The 2010 Budget assumed the employment insurance (EI) premium rate would increase by 15 cents (employee rate) a year, from 2011 to 2014, (the rate was frozen in 2009 and 2010) contributing an additional $6 billion to government revenues by 2014-15. The increase in EI revenues is critical to the government’s plan to eliminate the deficit over the medium term.

The Minister of Finance has now announced that the government will limit the increase in the employment insurance (EI) rate for 2011 to 5 cents (employee rate) rather than the 15 cents “recommended” by the Canada Employment Insurance Financing Board (CEIFB). In addition, the annual change in future years would be limited to 10 cents rather than the current 15 cents. This will cost the government about $3 billion in 2014-15 compared to the budget.

Since the government seems to be grudgingly admitting that the EI rate increase is a tax on jobs, particularly for the young and less skilled, why increase the EI rate at all, especially when the Minister of Finance admits that the recovery is fragile and the unemployment rate is stuck at 8%? Why not freeze the EI rate and find a better way to raise revenues to eliminate the deficit?

But, there are other pressures which will need to be addressed over the medium term, if the government wants to achieve a balanced budget.  So there challenge is to find money to fund a EI rate freeze and address the other pressures.

The government could try to meet these challenges by cutting government programs. But Departments are already under pressure to find savings from their programs to meet the Budget 2010 commitments. Significant additional savings to offset a freeze in EI premium rates and to fund new initiatives can only be secured through the complete elimination of existing programs. Asking departments to find “efficiency gains” will not solve the problem. It will be interesting to see what the review of programs currently underway comes up with before considering further reductions

The reality is that the government will need to look, not just for more revenues, but also for better ways to raise revenues. Taxing jobs makes no sense at all.

Maybe cutting the GST, which costs $14 billion a year, in favor of a tax on jobs, wasn’t such a good idea after all. Bad policy decisions inevitably catch up with you.