Michael Smart
Cutting the GST for a short time won’t do much to make life more affordable for families, and it will do nothing to beat inflation. But a GST holiday would get consumers spending more. That would give the economy a boost it might well need, as the recovery faces headwinds this fall from a possibly resurgent coronavirus and from economic shocks in the rest of the world.
Conservative Leader Erin O’Toole is right to promise a GST tax holiday in December if he is elected – although he’s wrong about why we need it.
Cutting the GST for a short time won’t do much to make life more affordable for families, and it will do nothing to beat inflation. But a GST holiday would get consumers spending more. That would give the economy a boost it might well need, as the recovery faces headwinds this fall from a possibly resurgent coronavirus and from economic shocks in the rest of the world.
All parties in this election campaign promise that their governments would continue to borrow and spend to get the economy back on its feet. But the Liberals’ stimulus plan is to continue to give cash transfers to seniors, displaced workers and businesses.
The problem is that people are saving those cash payments, not spending them. Household saving is running more than $150 billion higher annually than it was before the pandemic. That might be good for household balance sheets in the long run, but it won’t get the economy firing on all cylinders now, when we need it.
Cutting the GST gives money to families too – but only if they spend, not save it. A GST cut would encourage consumers back into stores, unlocking some of the extraordinary level of personal savings accumulated during the pandemic.
A recession-era sales tax reduction is not a new idea – and it is not an electoral gimmick. The U.K. government made a reduction in sales taxes a key part of its stimulus package after the 2008-09 financial crisis. Several European countries have already implemented sales tax reductions to support their economies during the pandemic.
In recent research for the Finances of the Nation project, I showed that sales tax cuts are effective. I looked at what happened the last time a sales tax cut happened – in 2006, when Saskatchewan reduced its sales tax rate by two percentage points. (Not surprisingly perhaps, tax cuts happen a lot less frequently than tax increases.)
The evidence shows that prices of taxed goods and services fell immediately by almost the full amount of the tax cut. In other words, businesses passed the tax saving onto consumers, rather than keeping it for themselves.
And consumers responded. Retail sales in Saskatchewan rose by five per cent in the year after the tax cut, compared to other provinces that kept their tax rates constant. Mr. O’Toole’s GST holiday would be larger than Saskatchewan’s, and it would likely have an even larger effect on consumer spending.
The fiscal cost of the GST holiday would be modest. The government would lose about $2.5 billion in revenues it would otherwise collect in December – and possibly somewhat more, if consumers move purchases of big-ticket items into December, to take advantage of the tax break.
For better or for worse, that revenue loss is a drop in the bucket, compared to the government’s planned deficit of $166.7 billion in the current fiscal year. And it would be money well spent, if it keeps the recovery on track.
In fact, the Conservative proposal is too modest. The GST holiday should last for longer. That would create a real incentive to spend more, not just move planned spending from other months into December.
The Conservative tax holiday would apply only to spending “in retail stores,” which presumably excludes spending on accommodations, travel and other services, and perhaps even purchases of cars and other big-ticket items sold outside the usual retail environment.
There’s no reason to be so stingy. All spending is good for the recovery, as long as the economy remains below its potential, as it is right now. So to generate the right level of stimulus, the GST holiday should last at least three months, and it should apply to all taxable purchases, other than newly built homes.
O’Toole says he wants to be the “man with the plan” to secure the recovery. A GST holiday would put us on the right track, so let’s go a little further in that direction than he has proposed so far.
