September 9, 2013 / 4:02 PM / 5 years ago

Canada cancels payroll tax increase as hiring slows

OTTAWA (Reuters) - Canadian Finance Minister Jim Flaherty canceled plans on Monday to increase a payroll tax in a break for small businesses hurting from lingering economic uncertainty, but the move is not expected to provide a big lift to growth or jobs.

Canada's Finance Minister Jim Flaherty makes an announcement in Ottawa September 9, 2013. REUTERS/Blair Gable

The employment insurance (EI) premium paid by both employers and workers will be frozen at 2013 levels for 2014 and will not be allowed to surpass that rate in 2015 and 2016, Flaherty said, instead of rising every year as outlined in the government’s March budget.

Flaherty noted global economic troubles, particularly in Europe, that he said Canada could not ignore. At the same time, he said the move to roll back what he called a “payroll tax” was possible because more Canadians are working and fewer are claiming EI benefits, so the EI operating account is on track to eliminate its deficit earlier than planned.

The change will save employers, who pay 60 percent of the premiums, and workers a combined C$660 million ($634 million) in 2014 and will have no impact on government finances, Flaherty said.

“This tax relief will help support Canada’s continued economic recovery and sustained, business-led, long-term growth,” he said.

Canada has long recovered all the jobs lost in the recession but job growth has slowed this year compared with 2012, and the unemployment rate has yet to drop to pre-crisis levels. The economy also slowed markedly in the second quarter but is expected to bounce back in the third quarter.

The government says its top priority is training unemployed workers in the skills needed to fill available jobs.

The EI system provides assistance to workers who lose their jobs. The EI operating account fell into a deficit as a result of the global recession, recording a shortfall of C$9.2 billion in 2011.

Flaherty had projected in his budget that the EI premium rate would increase the maximum 5 cents per year to reach C$1.93 per C$100 of insurable earnings by 2016, up from C$1.88 in 2013.

Monday’s announcement means the rate will hold steady instead at C$1.88 through 2016. Starting in 2017, the rate will be set annually at a seven-year break-even rate.

There is unlikely to be much of an economic boost from the new EI policy, which appears to be more a reaction to labor market improvements than an admission of economic weakness, said Doug Porter, chief economist at Bank of Montreal.

“In terms of the macro effect, this would be more of a case of avoiding a negative (i.e. premium increase) rather than introducing positive (i.e. premium cut),” Porter said.

Porter believes the government will have room to cut the EI rate in 2015 or 2016 for a bigger bang. An announcement for 2016 could potentially come in autumn of 2015, just before an October general election that the Conservatives hope to win on the basis of their economic track record.

“If the government is looking for a fiscal measure to help promote job growth, cutting EI premiums would be an excellent place to start,” Porter said.

Derek Burleton, deputy chief economist at Toronto-Dominion Bank, welcomed the move because the small businesses most affected by the EI premiums are the economy’s job-creation engine.

“The stability of premium rates removes one of potential headwinds that was facing employment growth over the next few years,” Burleton said.

“That said, this announcement wouldn’t lead us to revisit our employment forecast over the next few years.”

Flaherty repeated his pledge to balance the budget by 2015 and said the change to EI premiums would have no effect on those plans.

“There’s no fiscal impact, because the EI account, the operating accounts, stands by itself, so it doesn’t affect the budget of the government of Canada.”

($1=$1.04 Canadian)

Editing by Peter Galloway and Maureen Bavdek

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