GST revenue hit hard by recession
It is important to remember that the GST was introduced in 1991 at the rate of 7%. The Conservative government fulfilled its election promise and reduced the rate to 6% in July 2006 and to 5% in January 2008. Economists (and the Liberal opposition) generally condemned the move because of the regressive nature of value-added taxes.
Are these low rates sustainable in the current (post ?) recession era? One thing is sure, federal budgetary deficits are back with a roar; for the seven month period from April 2009 to October 2009 the federal deficit totals 31.9$ billion. According to the latest Fiscal Monitor, 12.1$ billion of this deficit is attributable to actions taken to fight the recession. This leaves a huge increase attributable to reduced economic activity. GST revenue alone were reduced by 2.7$ billions or 16.5%. And the picture will surely worsen by year-end on March 31.
As the recession tampers off, focus will necessarily shift to deficit reduction. Accordingly a rate increase of the GST (you read it here first) is almost a foregone conclusion. Although Finance Minister Jim Flaherty continues to maintain that deficits are temporary and will progressively be reduced by increased economic activity, this view is challenged by the Parliamentary Budget Office.
Structural Deficits now the norm?
While they use somewhat different accounting methods the PBO and Finance Department's forecasts have historically been strongly (96%) correlated but this is no longer the case. For example, for fiscal year 2008-09, Finance Canada estimated a structural surplus of 13.8$ billions while the PBO forecasted a structural deficit of 3.2$ billion and the difference is clearly due to different views about increases in economic activity; more worrisome is that the PBO is now forecasting such structural deficiits ranging from 12.9$ billion to 18.9$ billion for the next five years. Only time will tell if federal revenue will increase enough through increased economic activity, as Flaherty predicts, or if federal finances will remain hindered by burgeoning deficits. The trend shown in the last years of decreasing GDP growth and aging of the canadian population appears to indicate continuing structural deficits, according to to the PBO. Continuing structural deficits demand strong action such as tax increases or spending cuts.
GST to the rescue?
Bearing in mind that each 1% variation of the GST rate represents 5.4$ billion in revenue, "temporary" increases of the GST are easy to predict, should the reality not be as rosy as Flaherty's predictions. The federal government would not be very original in doing so. The Quebec government has already announced that the QST will be increased in 2011 (sic) in order to fight the deficit. American states, burdened by lower revenue have also resorted to increase in sales tax rates.
In addition, the liberal opposition who objected to the GST rates reduction would be ill-advised to now complain of their increase. An increase of the GST may therefore be more palatable than income taxes increases.
Canadians have benefited generally from lower taxes in the past few years. It may now be, the time to "Pay Later". Unfortunately, sales tax increases are just what the (economic) doctor does not prescribe in fragile economic recovery situations, Considering that consumer spending represent roughly 2/3 of the GNP, sales tax increases are a direct disincentive to economic recovery. On the other hand, continuing, ballooning defictis are surely worst than the remedy of tax increases. An increase of the GST may, in the end, simply be the correction of a past aberration.
Comments