Ottawa’s GST cut a mistake

Posted on March 16, 2011 in Governance Debates

Source: — Authors: – RoB/Economy – Economy Lab
Posted on Wednesday, March 16, 2011.    Stephen Gordon

It’s getting harder and harder to view the Conservative government’s cuts to the GST as anything other than a mistake.

When the idea was first raised, economists were unanimous in their criticism: even if you were in favour of lower taxes and a smaller government, the GST would have been the very last item on the agenda. Cutting other taxes – most notably corporate and perhaps personal income taxes – would have produced efficiency gains and increased incomes. The GST was and is the federal tax that is least harmful to economic growth, and should have been left alone.

Those were the arguments made in the 2005-06 election campaign, when the federal government was running large and persistent surpluses. We now knowthat those surpluses were being generated by an economy that was operating well above capacity, and could not be sustained. The current deficit is of course largely due to the recession, but available evidence suggests that even if the economy had simply returned to operating at capacity, we would be running a deficit on the order of $12 – 14-billion per year – which works out to the revenues sacrificed by the reduction to the GST.

The fact that the surpluses of 2006-08 were a product of a temporary surge in revenues seems to be a development that has taken everyone – including the federal government – by surprise. The Conservatives’ pledge to reduce GST revenues by $12- 14-billion per year was never matched by a plan to reduce spending by a similar amount, and they have made things even more difficult for themselves by promising to not make cuts in the items that account for 80% of total federal spending. This will be something to look for in next Tuesday’s budget. At this point, I don’t see how the federal government can make the math work.

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