MNI INTERVIEW: Canada May Entrench Richer Jobless Benefits

Canada may entrench some of the expansion of jobless benefits given during the pandemic, which could lead to a more permanent shift in payroll taxes or the fiscal deficit, former finance department analyst and RBC economist Colin Guldimann told MNI.

The government last week announced a CAD39 billion one-year plan aimed at moving 3 million people off relief checks to the traditional employment insurance (EI) system, which leaves open the question of what happens when that phase runs out, he said in a phone interview. The new system relaxed rules such the number of working hours needed to qualify, which allows some gig and contract workers to qualify, and set a higher minimum payout of CAD400 a week.

The shift "suggests to me there is some thinking going on in the government about the adequacy of EI more broadly," Guldimann said. "That is a concrete potential policy risk for the outlook over the next little while." Before RBC he worked on housing policy and macroeconomic research at the Department of Finance.

Prime Minister Justin Trudeau has said the jobless benefit system needs an overhaul to adapt to an era of gig and contract workers who have been left out, but the employment and finance ministers who announced the changes last week didn't say if they plan to make a permanent shift. Such changes could be welcomed by the Bank of Canada where officials have said fiscal policy needs to play a bigger role in a prolonged recovery that began with low interest rates.

Payroll Tax Freeze

While more expensive jobless benefits could lead to a rise in the payroll taxes that fund the system, new Finance Minister Chrystia Freeland said last week the employer and employee premiums will be frozen for two years at a cost of CAD2 billion. The government also must be mindful about keeping the principle that the benefits system pays for itself over a seven-year cycle, Guldimann said.

The extra cost of the package will likely push this year's federal deficit to CAD375 billion or 16.9% of GDP, RBC predicts. That's up from the government's July update showing a CAD343 billion deficit.

The economy still benefits from that kind of broad support for incomes through the pandemic, helping stave off longer-term damage from potential defaults by indebted households, he said.

"I don't think we're at the point where the federal debt is becoming unsustainable, just given how much we expect the economy to grow in the next couple of years," he said. "There are risks to the fiscal outlook."