The Christmas present our economy needs

Conservative leader Erin O’toole is right to promise a GST tax holiday in December if he’s 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 promise that if elected they 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 with that approach is that people are saving those cash payments, not spending them. Household saving is running more than $150 billion a year higher 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 also gives money to families — but only if they spend. A GST cut would coax consumers back into stores, unlocking some of the extraordinary level of personal savings accumulated during the pandemic.

A recession-era sales tax reduction is neither a new idea nor simply an electoral gimmick. The U.K. government made a reduction in sales taxes a key part of its stimulus package after the 2008-9 financial crisis, while 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 can be effective. I looked at what happened the last time one happened in this country – in 2006, when Saskatchewan reduced its sales tax rate by two percentage points. (Not surprisingly, tax cuts happen a lot less frequently than tax increases.) The 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 on to consumers, rather than keeping it for themselves.

And consumers responded. In the year after the tax cut, retail sales in Saskatchewan rose by five per cent compared to other provinces that kept their tax rates constant. Mr. O’toole’s GST holiday would be larger than Saskatchewan’s and so would likely have an even bigger 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 — 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 if it keeps the recovery on track, it would be money well spent.

In fact, if anything, the Conservative proposal is too modest. A longer GST holiday would create a real incentive to spend more, not just move planned spending from other months into December.

CUTTING THE GST ALSO GIVES MONEY TO FAMILIES — BUT ONLY IF THEY SPEND.

Moreover, 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 — especially around Christmas. With the economy below its potential, as it is right now, all spending is good for the recovery. 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, which don’t need stimulus right now.

O’toole says he wants to be the “man with the plan” to secure the recovery. His 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.