Business

Ottawa's GST cut hiked deficit by as much as $10B

For the federal Liberals, revisionist history revolves around the Conservative government's two percentage point cut to the seven per cent Goods and Services Tax. But what if the Harper government had decided to hold off on its two GST cuts?

Playing "what if" games are usually reserved for sporting events or the dating world.

In public policy, however, rethinking what a government did or didn't do usually involves money, as in: "If only the government had or hadn't spent this cash, we'd be better off."

For the federal Liberals, revisionist history these days revolves around the Conservative government's two-percentage-point cut to the seven per cent Goods and Services Tax starting in 2006.

Indeed, squeals of outrage burst from the opposition side of the House of Commons as Prime Minister Stephen Harper ratcheted down the much-hated seven per cent GST by one point on July 1, 2006, and another percentage point on January 1, 2008.

The Harper government brought in its sales tax cut in a bid to stimulate the economy, something that might not have been necessary given that the country was already growing at a rate of almost three per cent at the time.

Finance Minister Jim Flaherty is stuck dealing with looming $50 billion deficit ((Sean Kilpatrick/Canadian Press))

As soon as the government announced the policy, the Liberals began griping that the GST was a guaranteed cash generator that would keep the nation's finances in balance and pay for important social programs.

"[The] issue that concerns me is these GST cuts I think are regressive. They cut back the capacity of the federal government to do the things that Canadians want, which is invest in daycare and early childhood learning. They cut back on our capacity to do something crucial," said Liberal Michael Ignatieff back in 2006 when he was vying to become party leader.

Stéphane Dion eventually won the party leadership but the Liberals lost to Harper in the ensuing federal election.

Fast forward to 2009 and Canada is in the midst of its worst recession since the 1930s. National gross domestic product is plunging and the federal deficit is soaring.

In fact, a modest $1.3 billion federal budget surplus at the end of fiscal 2009-10 is now set to become a monstrous $50-billion deficit.

That means Canada's overall debt level, which had turned down from a peak of $609 billion in 1996-97 to $516.3 billion by 2007-08, will start heading northwards once again, according to the federal Department of Finance.

In projections prior to the announcement of the $50-billion deficit, Finance had already estimated total federal debt at $541.8 billion by 2013-14. A markedly higher deficit will ensure that the national borrowing will go up even more.

Playing with history

That leaves an interesting "what if" question: what if the Harper government had decided to hold off on its two GST cuts? How much better off would the national finances be?

Unlike income taxes, the GST is harder for Canadians to avoid. If you want to buy something, you will, in most cases, end up paying the federal sales tax.

GST revenue 

Overall ($)

Revenue per percentage point ($)

2002-03 

28.3B 

4.0B 

2003-04 

28.3B 

4.0B 

2004-05 

29.8B 

4.3B 

2005-06 

33.0B 

4.7B 

2006-07 

31.3B 

4.8B 

2007-08 

29.9B

5.0B 

Source: Department of Finance

For this reason, sales tax revenue is more recession-resistant than corporate or personal income tax payments.

Most economists, however, also note that a GST cut would stimulate retail sales by dropping the checkout price of many goods. The economic debate usually centers around how big an influence a smaller sales tax has on purchasing decisions.

"The links are not as strong as you might think," said Jim Stanford, economist with the Canadian Auto Workers.

But even Stanford, a GST cut opponent, agreed there was some economic boost from the Harper tax reductions. 

Inflation gain

When examining most economic variables, experts usually try to isolate the effects of inflation.

Take GDP, for instance.

Suppose Canada's national income revenue rose from $300 billion to $330 billion in a year. With a population of 30 million people, GDP per-person should to rise from $10,000 to $11,000.

If the national inflation rate was 10 per cent, the country's GDP would not have actually gained a penny once the numbers were recalculated to take into account higher prices.

With the GST, however, sales tax revenue is not adjusted for inflation. In fact, higher prices at the cash register translate into increased sales tax revenue for the public treasury.

Re-calculating history

Not bothering with inflation conveniently makes a GST recalculation a bit easier.

According to Finance, federal GST revenues rose from $15.1 billion in 1991-92, the first full year of the new tax, to $29.92 billion by 2007-08.

Government believes GST cut stimulates retail sector ((Associated Press/ Jim Mone))

Taking the last year in that series, each percentage point of GST revenue was worth slightly more than $5 billion. (In the case of 2007-08, one needs to account for the January 1 reduction to five per cent.)

Thus, as a simple calculation, that means Ottawa's deficit would have been $10 billion lower had the federal government not cut the national sales tax.

Recognizing that the Canadian economy changes each year, taking the GST revenue over a five-year period might give a better estimate of the tax's performance over time.

Using a five-year average, the federal per-point GST take is slightly more than $4 billion, implying that Ottawa is losing $8 billion by its previous sales tax cuts.

So, depending upon the figure used, Ottawa's anticipated deficit would range between $40 billion and $42 billion.

"The tax cuts have made life marginally worse for the federal government," Stanford said, while adding that the $5 billion estimate for GST revenue loss was in line with other figures he had seen.

Even at $40 billion, Canada's deficit would still be among the largest in the country's history.

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