EI Premiums Come Full Circle

For reasons that escape me, the Globe ran a headline front page story today on what all fiscal policy and Employment Insurance wonks have known to be true for some time.

Under current legislation, and as announced in the 2009 Budget, the EI premium rate set by a supposedly autonomous but tightly constrained new body will rise by 15 cents per $100 of insured earnings for workers, and by 21 cents per $100 of earnings for employers in January. This is the maximum increase allowed, and the maximum increase is required since premiums must rise to balance revenues and expenditures if the fund has no surplus. Premiums must rise, that is, unless the government decides to exercise its right to unilaterally set the premium rate, which it does not intend to do.

This is a new chapter in an old story which brings us full circle.

Once again, the federal government will be deliberately running annual EI account surpluses to reduce the public debt. Minister Flaherty is taking a rather big play out of Paul Martin’s book.

Over the decade from the mid 1990s, the Liberals slashed EI benefits and only slowly reduced premiums, resulting in the gradual accumulation of a $57 Billion surplus in the EI account. This was a semi fictitious account which is fully integrated with the consolidated revenue fund, meaning that the annual EI surplus effectively reduced federal government deficits and debt.

Using EI surpluses in this way was vigorously opposed by workers (who wanted better benefits) and employers (who wanted lower premiums.)

Enter Canada’s New Government. It will never happen again, they said. So they established a separate EI Fund run by a crown corporation to balance the Fund on an annual basis and to ensure that any surpluses were not diverted to government coffers.

They did, however, neglect one important thing, namely to endow the “new” EI Fund (still integrated with the federal government accounts) with the “old” EI surplus. Instead, it got a semi fictitious intital credit of $2 Billion – well under the $15 Billion which it has been calculated by the Chief Actuary would be needed to deal with a serious recession.

Shit happens, and the unanticipated Great Recession hit us, and the federal government’s finances, big time.  The “new” Fund has effectively begun its life with a very large deficit, expected to be as high as $10 Billion, accumulated over the recession. This deficit now sets the stage for a series of annual premium increases intended to produce annual EI account surpluses moving forward. These surpluses will reduce the EI Fund deficit, which effectively means the federal government deficit and debt since the accounts are still integrated. 

In short, the Conservative government will give us exactly what we got under the previous government – annual EI account surpluses which will be used to pay down government debt rather than to support workers and communities. 

(Afficianados of subtle differences will note that the new model precludes sending a possible future surplus in the new EI account over to the government books, which is a theoretical possibility a few years out and modestly to the credit of the Conservatives. By then I shall have forgotten, and a new government may simply choose to  revisit EI Fund governance once again.)   
 
This is perverse policy in macro policy terms.  At a minimum, the premium rate should not be raised so long as the economic recovery is still very slow and unemployment remains at or near 8%. The fragility of the economic outlook for 2011 was emphasized as recently as yesterday by the Governor of the Bank of Canada. There is a very real risk that already very slow new hiring by employers could grind to a halt if premiums increase, especially when employers can see full well that their premiums will be rising over several years moving forward.
 
As an alternative, the Canadian Labour Congress has said that the Government of Canada Consolidated Revenue Fund could and should absorb all of the additional EI program costs incurred during the extraordinary circumstances of the recession, not just the modest cost of the few special measures such as the five extra weeks which were introduced on a temporary basis.

Such a move would let us maintain the current EI premium rate, which approximately balances revenues and costs at an unemployment rate of between 6% and 7%. 
 
Canadians understand the critical importance of the EI program, especially in tough economic times. Why should the the extra cost of the program in the recession not be charged to the emergency stimulus program which helped us get through the recession?