concerned about employment growth in 2013 which has been very sluggish, well below the pace set in 2012 and what this may mean for 2014 and 2015.  The unemployment rate is stuck above 7 per cent compared to 5.9 per cent before the recession.  It may finally be dawning on the government that eliminating the deficit will not be good enough to claim “sound management of the economy “ at the time of the 2015 election. The government’s job creation record since the recessionis is not very good, no matter how hard they try to spin it.
The upcoming prorogation of Parliament will delay the release of the traditional fall Economic and Fiscal Statement.  We can only hope that his Statement will provide more information as to why the Minister decided to announce this week a freeze on the EI rate until 2016.



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