It’s amazing how self-reinforcing some concepts can be. For example, the idea that a GST cut is a stimulative action.
It’s true that consumer spending in Canada hit new highs concurrent with the 1, then 2 per cent cut in the GST. Other factors, such as the wealth effect from a peaking stock market, ballooning house prices, and overshooting oil prices, and the short-lived period of Canadian dollar parity with the U.S. dollar at the same time were, of course, the real cause of consumer buoyancy.
But then the UK, as part of a comprehensive stimulus package introduced last month, brought in a cut of 2.5% in the VAT. One small, and somewhat derided element of a 20 billion GBP package that included far blunter tools, and now everyone thinks it’s a good idea.
OK, maybe not everyone. But Derek Decloet this morning has a column suggesting that a GST holiday could be just the stimulus the Canadian economy needs — perhaps a perfect way to help Canada’s beleaguered automakers. Right. Because while no one’s buying cars at the fire sale prices now available, another 5% off, and they won’t be able to resist!
Has Decloet talked to any of the other people in the ROB newsroom? Retailing reporter Marina Strauss, for example, who might be able to talk about the 20% drop in sales some retailers are experiencing this Christmas, even though they’re offering Boxing Day pricing 3 weeks before Christmas? Or maybe Greg Keenan, the auto reporter, who could show him a neat graph showing how sales and prices of vehicles are falling simultaneously in Canada? (OK, I don’t know if he has a graph.)
But not to single out Decloet. There are also the folks at economics blog Worthwhile Canadian Initiative, who have begrudgingly come around to the idea that things *might* get bad enough in we’re-so-special Canada to require, at some ever-closer point in time, fiscal stimulus of some sort. While in theory they’ve no objection to infrastructure projects, our construction workers, they believe, are going to be tied up for the foreseeable future in endless condo building and [cancelled] oil sands projects, so why not just cut the GST — it’s easier! To be fair, they raise some questions of their own:
A GST cut, announced as temporary, like in the UK, could be the weapon of last resort. People would increase spending while taxes are low. It could be implemented quickly if needed. It could have a big temporary bang for the fiscal buck. But we cannot be 100% certain that people would increase spending. And I’m not 100% certain how it would influence deflationary expectations.
Again — prices for many goods, such as flat-screen TVs, are lower this Christmas than last. Aren’t the “deflationary expectations” already there? Does no one else read the retail news in the paper? Does online shopping blind us to changing price environments? Another 5% off is not going to cause anyone to buy anything if they think they can get it for 10% less in two months. Just back away from the GST cut, please, and find another instrument in that fiscal toolbox.