From: Brian Lewis
To: Concerned Canadians
Date: November 26, 2024
Re: Tis the Season for Gimmicky Economic Policy
Hot on the heels of Ontario Premier Doug Ford’s $200 “taxpayer rebate,” Prime Minister Justin Trudeau has unveiled a time-limited sales tax break on select holiday wares, followed by a $250 “Working Canadians Rebate.”
At first glance, these may seem like Christmas cheer followed by a tasty Easter egg. Nonetheless they are ineffective and financially irresponsible policy missteps, and much less festive.
Sales taxes, particularly value-added taxes (VAT), should be broad-based to promote economic efficiency, minimize distortions, and maintain stable revenue streams. By selectively exempting specific goods – such as groceries, alcohol, and restaurant meals – the government incentivizes inefficient consumption behaviors.
They will shift spending between goods and over time in response to lower taxes. Specifically, temporary sales tax holidays merely shift consumption rather than generating net new activity (for example, from Black Friday to Boxing Day), resulting in negligible economic benefits. Businesses face demand spikes during the tax break and subsequent slumps, with no meaningful net impact.
In addition to their inefficiency, these exemptions send harmful signals. Lower prices on alcohol and sugary snacks contradict health policy objectives, in much the same way that reduced carbon taxes would undermine action on climate change. Strong policymaking requires coherence; these measures erode that principle.
While sales tax reductions are often portrayed as progressive, these measures fail on equity grounds. Exemptions like children’s clothing might benefit lower-income households, but rebates for restaurant meals disproportionately aid higher-income earners. Furthermore, the $250 rebate excludes non-working Canadians, including those on social assistance – groups disproportionately affected by inflation and economic uncertainty. This leaves the most vulnerable without new relief while offering marginal benefits to others.
The projected $6.3-billion cost brings a significant fiscal burden. At current borrowing rates, the measures add $220 million annually in interest expenses, saddling taxpayers with long-term costs for dubious short-term benefits.
Administrative challenges may further undermine the federal package. Businesses must reconfigure systems to apply temporary exemptions, incurring costs and operational headaches. Additionally, under Canada’s Comprehensive Integrated Tax Coordination Agreements, the federal government may need to compensate HST-participating provinces for revenue losses exceeding 1 percent, potentially sparking friction with non-HST provinces like Alberta and Saskatchewan.
This policy package represents an unhelpful diversion from Canada’s pressing challenges. With price inflation moderating and unemployment rising, government should shift priorities from affordability issues towards investment and job creation. Piecemeal tax relief does little to address these greater issues while exacerbating fiscal strains.
Transparency also remains a concern. The federal government’s delayed release of the Public Accounts for the 2023–24 fiscal year highlights a troubling lack of fiscal accountability. Every province has managed to release its financial results for the fiscal year ended March 31 2024 (yes… that was eight months ago), but Ottawa has not. Canadians deserve timely updates, including a Fall Economic Statement to get a clearer picture of the nation’s financial health.
Overall, these measures represent a costly distraction. They provide fleeting relief while ignoring Canada’s systemic economic challenges. Policymakers must shift their focus to long-term strategies for economic growth and fiscal sustainability. Canadians deserve better than gimmicky policies masquerading as solutions. Perhaps the Grinch’s skepticism of holiday excess is a lesson worth revisiting.
Brian Lewis is a senior fellow at the C.D. Howe Institute and the Munk School of Global Affairs and Public Policy and former Chief Economist for Ontario.
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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.
