Source: The Canadian Press

The federal government is scaling back a planned hike to Employment Insurance premiums and limiting future increases.

The move follows warnings from business groups that the original boost would have cost thousands of jobs and hurt the fragile economic recovery.

Finance Minister Jim Flaherty announced Thursday that the government will hike premiums by five cents per $100 of insurable earnings on Jan. 1 instead of 15 cents.

Flaherty also said the government will limit future increases to a maximum of 10 cents per $100 of insurable earnings.

He said the decision will save employers and employees $1.2 billion next year over what they would have paid under the planned hike.

The announcement limits the 2011 premium rate to a maximum of $1.78 per $100 of insurable earnings.

“This will support job creation by leaving more money in the hands of businesses and their employees … in a time of fragile economic growth,” Flaherty said.

“Together, these new limits strike an optimal balance between supporting economic recovery and ensuring that the EI program breaks even over time.”

The minister is also launching cross-country consultations on how EI rate-setting “can be further improved to ensure more stable, predictable rates going forward.”

“In reviewing EI rate-setting, we will not abandon our commitment to a program that breaks even over time,” he said.

While the Canada Employment Insurance Financing Board will continue to ensure EI revenues only cover program costs, Flaherty said it’s “obvious that the unprecedented effects of the global financial crisis have taken their toll on the current rate-setting mechanism.”

“The cumulative deficit built up over the last two years would require high, steady increases in EI premiums over a number of years to repay the deficit in the program’s finances,” he said.

“That is something that is simply not appropriate at a time when we are trying to support economic growth and recovery.”

The Canadian Federation of Independent Business had estimated the projected maximum hikes could cost as many as 170,000 jobs by making hiring more expensive.

“Certainly this is a step in the right direction and one that we had to fight for,” said Satinder Chera, a federation vice-president.

“When we’ve surveyed small-business owners, they’ve often said that payroll taxes are really one of the biggest impediments to growing their business, to hiring employees. In a sense, they’re a job-killer.”

Chera said the campaign against the hike was “probably the biggest lobbying effort in the history of the CFIB.”

The CFIB didn’t get everything it wanted, since there hasn’t been a complete rate freeze, but Chera said it recognizes the EI system has to pay for itself and be affordable for employers and employees.

The head of the Canadian Labour Congress said he supports the change but warned it won’t solve the shortcomings of the EI system.

“We’re happy that the government has recognized that they should take most of the impact of the deficit in the EI fund … from general revenues, rather than increase the premium,” Ken Georgetti said from Victoria.

“But we’re still hopeful that the government is going to look at the number of people falling off the EI system and extend those benefits to those people as well.”

The EI system doesn’t have a mechanism to collect enough from employers and employees during good economic times to cover the costs of a major economic downturn and massive job losses.

“When the economy is at its worst, is the time that it has to start to raise premiums all the time. It’s not a good structure for the EI fund or for the system,” Georgetti said.

The CLC has met with Finance officials and urged them to extend the period when unemployed Canadians are eligible to receive EI payments, he said.

While Canada’s economy has recouped the more than 400,000 jobs lost during the recession, the unemployment rate remains at 8.1% — about two points higher than in 2008.

Statistics Canada says there are about 370,000 more Canadians officially unemployed now than was the case two years ago.

Restaurateurs said Thursday’s measures improve a bad situation, but they said their payroll tax bill will still increase by $100 million next year.

“In an industry like ours that invests in people, not machinery, payroll taxes are a huge issue,” said Garth Whyte, head of the Canadian Restaurant and Foodservices Association.

“Today, we’ve been told the EI hurricane threat has been downgraded from Level 5 to Level 2.”

The $60-billion restaurant industry employs more than one million people.