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Business Council of British Columbia Submission in Response to Finance Canada's Employment Insurance Premium Rate-Setting Mechanism:

Federal-Provincial Relations and Social Policy
Department of Finance
15^th Floor, East Tower
L-Esplanade Laurier
140 O'Connor Street
Ottawa ON K1G 0G5

Re: Employment Insurance Premium Rate-Setting Mechanism

I am writing to provide you with the views of the Business Council of British Columbia on the Employment Insurance rate-setting mechanism that is currently under review by the federal government.

By way of background, the Business Council of British Columbia, established in 1966, is an association representing approximately 185 large and medium-sized enterprises engaged in business in British Columbia. Our members are drawn from all major sectors of the provincial economy, including forest products, mining, manufacturing, energy, chemicals, transportation, agri-food, telecommunications, information technology, financial services, energy, tourism, retail trade, construction, bio-technology, healthcare, education and the professions. Taken together, the corporate members and the associations affiliated with the Business Council are responsible for one-quarter of all jobs in British Columbia.

In the 2003 budget, the Minister of Finance announced that the government would be consulting premium-payers on a new Employment Insurance (EI) rate-setting regime to be in place by 2005, and that the government's final decision would be based on the following five principles:

• Premium rates should 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 on the business cycle; and,

• Premium rates should be relatively stable over time.

The Business Council supports establishing an independent regime to set employment insurance rates. We are also broadly in agreement with the above five principles. However, we believe that a number of clarifications and changes should be incorporated into the EI rate-setting process.

To begin, it is essential that the new body (or possibly even a revised Employment Insurance Commission) seek public input during the rate-setting process. In this respect, €œexpert advice€ must be understood explicitly to include employers and employer associations. The Business Council would not support establishing a body whose mandate did not allow for meaningful input from the employer community, which after all bears the lion's share of the cost of running the EI system.

A more fundamental issue that is not adequately addressed by the five principles is the accumulated surplus in the EI account. EI premiums are payroll taxes. Other things being equal, such taxes work to lower aggregate employment in the economy. One of the core principles of a revamped EI rate-setting regime should be to keep premiums as low as possible while continuing to meet the core objectives of the program.

Under Section 66 of the Employment Insurance Act premiums are to be set each year at a rate €œthe Commission considers will, to the extent possible,

There is no reference to a cap or any other restriction on running a surplus in the EI account. Although one of the €œnew€ principles enumerated above states that premium revenues should correspond to expected costs, there is no indication over what time period this should occur - or, indeed, whether a surplus should be maintained at all. Arguably, the current cumulative surplus in the EI account was allowed to grow to its present level of $45 billion in part because no effective limits existed on running a surplus or on setting premiums. The result is that the payroll tax burden has been excessive for a long time, including during part of the 1990s when job growth in Canada was notably lacklustre. Of course, the $45 billion EI account surplus is purely notional; the reality is that the surplus funds have been spent. Still, the fact that such a huge surplus - notional or not - was generated is another way of saying that the federal government for many years was over-collecting EI premiums, including from millions of low and modest-income workers and hundreds of thousands of small businesses.

The chief actuary of Human Resources Development Canada has indicated that an EI account surplus in the range of $10 to $15 billion would be sufficient to cover higher program expenditures during periods of economic weakness/rising unemployment. This suggests that an independent agency charged with setting EI rates could comfortably set premiums at or slightly below the projected break-even point. The Business Council sees merit in the idea of freezing EI premiums somewhat below the currently projected 2004 level for an extended period in order to provide stability and predictability for premium-payers.¹ Under this model, the government would then assume responsibility for covering any EI program costs in excess of the revenues collected from the fixed premium rate. In thinking about what might be an appropriate EI premium rate for the next several years, it is important to recognize that unemployment is not likely to return to the levels that prevailed in the 1980s and early 1990s because of changing labour force demographics and expectations that overall labour market conditions will tighten as the first wave of the baby-boom generation starts to retire.

Another issue not directly addressed by any of the five principles relates to equity. Since 1971, the EI premium rate for employers has been set at 1.4 times the employee rate. The Business Council believes the new rate-setting regime should incorporate a re-examination of this basic issue. The government has never offered a compelling justification for maintaining such a marked difference in employer versus employee premiums. The Business Council's position is that the employer multiple should be phased out over the next five years.

A related concern is that the EI system has been expanded over time to create a source of funding for purposes unrelated to the program's original insurance-based mandate. In 2002, EI paid out more than $3 billion in sickness, maternity, parental and special fishing benefits. In addition, $2.2 billion was charged to the EI account for training, job creation and various other programs. Payments for €œregular€ EI benefits amounted to $7.8 billion. Since it was the federal government - not the premium payers - who chose to expand the €œsocial€ dimensions of the EI program, the government itself should be making a significant direct financial contribution to cover the costs of EI. At present it does not do so. The government's plan to add €œcompassionate benefits€ to the EI program next year will move the system even further away from its original insurance-based mandate. The cost of adding €œcompassionate benefits€ should be borne by the federal government through general revenues and not fall on EI premium payers.

Another priority for the Business Council and many other employer organizations is to establish a mechanism for refunding employer over-contributions, which occur frequently when individuals work for more than a single employer within a given calendar year. Employee over-contributions are currently refunded, while those from employers are not. We see no justification for this discrepancy and recommend that it be remedied forthwith.

With respect to mitigating the impact of EI premiums on the business cycle, we believe the program should be administered at a minimum to hold rates constant during economic downturns. Ideally, premiums would actually fall when the economy is weak in order to help support job growth, although we recognize that this may unduly complicate the rate- setting process and is contrary to the principle of stability. In the long run, the best way to ensure that the EI program operates in a manner that offsets the business cycle would be to establish a segregated EI account - which we understand the government is unwilling to consider at this time.

The Business Council of British Columbia appreciates the opportunity to provide our comments on the EI rate-setting process.

Yours sincerely,

Original signed by
Jock Finlayson

Jock Finlayson
Executive Vice President - Policy

Submitted via e-mail: ei-ae@fin.gc.ca
Original to follow by mail.

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1. The 2003 federal budget announced a planned EI rate of $1.98 for employees and $2.77 for employers for 2004. These rates are modestly higher than break-even. [Return]