Blogs & Comment

Harper's take on increasing EI rates misleading

After Monday’s non-announcement that the Conservatives were going to provide $500 million over two years to extend employment insurance income to Canadians in long-term training programs (this was first mentioned in the January budget, so this is really a re-announcement), the debate over EI reform has been kicked up a notch.
The lack of desire on Harper’s part to alter the troubled insurance program is clear, especially after Monday’s big EI reveal amounted to almost nothing, at least in the grand scheme of things. As I’ve mentioned before, Ignatieff wants the Cons to reduce the amount of hours worked to qualify for EI to 360 across the country as it stands now that number is between 420 and 700 depending on the province.
Harper’s argument against changing EI is that it would ultimately amount to an increase in the payroll tax. Yesterday, Transport Minister John Baird reiterated Harper’s point saying: “What the Leader of the Liberal Party has to do is to come clean and admit that his only plan for the unemployed is to raise taxes, which would kill jobs, especially for small businesses. That is what Canadians do not want, a job-killing payroll tax increase, which is exactly what would be required under the Liberal plan.
On the surface this seems logical, but this position is actually quite misleading. According to TD economist Grant Bishop, co-author of this reporton employment insurance, it’s not exactly correct to say that if EI is reformed payroll taxes will increase. In fact, payroll taxes are likely to increase even if EI stays the way it is.
Until the great job purge started earlier this year, there was a $59 billion surplus in the employment insurance reserves. If EI stays the way it is, Bishop says the government will end up spending $19 billion of those funds over the next four years, reducing the surplus to about $40 billion. If Ignatieff gets his way, and the eligible hours for EI is dropped to 360, you can add $1 billion a year to the employment insurance deficit, which means the reserves will fall to $36 billion by 2012.
Now, says Bishop, the government could fix the deficit three ways: the costs must either be funded by past surpluses, recouped through current or future EI premiums, or by cutting other costs within the EI program.
Technically, the government could do what Iggy wants and just keep the EI reserve at $36 billion and not raise payroll taxes at all. That’s still plenty of cash in the event of another downturn.
However, its unlikely the government will do that they like to (theoretically) return what they’ve taken out so to get back the cash, whether it’s $23 or $19 billion, they’ll have to raise rates.
Right now the rates are set at 1.73%, the lowest level since 1994 when people were paying a 3.07% premium. (The rates have dropped every year since ’94.) By law, when there’s a deficit in a year, the rate has to increase .15%, unless the government freezes it, which it did for 2010, leaving it at 1.73%. Bishop thinks this is a good thing because employers have to pay 1.4 times that rate. That would have meant more job losses as company costs would have gone up.
If everything stays as is, TD expects the rate to increase in 2011 to 1.88%, and again in 2012 to 2.03%. Bishop projects 2013 to be a surplus year, so he thinks the rate will drop to 1.95% and, if it stays there, the government will have made its shortfall back by 2019.
So, what does this all mean? Basically, Harper’s comments that Ignatieff’s plan will result in a payroll tax is wildly erroneous because, by Bishop’s projections, the Conservatives will have to raise rates anyway come 2011. Adding $4 billion extra to the deficit might mean the rates will have to stay at a higher level than they are now for longer, but they can’t keep increasing indefinitely because, again, rates only rise during deficit years. Assuming the economy gets back on track by 2013, surpluses would kick in again and rates would stabilize. So, to say that Ignatieff’s plan will raise taxes, while implying that doing nothing won’t, is flat out wrong.
There’s something else Harper could do that would allow him to keep rates lower and reform EI. Right now, says Bishop, the EI program involves $8.6 billion in non-benefit costs. That money is mostly for retraining workers. The TD economist thinks these funds should be removed from the EI banner and put under a more general government spending umbrella. If Harper did that, it would take far less time to recoup the deficit and rates could essentially return to today’s levels much sooner.
If Harper doesn’t want to change EI that’s his prerogative, but he’ll need to come up with an actual reason why he wants to keep the status quo, rather than making something up that, it seems, has no merit at all.
Previous posts on EI:
Q&A with Ralph Goodale
Why Harper should fix EI
Ignatieff new leader; tackles EI