In a recent Opinion Piece in the Globe and Mail, Ken Boessenkool, the former Chief of Staff to Stephen Harper, argued that a cut in the GST would satisfy most of “the design elements of an ideal stimulus stimulate the economy”. He set out four design elements: timing, speed, target, and sustainability.

With respect to timing, a stimulus package should be delivered “just before an economic slowdown”, which would be ideal if governments had perfect foresight, which of course they don’t, unless you’re a Conservative.  He stated, “The last GST/HST reduction was enacted on January 1, 2008, just as the Canadian economy began to tumble as a result of the global economic downturn”. This would represent exceptional forecasting, except Jim Flaherty denied the existence of a recession in Canada in his November 2008 Economic and Fiscal Update. It was only after public criticism of the November 2008 Update that the Harper Government finally admitted that Canada was in a recession.  The GST/HST was cut in two stages: the first in July 2007 and the second January 2008. The cuts in the GST/HST were done solely for political reasons, and in no way helped Canada weather the global economic downturn better than most other countries, as alleged by Mr. Boessenkool.   All they did was make the ensuing deficit worse.

With respect to speed, a reduction in the GST/HST can be implemented immediately and does not require the tabling of a budget (neither does a cut in income taxes).  The Minister could table a Notice of Ways and Means Motion in the House of Commons, implementing the change effective at midnight. Tax changes do not required passage of the applicable legislation before they become effective.  Mr. Boessenkool is correct in stating it could be implemented much faster than infrastructure spending,

With respect to target, a reduction in the GST/HST would encourage spending.  If temporary, it would simply move up spending from the future period to the current period. But when is a cut in the GST temporary, certainly not under the Conservatives. If permanent, some of the savings, especially on big-ticket items could result in higher savings as well. 

However, the current slowdown is largely concentrated in the oil-producing provinces.  As such, any stimulus measures should be largely earmarked to these provinces rather than the country as a whole.  Measures, therefore, should be directly to these provinces, such as through changes to the employment insurance program, as done during the financial meltdown in 2008 and 2009, increased training funding, etc. and not through general tax changes.  The current situation is not your typical cyclical slowdown.  Structural changes are required in the oil-producing provinces to diversify their economies. This will require improving the economic fundamentals in those provinces, which cannot be accomplished through a cut in the GST/HST.

On sustainability, the author argues that since the federal government is currently in surplus, a permanent cut in the GST/HST is possible. However, the federal government is not currently in a surplus position. Although financial results for the first eight months of 2015-16 reported a surplus of $1 billion, that surplus is entirely attributable to the sale of the government’s remaining shares in General Motors.  For the year as a whole, a deficit of possibly up to $3 billion is now forecast.  In addition, most private sector economists expect deficits in the $20 to $30 billion range over the next four years.  This is the result of slowdown in economic growth on the federal government’s automatic stabilizers as well as the initiatives promised in the 2015 election.  A one-percentage point cut in the GST/HST would cost the federal treasury up to $7 billion per year, thereby further increasing the deficit. The federal government’s fiscal position would no longer be sustainable – it would be running a structural deficit which could only be eliminated through program cuts and/or revenue increases. Mr. Boessenkool states that any cut to the GST/HST could be made temporary.  The changes of that happening are very unlikely.   

The proposal to reduce the GST/HST should be viewed as another attempt to further reduce federal revenues – in short to “starve the beast”. This was the Conservative strategy that was introduced in 2006 and subsequently led to 9 years of deficit and increase of $150 billion in government debt.

Such a measure would result in an unstable fiscal situation – a situation in which the federal government would incur ongoing deficits and an increase in the debt-to-GDP ratio.  The two percentage point reduction in the GST/HST from 7% to 5% in 2007 and 2008 eliminated the inherited fiscal surplus and resulted in a structural deficit at that time.  This was only resolved through major cuts to direct program expenses and a reduction in the escalator for Canada Health Transfer, the latter putting major fiscal pressures on provincial governments. Private sector economists did not support the reductions to the GST/HST at that time. Today, many of these economists are recommending that the federal government restore the cuts to the GST/HST and using the increase in revenues to reduce taxes on income.   

Besides being bad public finance policy a cut in the GST would be bad tax policy. In the current economic circumstances (inadequate demand and declining economic potential) the right tax policy would be to increase the GST and use the revenues to cut income taxes. Even Jack Mints, a senior tax adviser to the Conservatives, recommended this.



Add new comment