Recession exposes fallacies behind EI funding

TheStar.com – Opinion/Editorial Opinion
Published On Wed Sep 22 2010.   By Carol Goar, Editorial Board

Five years ago, politicians, business leaders and financiers were under the delusion they’d found the key to continuous economic expansion. Recessions, they believed, were obsolete.

This assumption meant Canada need not fear damaging surges in unemployment. And it allowed the governing Liberals to rid themselves of the troublesome task of setting of employment insurance premiums. For years, they’d been accused of keeping rates artificially high so they could use the EI surplus to pay Ottawa’s bills.

Ralph Goodale, the finance minister of the day, announced a new rate-setting mechanism in his 2005 budget. He empowered the Canada Employment Insurance Commission — a panel consisting of two bureaucrats, a labour representative and an employers’ representative — to set rates each year on a break-even basis.

He touted this scheme as transparent, stable and non-partisan. But his real motive was political: to write off, once and for all, the $57 billion surplus that had accumulated in the EI account since Jean Chrétien took power (and which had already been spent).

The Liberals were defeated before the change took effect. But the incoming Conservatives happily implemented it — then locked it in by taking the job of setting EI premiums out of government hands entirely. They assigned it to a new Crown corporation consisting of bankers, accountants and lawyers.

Initially, the economy kept growing and Canadians were scarcely aware of the privately managed Canada Employment Insurance Financing Board.

Then the recession that was never supposed to happen, did.

Fearing premiums would go up as people lost their jobs, Finance Minister Jim Flaherty slapped a two-year freeze on EI contributions in 2009.

The freeze is scheduled to end on Dec. 31. The Canada Employment Insurance Financing Board is proposing the maximum increase allowed by law, meaning workers would have to pay an additional 15 cents an hour next year and employers would have to hand over an extra 21 cents per hour.

Although this would not mop up the red ink in the EI account, it would put $1.5 billion in the kitty. With similar hikes over the next three years, Flaherty projects a $6.7 billion surplus in the EI fund by 2015.

Since the financing board made its recommendation, a chorus of opposition — from employers, unions, at least two premiers and the federal Liberals and New Democrats — has swelled.

“The timing is brutal,” says Dan Kelly of the Canadian Federation of Independent Business. “It’s asinine to increase these job-killing payroll taxes,” adds Liberal finance critic Scott Brison.

The government has until Nov. 30 to decide whether to go ahead with the proposed 15-cent-per-hour increase on Jan. 1, 2011, or override the EI financing board.

Political observers are divided about which the Conservatives will do. If they stick to their fiscal plan, they risk upsetting voters in every part of the country. If they delay the premium increase, they’ll have trouble reaching their goal of balancing the federal budget within five years.

One of the few commentators who foresaw this “premium-setting train-wreck” was Michael Mendelson of the Caledon Institute. He wrote in 2005: “This proposed financing change will remove altogether any potential counter-cyclical element of EI. Instead of maintaining consumer demand in a declining economy, EI will accentuate the decline.”

In other words, EI would cease to be a cushion in hard times. Nor would it act as brake on inflation in boom times.

Canadians shrugged.

Now Mendelson and his colleagues at the Caledon Institute have written a new paper entitled:EI Financing: Reset Required. It urges the government to forgo next’s year’s rate increase. But its bigger message is an appeal to Parliament to rethink the financing of jobless benefits.

As things now stand, Canada has an employment insurance system built on a fallacy.

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