- Consulting with Canadians -

Canadian Restaurant and Foodservices Association�Submission in Response to Finance Canada's�Employment Insurance Premium Rate-Setting Mechanism Consultation:

Regarding a New EI Rate-Setting Process

July 10, 2003

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Table of Contents

Executive Summary�

Introduction�

YBE�

EI Cost-Sharing�

The Challenge: EI's Current Rate-Setting Process�

CRFA's Solution #1: A Dedicated Trust Fund Operated at Arm's Length from Government�

CRFA's Solution #2: Stable Long-Term Low Premium Rate�

Summary of Recommendations�

The Canadian Restaurant and Foodservices Association�

APPENDIX I�

APPENDIX II

APPENDIX III

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Executive Summary

The Canadian Restaurant and Foodservices Association (CRFA) applauds the government's decision to reform the EI premium rate-setting process and appreciates the opportunity to share the views of the $42 billion foodservice�industry.

As one of the largest employers in the Canadian economy, the foodservice industry provides jobs for more than one million full and part-time employees. Issues that affect the labour market - such as EI reform - are of vital interest to the more than 48,000 businesses which CRFA�represents.

EI program integrity and accountability are issues that urgently need to be addressed. By the end of 2002, employers and employees in all industries had contributed $42 billion in premium payments in excess of the funds required to administer the EI program. The reserve in the EI account is expected to reach $45 billion by the end of 2003. The new rate-setting model adopted by government must include a mechanism to return these surplus contributions to their rightful owners - the employers and employees who exclusively fund the EI program. The new rate-setting process must also be designed to ensure that EI contributions cannot be diverted for purposes unrelated to EI.

In the February budget, the Minister of Finance outlined five principles that will serve as the basis for a new rate-setting process. These principles essentially exist within the current legislative framework, but have been largely ignored by�government.

To ensure that these principles are respected in the future and that they are fully integrated into the new rate-setting process, CRFA has developed two alternative proposals for government's consideration.

CRFA's preferred option is that a truly stand alone EI fund be established and administered at arm's length from government. This is the only way to ensure the financial soundness and integrity of the EI system and to reassure employers and employees who fund the system that their premiums will be well spent.

CRFA's alternative option is to establish by legislation a low, long-term (10year) premium rate that would ensure a gradual drawing down of the $45-billion surplus. Under this option the premium rate could be lowered further if revenues are generated in excess of program costs. On the other hand, an Act of Parliament would be required to raise the rate.

Other EI policy issues that should be considered as part of the new EI rate-setting process are the establishment of a $3,000 yearly basic exemption (YBE) and a return to government cost-sharing of the social components which have been cobbled to the EI program.

Introduction

Canadian Restaurant and Foodservices Association (CRFA) appreciates the opportunity to submit its views and recommendations regarding a new EI rate-setting process. Canada's $42 billion foodservice industry represents 4.0% of GDP and is one of the country's largest private sector employers with over one million full and part-time employees on its payroll. Fully 433,000 youth between the ages of 15 and 24 are employed by foodservice companies. This represents 18% of total youth employment and 42% of the foodservice�workforce.

Recognizing the burden that artificially high rates place on labour-intensive industries, CRFA is on record as objecting to the setting of EI premiums at artificially high levels, and has argued against the use of EI funds for purposes unrelated to employment insurance. The long-awaited consultation on a new rate-setting process is applauded as an opportunity to correct these past mistakes and ensure a strong and viable EI system well into the future.

While EI premiums have been reduced in small increments over the past decade, sharp increases in CPP premiums and legislated changes to the basic exemptions in both the EI and CPP programs have resulted in a steady increase in payroll taxes for entry level workers and their employers. By the end of 2003, employers and employees will have over-contributed $45 billion in EI premiums. These excessive payroll taxes have had a serious effect on business growth in Canada limiting business expansion, economic growth and job creation. The impact on Canada's labour-intensive foodservice industry has been particularly harsh. The average restaurant now pays more in payroll taxes than any other form of tax, forcing restaurants to reduce the labour component of their operations. The average number of workers per foodservice establishment has dropped from 13.7 per restaurant in 1990 to 12.7 in the year 2002. This translates into 63,000 fewer jobs.

As part of the rate-setting review, five principles have been identified by government as essential components in developing a more transparent and sustainable process for setting EI contribution rates:

• Premium rates must be set transparently.

• Premium rates should be set on the basis of independent expert�advice.

• Expected premium revenues should correspond to expected program�costs.

• Premium rate-setting should mitigate the impact of the business cycle.

• Premium rates should remain relatively stable over time.

These principles, while essential to EI reform, are not new. In fact, they are very similar to the rate-setting requirements that currently exist but have not been adhered to by government. The new rate-setting mechanism must ensure that these principles are adhered to and that the process is free of government interference.

This brief includes a discussion of the consultation principles identified by the Minister as they relate to the current legislative framework and to the two alternative rate-setting options recommended by CRFA. These two options�are:

Because the creation of a new EI rate-setting process will require changes to the EI Act, it is an ideal time to review and resolve related EI policy matters. CRFA recommends that a $3,000 yearly basic exemption and a government cost-sharing of the social aspects of the EI program be built into the rate-setting model which the government subsequently adopts.

YBE

CRFA's proposal for a yearly basic exemption (YBE) in the employment insurance program is modeled after the Yearly Basic Exemption in the CPP program. It is an innovative and cost effective way to provide targeted payroll tax relief to the groups most punished by this regressive, profit-insensitive form of taxation - lower-income workers and labour-intensive businesses. At the same time, universal application makes it fair and easy to administer.

The YBE refers to the annual earnings level in which premiums are not applied and not to the first $3,000 of earnings. In terms of benefits, the implementation of a YBE would not necessitate a change in the calculation of benefits. In fact, CRFA would recommend including the $3,000 exemption in the contribution base.

Currently, employees earning less than $2,000 per year can apply for a full premium refund. Those employees earning slightly more than $2,000, however, cannot, despite having virtually no chance of qualifying for EI benefits. Only two- thirds of the individuals eligible for a rebate actually receive it. In addition, the existing rebate applies only to employees and not to employers. These concerns were highlighted by the Standing Committee on Human Resources in its 2001 report "Beyond Bill C-2". (See Appendix I)

In addition, the Standing Committee on Finance recommended the establishment of a YBE in the EI program in both 2001 and 2002 in their "Securing Our Future" and "Canada: People, Places and Priorities" reportsrespectively. (See Appendices II and III)

Introducing a YBE in the employment insurance program would turn a regressive tax into one that proactively supports Canadians at the low end of the income scale - those who will benefit the most from reduced taxes and increased job opportunities. According to research by the Canadian Labour Congress, (CLC) 64% of the $40-billion surplus generated through the EI program came from workers who earned $20,000 or less annually¹. A YBE would also ensure that the recovery of over-contributions to the EI system under a new rate-setting process would be disproportionately higher for lower income Canadians.

EI Cost-Sharing

Because an increasing percentage of benefits are unrelated to the labour market, CRFA also believe it is time for government to pick up a share of the costs for the EI program on a permanent basis. A broad range of social programs have been added to EI over the years such as benefits for parental leave and compassionate leave. These benefits, while introduced as a response to genuine societal needs and concerns, are unrelated to the original intent of EI and now comprise more than 40% of program costs.²

When the EI program began, its purpose was to provide income support for those temporarily and involuntarily out of work. The cost of the program was split between employers, employees and government. Over time government

gradually reduced its level of contribution and in 1990 withdrew its contributions altogether. Today employers shoulder 60% of the costs of the EI program, with employees contributing the balance despite the fact that only $8.9 billion out of the $16.4 billion forecast to be disbursed in 2003 is for regular or pure EI benefits.³

CRFA has long been on record as supporting a more equitable split in EI contributions. The timing is appropriate for government to begin contributing again to the EI program and CRFA recommends that contributions be shared according to the following formula:

Employers: 40%�

Employees: 40%�

Government: 20%

Without government contributing to the program history has shown that the temptation is too great for politicians to add new and expensive programs funded exclusively by employers and employees. Adding government as a partner in the cost of the program will make it more equitable and ultimately improve accountability.

The Challenge: EI's Current Rate-Setting Process

Principle #1 - Transparency

The EI Act was established so that there would be transparency in the setting of the EI rate and so that employer and employee stakeholders who exclusively fund the program would have a say in how rates are set. Part III, Section 66 of the Act states that "the Commission shall, with the approval of the Governor in Council on the recommendation of the Minster and the Minister of Finance, set the premium rate for each year .". In reality, even before the Commission was stripped of its rate-setting powers in 2001, it did not have sufficient autonomy, power or authority to set the premium rate. The Commission operates as a government department and is governed by the guidelines of the Treasury Board and the Public Service Commission. Despite the efforts of the former Commissioner of Employers to present a consensus view of employer associations, the employer and employee commissioners had minimal influence on the premium rate. As a result, the decision on the premium rate was effectively dictated by the Minister of Finance.

The integrity of the Commission and transparency of the rate-setting process was further called into question when a new employer commissioner was arbitrarily appointed last year, without meaningful consultation among the organizations representing employers.

Principle #2 - Based on independent expert advice

The second principle, that the premium rate be set on the basis of independent expert advice, is not currently enshrined in legislation. However, an actuary and his staff do provide a detailed financial analysis of the program on a yearly basis, taking into consideration economic conditions that could impact the financial health of the program and forecasted unemployment rates. Although government solicits expert advice from the actuary on the prudent surplus level and break-even point of the program, his recommendations are consistently overruled by government.

Principle #3 - Revenue neutral

The third principle, that expected premium revenues should correspond to expected program costs, is implicit in the legislation but has also been largely ignored by government.

Part II, Section 66 of the EI Act requires that the premium rate be set to "ensure that there will be enough revenue over a business cycle to pay the amounts authorized to be charged to the Employment Insurance Account; and maintain relatively stable rate levels throughout the business cycle."

Figure 1 provides a historical perspective of EI revenues and expenses over the past three decades. It illustrates how premiums have been set to produce revenues that have far exceeded program costs over the last seven years, resulting in the accumulation of a $42-billion surplus in the EI account by the end of 2002. An additional $3 billion is expected to be added to the reserve by the end of 2003. The federal government has been irresponsible in allowing the reserve to grow to almost a quarter of its annual operating budget resulting in an enormous financial obligation to the employers and employees who exclusively fund the program.�

Figure 1

Principles #4 and #5 - Mitigate impact of business cycle and stable over time

Currently the EI Act requires that the premium rate be set to mitigate the impact of the business cycle and remain relatively stable over time (see Part III, Section 66 above).

Figures 2 and 3 (next page) illustrate the unemployment rate and the EI premium rate from 1976 to 2003. Although the rate-setting process was designed to be counter-cyclical, in reality, it has been pro-cyclical, particularly since the integration of the (then) Unemployment Insurance Account with the Consolidated Revenue Fund in 1986. Premium rates have also fluctuated wildly.

Figure 2

Figure 3

In principle, building up a surplus during times of economic growth makes sense, so that premium assessments do not have to increase during a prolonged recession. In practice, the intention behind establishing surpluses has not been respected. As far back as 1994, in a submission to the Standing Committee on Human Resources, CRFA expressed concerns about this approach: "Unfortunately, our experience has been that surpluses have been too irresistible for government, and have been diverted to other initiatives. CRFA cannot support the anti-cyclical financing approach unless there is a statutory guarantee that the surplus would be accumulated as a cushion for an economic downturn only."

CRFA's fears were well-founded. Government quickly became dependent on the funds in the EI account, first to balance the country's finances, and then to fund new spending initiatives.

The 1986 directive of the Auditor General to integrate the Employment Insurance program into the overall finances of the government has been used as an excuse to justify the misappropriation of EI funds. It was never the intent of the Auditor General to have EI premiums as part of the government's general tax revenue stream, nor for them to be used for purposes other than EI. In fact, the EI account was in deficit, which impacted the overall borrowing requirements of the country.

In the mid-90s the government's rationale for keeping EI rates artificially high was to protect against premium hikes during an economic downturn. Finance officials frequently pointed out how quickly a surplus can evaporate in the event of a recession, citing the $2-billion surplus in the account at the end of 1990, and the nearly $6-billion deficit in place by the end of 1993. Officials failed to note, that the account imbalance was exacerbated by government cessation of contributions in 1990. Prior to 1990, the UI program was funded by employers, employees and the federal government. From 1988 to 1990, federal government contribution to the UI program amounted to 15-20% of total receipts. These contributions ostensibly helped to finance regionally-extended benefits and benefits for self-employed fishermen, benefits which were out of proportion to the premiums collected. Since 1990, these parts of the EI program have been entirely funded by premiums paid by employers and employees. Had the federal government made its contributions in 1991 and 1992, the UI account deficit would have been negligible.

Once the EI surplus accumulated to more than double the maximum surplus that the chief actuary of the program recommended was prudent, the former Minister of Finance abandoned the "rainy day" fund rationale and admitted that EI was simply another tax base that was needed to meet the overall financial considerations of the government.

EI revenue will undoubtedly remain as just another tax base, and a most regressive one, as long as the EI account is consolidated with general revenue. A counter-cyclical approach to rate-setting is pointless without first establishing a separate, dedicated fund, because government's accounting principles do not allow surpluses to be carried forward from year to year. This leaves employers and employees vulnerable to premium rate increases when the unemployment rate goes up, regardless of the size of the "reserve" in the notional EI account.

CRFA's Solution #1: A Dedicated Trust Fund Operated at Arm's Length from Government

CRFA has concluded that the only way to ensure that the rate-setting principles identified by the Minister of Finance are followed and respected is to re-establish a dedicated trust fund that is separate from Canada's public accounts and operated at arm's length from government.

This new entity would be similar to provincial Workers' Compensation Boards in that government would be required to delegate control of the financial and operating policies of the insurance program. Workers' compensation is a good model of a quasi-government agency that works effectively, and that, for the most part, is free from political interference. In Ontario, the Workplace Health and Safety Board is classified as a Schedule III Crown agency. The full extent of the Board's powers are set out in statute, and include administrative and financial accountability. The provincial government is responsible for appointments to the Board, but once Board members are in place they act independently. The Board reports to the Legislature through the Minister of Labour. Services are regulated by government. The government has supervisory responsibility of the Board to ensure the public is protected, and the Board is audited annually by provincial auditors, however, the government has very little influence over Board policy.

The Auditor General's directive to consolidate the EI account with general revenue would no longer apply if government followed the Canadian Institute of Chartered Accountant (CICA) guidelines when establishing EI as a separate entity. EI would become a government business enterprise or a Crown corporation.

CICA guidelines define a government business enterprise as follows:

• "A government business enterprise is an organization that has all of the following characteristics:

The CICA guidelines go on to say:

Establishing the EI insurance plan as a type of "business enterprise" or Crown corporation and replacing the current EI Commission structure with a Board of Directors similar to WCB with statutory responsibility for managing both EI funds and operations would meet the Minister's principles and objectives. A legislative framework would remain in place to determine services, benefits and the appeal process, but not the financing of the EI program itself.

Principle #1 - Transparency

To ensure transparency, a representative Board would be appointed consisting of employer, employee and government representatives to reflect the financial contribution of each group (40:40:20). In addition, CRFA would recommend the inclusion of professionals from the insurance industry. The Board, independent from government, would have explicit accountability to stakeholders, and would apportion the provision of fair benefits against the cost of premiums and the financial soundness of the system. The Board would continue to employ an actuary who would report publicly on the state of the program.

Principle # 2 - Based on independent expert advice

The in-house actuary would analyse and monitor the financial health of the plan. In addition, a statutory requirement would require the Board to consult with stakeholder groups, economists and other outside experts. The three-year consensus forecast published by the Ministry of Finance each fall could be the basis of the economic forecast used to calculate the premium rate.

Principle #3 - Revenue neutral

Under the new structure, the program would not be permitted to run a deficit. A responsible Board of Directors would be required to ensure that sufficient funds were available to meet program costs. The EI fund would be managed separately from consolidated revenue, necessitating the creation of an investment fund that is professionally managed. There would be no opportunity to divert funds for programs or activities unrelated to EI.

Principle #4 and #5 - Mitigate impact of business cycle and stable overtime

The new financial entity would begin with a surplus large enough to cover over three years of operating costs. This will ensure that EI premiums can be set, as originally intended, to cover cyclical expenses of the program. Once the current massive surplus is depleted, a maximum surplus as a percentage of annual program costs could be established through statute, and any revenues in excess of that would automatically be rebated to premium payers in the following year though a reduction in the rate. A responsible, independent Board removed from the political whims of government will enhance the integrity of the program and reassure the employees and employers who fund the program that their premiums are being spent appropriately. This will also result in greater stability in premium rates.

CRFA recognizes that the $45 billion surplus is a "notional" account only and cannot be turned over to employers and employees immediately. CRFA recommends that a repayment plan be established that would see both the interest and principle returned to the new fund over a period of several years.

Finance officials have pointed out that government "took responsibility" for past deficits in the EI program, implying that the EI account benefits from interest payments when it is in surplus but needed to be bailed out when it was in deficit. In reality, employers and employees, through their premium payments, repaid every cent of EI debt plus interest. Employers and employees in the foodservice industry are not prepared to forgive the government debt which is rightfully owed them. It would be irresponsible for government to develop a new premium rate-setting system that did not account for this entitlement.

CRFA's Solution #2: Stable Long-Term Low

Premium Rate

CRFA's second option, if government refuses to establish a stand-alone EI fund, would be for government to commit to a stable, long-term (10-year) EI rate. The EI account would continue to exist as a notional entry and a premium rate would be established to ensure that the EI surplus in the account is drawn down to a pre-set minimum level over a 10-year period. There would be a statutory requirement to reduce premium levels further if the surplus in the account failed to decrease or began to accumulate again. Under this approach, government would not be required to hand back the surplus, except in small amounts over a period of time. However, government would be required to absorb the additional cost of benefits if and when the unemployment rate rises. In order to give employers and employees some assurance that they will not lose their claim to the surplus they have contributed to, or that they will not be overcharged in future, an Act of Parliament would be required to raise the EI premium rate.

CRFA recognizes that this option requires an element of trust on the part of employers and employees that government will honour its commitment to a low premium rate over an extended period of time, and that a future government will not legislate changes to the rate. This option also carries a greater financial risk for government if economic conditions deteriorate. However, the long-term economic outlook suggests stable economic conditions and low unemployment levels.

Over the next seven years, the unemployment rate in Canada is forecast to decrease steadily from its current level of 7.8%. While increasing economic prosperity will lead to greater labour requirements by businesses, a jump in the number of retirees will restrain working-age population growth. The combination of these two factors will produce a tighter labour market in Canada over the next decade. Consensus Economics forecasts Canada's unemployment rate will fall to 7.2% by 2005 and to 6.5% by 2010. There are no economic institutions forecasting an increase in the unemployment rate over this period.

The forecast for a low unemployment rate is in stark contrast to the double-digit unemployment rates during the 1981-82 and 1990-91 recessions. The improvement in federal and provincial government finances has allowed the Bank of Canada to lower interest rates which has, in turn, produced a more stable macroeconomic environment. Low interest rates and recent tax cuts have also led to greater business investment and increased consumer spending, both of which will spur economic growth over the coming years and lead to greater economic prosperity. These factors will limit the risk to government of setting a low, long-term premium rate.

This option could also meet the Minister of Finance's reform principles as follows:

Principle 1 - Transparency

The EI premium long-term rate would be set by an Act of Parliament, which would ensure transparency while facilitating sincere consultation and debate. Additional safeguards would be legislated to ensure a continuous reduction in the $45-billion surplus. An actuary would continue to report publicly on the state of the program.

Principle 2 - Based on independent expert advice

This approach would eliminate the need for an advisory board or commission. However, there would continue to be an actuary who would provide analysis on the financial health of the system. The long-term rate would be calculated on the basis of unemployment rate forecasts over a 10-year period. Again, CRFA recommends a statutory requirement to consult with stakeholder groups, economists and outside experts.

Principle # 3 - Revenue neutral

The long-term rate would be established to include the effects of the interest on the surplus, using unemployment rate forecasts that would allow a gradual reduction of the surplus over a 10-year period. This would mean that rates would be set slightly below the break-even point to adjust for rates that were set well above the break-even point over the last seven years.

Principles #4 and #5 - Mitigate impact of business cycle and stable over time

A legislated long-term, low, stable rate will, by definition, mitigate the impact of the business cycle and be stable over time. This approach requires that government commit to covering increased program costs in the event of an economic downturn and may mean raising other taxes or cutting spending to make up for any shortfall in EI revenues if program demands increase.

Summary of Recommendations

• Ensure that the new rate-setting model adopted by government includes a mechanism to return the $45 billion in the EI reserve account to employer and employee stakeholders.
• Establish EI as a separate stand-alone fund separate from consolidated revenue, operated at arm's length from government

or

• Establish by legislation a low, long-term (10-year) premium rate that will ensure a gradual draw down of the $45 billion surplus.
• Incorporate a $3,000 yearly basic exemption (YBE) into the employment insurance program.
• Reinstitute government contribution to EI funding to cover a portion of the costs for benefits unrelated to the labour market.

The Canadian Restaurant and Foodservices Association

The Canadian Restaurant and Foodservices Association (CRFA) is the largest hospitality association in Canada. Since its founding in 1944, CRFA has grown to more than 16,500 members. Members include restaurants, quick-service establishments, hotels, caterers, institutions, educators and foodservice suppliers. Approximately 80% of CRFA members are independent businesses with the remaining 20% being regional and national chains.

The association is funded by membership fees and non-dues income from member services and trade shows. CRFA's mission statement expresses our function: "We will create a favourable business environment and deliver tangible value to our members in all sectors of Canada's foodservice industry". Creating a "favourable business environment" includes working to influence government policy in a fashion that will allow our industry to grow and create job opportunities for Canadians.

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Appendix I

Excerpt From

Beyond Bill C-2: A Review of Other Proposals to Reform Employment Insurance

E. Coverage

1. Coverage for Individuals with Low Earnings

Prior to the 1996 reform, individuals who worked fewer than 15 hours in insurable work or earned less than 20% of maximum weekly insurable earnings were not covered under UI. As noted above, the first hour of work is covered under EI, but in order to reduce the impact of this on low-income individuals, those who earn less than $2,000 a year are entitled to a full premium refund. This refund is considered by some to be too low as it fails to capture many individuals (e.g. students) who earn more than $2,000 per year, but are unable to obtain enough hours of insurable employment to access EI.

According to the most recent available data, more than 1.2 million individuals were eligible for a premium refund in 1998. However, only 838,620 individuals applied to have their premiums refunded. [15]

The fact that almost one-third of those eligible for a premium refund failed to do so concerns us; it is virtually impossible for individuals earning less than $2,000 to qualify for EI. To reduce administrative complexity and to ensure that all individuals, not just those who apply for a premium refund by filing an income tax return, are treated equally, it was suggested that the government introduce a yearly basic EI premium exemption on the first $2,000 of earnings. This approach is not only fairer to workers with low earnings, but also to employers who are currently required to pay premiums on behalf of workers who receive a premium refund. This latter issue is addressed in recommendation 12.

Recommendation 7:

The Committee recommends that the government consider increasing the current earnings threshold for an EI premium refund to $3,000 as well as consider converting this refund to a yearly basic premium exemption.

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Appendix II

Excerpt From

Securing our Future
Report of the Standing Committee on Finance

The second issue raised by witnesses, notably from groups like the Canadian Federation of Independent Business, the Hotel Association of Canada, the Canadian Tourism Association, the Canadian Restaurant and Foodservices Association and the Retail Council of Canada, is a yearly basic exemption (YBE) for EI similar to the used in the Canada and Quebec Pension Plans. A YBE would exempt employers and employees from paying EI premiums on the first few thousand dollars of an individual's income. Witnesses suggested a $2,000-$3,000 YBE.

The Committee notes that the House of Commons Standing Committee on Human Resources Development and the Status of Persons with Disabilities (HRD Committee) supported a $2,000 YBE in its May 2001 report, Beyond Bill C-2: A Review of Other Proposals to Reform Employment Insurance. That Committee remarked that currently a third of the 1.2 million individuals eligible for a premium refund in 1998 applied to have their premiums refunded, and that a YBE would "reduce administrative complexity and . ensure that all individuals, not just those who apply for a premium refund by filing an income tax return, are treated equally.. This approach is not only fairer to workers with low earnings, but also to employers who are currently required to pay premiums on behalf of workers who receive a premium refund."

We recognize that the weakened economy has increased federal fiscal pressures and has limited [the government's] flexibility and options. .Our preferred approach is a $3,000 YBE for Canadians under the age of 25�only.� Canadian Restaurant and Foodservices Association	The Committee notes that, at $2.3 billion, a full YBE would be costly to implement and is not affordable given the current economic downturn and need for increased security spending. The Committee recommends that the government consider implementing a YBE, and that, in the interim, it take into consideration the recommendation of the Canadian Restaurant and Foodservices Association.

Appendix III

Except From

CANADA: People, Places and Priorities Report of the Standing Committee on Finance

Another proposal focused on the creation of a yearly basic exemption (YBE) for EI, similar to that which exists in the Canada and Quebec Pension Plans. A YBE would exempt employers and employees from paying EI premiums on part of an employee's income, and would primarily benefit labour-intensive sectors of the economy that employ immigrants, students and part-time workers. The Canadian Restaurant and Foodservices Association has been a main proponent of this view, believing that such a change would increase both the disposable income of Canadians with the greatest propensity to spend, and the ability of labour-intensive business to retain staff. It has proposed to the Committee that a YBE of $3,000 be established. At current premium rates of $2.20 per $100 of insurable earnings, the Association has estimated that the cost would be about $2.2 billion annually, slightly less than the expected surplus for 2002-03.

The Committee realizes that the concept of a YBE for the employment insurance program is not new. The House of Commons Standing Committee on Human Resources and the Status of Person with Disabilities supported a $2,000 YBE it its May 2001 report, Beyond Bill C-2: A Review of Other Proposals to Reform Employment Insurance. The report noted that a YBE would "reduce administrative complexity and . ensure that all individuals, not just those who apply for a premium refund by filing an income tax return, are treated equally. This approach is not only fairer to workers with low earnings, but also to employers who are currently required to pay premiums on behalf of workers who receive a premium refund."

Selected individuals also support the initiative. For example, Joseph Polito shared with the Committee his view that "[t]he exemption will provide a financial incentive for employers to create a bias to full employment. Employers will save money by reducing hours, not employees, during recessions, and save money by hiring rather than relying on overtime good times."

The Committee believes that the idea of a YBE in the context of the EI program has merit. In our view, it would stimulate both consumer spending and employment creation. It is from this perspective that the Committee recommends that:

Recommendation 9

The federal government amend the Employment Insurance Act to create a yearly basic exemption. The amount of the exemption should be determined following consultation with stakeholders. This change should occur concurrently with a reduction in Employment Insurance premium rates.

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1. Canadian Labour Congress, CLC Research Bulletin, May 2002. [Return]

2.��2002 Employment Insurance, Monitoring and Assessment Report, March 31, 2003 and Outlook for EI Premium Rates 2003, Actuarial Services, HRDC, Sept. 2002. [Return]�

3. Ibid. [Return]