Flaherty Caps Canada Payroll Tax on Fragile Recovery

Canadian Finance Minister Jim Flaherty scaled back plans to withdraw stimulus by limiting proposed increases to payroll taxes amid signs of a slowing recovery.

Canada will raise premiums for employment insurance by 5 cents per C$100 ($97.18), less than the 15 cent maximum that could be recommended by an independent panel, Flaherty said today. The measure will cost the government C$1.2 billion in forgone revenue next year.

“If we allowed the maximum of 15 cents to happen, then we would be running the risk of some significant economic harm at a time of fragile recovery,” Flaherty said in Ottawa.

The governing Conservatives are relying on higher employment insurance premiums to help the country become the first in the Group of Seven to balance its budget within five years, economists say. Flaherty’s March budget projected that annual revenue from the payroll tax will increase by C$10 billion over that time.

The government “is depending critically on these increases in employment insurance premiums to hit their budget balance target,” said Dale Orr, an economist at Economic Insight, in a telephone interview.

Better Than Nothing

“It’s better to have a smaller increase in EI premiums in January than the previously scheduled increase,” Scott Brison, the opposition Liberal Party’s finance critic, told reporters in Ottawa. “But we really question whether or not an increase at all makes sense with such fragile job numbers.”

Canada’s jobless rate was 8.1 percent in August, greater than the 6.1 percent two years earlier as Canada went into a recession, according to Statistics Canada.

Trade, wholesale sales and manufacturing shipment data out this month have failed to meet economist forecasts and the country’s trade gap rose to a record C$2.7 billion in July. Statistics Canada today reported the economy shrank 0.1 percent in July.

Flaherty said the government will review the process that sets increases to employment insurance premiums and that the system will break even over time. The premiums will be allowed to increase by a maximum of 10 cents per C$100 in earnings after 2011.

Hitting the Brakes

“The important thing here is that the government is taking actions that will allow the recovery to continue rather than putting the brakes on the economy,” Perrin Beatty, president and chief executive officer of the Canadian Chamber of Commerce, told reporters in Ottawa.

Flaherty froze employment insurance premiums for two years in his 2009 budget as part of a C$47 billion stimulus package to help the economy cope with the global recession. He had announced plans to increase them in 2011 “in order to balance the EI program over time,” according to the 2010 budget documents.

The Conservatives created a panel in 2008, the Canada Employment Insurance Financing Board, to set rates for premiums. That panel recommended the government boost the rate by C$0.15 for every C$100 of insurable earnings, two people familiar with today’s announcement said earlier. The rate was frozen at C$1.73 per C$100 of insurable earnings in 2009 and 2010, which the finance department projected would cost C$2.45 billion in foregone revenue over two years.

Global Weakness

Flaherty’s most recent fiscal plan, released in March, projected that revenue from employment insurance premiums would increase 14 percent to C$20 billion in the fiscal year that begins next March. That revenue would rise to C$26.6 billion for the fiscal year ending March 2015.

Weakness in the global economy has led economists to mark down forecasts for Canadian growth and prompted lawmakers to ramp up calls for the government to implement additional stimulus measures.

Flaherty said yesterday Canada’s deficit in the fiscal year that ended in March may exceed a prior estimate of C$53.8 billion because of payments to provinces that adopted a new harmonized sales tax. Flaherty forecasts a deficit of C$49.2 billion for the current fiscal year.