Oct 1, 2010

We told you so: HST introduction a factor behind GDP drop in July


Among the concerns about the HST that we at the CCPA have raised was the poor timing of the tax change. From my pre-budget piece last September:

If British Columbians respond to the HST by reducing their consumer spending, the timing of the HST introduction may actually slow down the economic recovery, which should be getting under way next summer. On balance, the effects of sales tax harmonization will be neutral or slightly negative as far as BC’s short-term economic growth is considered.

The BC government and HST proponents from the business sector, on the other hand, rebutted that the timing of the HST is perfect as the tax would spur business investment immediately and create new jobs, thus offsetting any negative effects the HST may have on consumer spending.

Now that the HST has been in for a couple of months, we are starting to get some numbers that allow us to check who was right. Did we need to worry about transitional impacts of the HST or not?

According to TD bank economist Diana Petramala, the introduction of the HST had a pronounced negative effect on the Canadian economy in July. In her analysis of July’s GDP decline (the first actual decline in Canada’s GDP for almost a year), she points to HST in her very first bullet under Key Implications:

•    It’s not all that surprising that Canadian economic growth has started to unwind given the introduction of the harmonized sales tax (HST) in Ontario and B.C., and as the positive impact from stimulus spending is beginning to wane.

Later in the same section she elaborates:

•    The decline was likely temporary in nature. In particular, retail sales in July suffered a heavy blow from the introduction of the HST in Ontario and B.C., and once consumers shake-off the initial shock, growth should continue.

Yes, it’s likely a temporary impact, but we’ve clearly seen that HST has serious transitional effects on consumer spending and the timing is definitely poor.

What of the incoming business investment? Data is not available yet on the third quarter, but whatever the investments may be, they’re obviously not sufficient to make up for the decline in retail spending in July.

Yes, in the long term, a value-added tax like the HST is more efficient than a simple retail sales tax than the PST. However, economic efficiency is not the only goal that government policy should pursue. The BC government has so far ignored other important aspects of the HST introduction, such as timing and transitional impacts. We’ve already seen the impacts on retail spending, but are yet to see how HST plays out in terms of jobs, wages and economic growth before the long run rolls around.

It’s time to give tax economist Jack Mintz’s work another read, as he and his CD Howe co-authors seem to be the only ones who have actually modelled the transitional impacts of HST on the labour market and on GDP growth in their September 2008 paper focused on Ontario. The results are not encouraging: Mintz and his co-authors estimate that Ontario would see temporary job loss for a number of years after harmonization, and a very smaller employment gain (only 5,900 jobs or 0.08% increase in employment) 10 years after harmonization with a provincial rate of 8%. He also finds negative impacts on real wages during the transition.

His paper still concludes that a value added tax will benefit Ontarians, but it warns that transitional issues are thorny and must be taken seriously and explicitly addressed. Something that’s currently not happening neither in Ontario nor in BC.

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