C.D. Howe: Permanently Higher Federal Spending Threatens GST Hike

November 30, 2020

BRITISH COLUMBIA – A GST hike could be looming on the horizon if Ottawa starts down the road of permanent post-pandemic spending increases, warns a new report from the C.D. Howe Institute.

The Fiscal and Tax Working Group stressed that now is not the time for permanent post-pandemic spending increases or matching tax increases. However, if Canadians want to see a significant increase in the level of ongoing program spending post-pandemic, they must be aware that it will require an increase in taxes across the income spectrum to be fiscally sustainable.

The group of experts from the private sector and academia held their third and fourth meetings on October 6, 2020, and November 11, 2020. The group calculated that excluding crisis-related temporary spending such as income support programs, spending promises made in the September Speech from the Throne may add between roughly $19 billion and $44 billion in permanent annual federal program spending. The group noted only broadly based tax increases that affect most taxpayers would come close to covering the necessary cost of the new spending.

  • Members agreed on four principles for the financing of any new permanent spending:
  • The majority of this spending should be met with increased tax revenue, if not with savings from a review of existing programs.
  • These new sources of revenue should do as little harm to investment and growth as possible.
  • These new sources of revenue must be reliable.
  • To be able to raise enough revenues, these new sources of revenues should be as broad as possible.

Members noted that – although politically unpopular – consumption taxes would fulfill these criteria. Increasing the GST by two percentage points, along with a 40 per cent increase in the GST tax credit, would raise nearly $15 billion annually. The group also considered additional tax changes that may be required.

Working Group members agreed that any permanent changes, whether ongoing post-pandemic spending increases or matching tax increases, are premature at this point. But should Ottawa go down this route, it should be clear as to how it proposes to finance it. Taxpayers and policymakers should not underestimate the scale of tax increases needed if Ottawa increases spending as much as envisioned in the Speech from the Throne.

 

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