Prime Minister Mark Carney announced a multibillion-dollar increase to the Goods and Services Tax (GST) credit on Monday.Carlos Osorio/Reuters
Claude Lavoie is a contributing columnist for The Globe and Mail. He was director-general of economic studies and policy analysis at the Department of Finance from 2008 to 2023.
Facing mounting pressure to address affordability concerns, the federal government has announced a 25-per-cent increase to the Goods and Services Tax Credit for five years, with an equivalent 50-per-cent boost in the first year.
The opposition has dismissed the initiative as recycled policy, a flashy headline and a temporary trick. While there’s some truth to that characterization, the measure is certainly preferable to many alternative interventions.
The policy doesn’t address the underlying drivers of surging food prices. The fact that elevated grocery costs plague several countries suggests global forces are at work: climate disruptions and geopolitical tensions chief among them. Yet food inflation has outpaced comparable nations in Canada. Although more studies are needed, this likely reflects our depreciating dollar, increased market concentration and the combined impact of rising global transportation costs with our heavy winter reliance on food imports.
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To its credit, the government is trying to address these underlying issues by pairing the GST credit expansion with structural measures aimed at encouraging greenhouse development, boosting domestic food production and supporting the Competition Bureau’s enforcement efforts in the grocery sector.
A GST credit increase is often considered a “go to” policy among policy experts.
Many see it as an ideal stimulus measure because it satisfies the three standard criteria: targeted, timely and temporary. The benefit flows to low-income Canadians who are more likely to spend it rather than save it, making it more potent than broad-based tax cuts to stimulate the economy. It can be rapidly delivered through existing systems, providing faster economic support than infrastructure spending which typically suffers implementation delays. And by being time-limited, it avoids creating permanent fiscal obligations and creating inflationary pressure when economic conditions improve.
The Trudeau government deployed this approach in 2020, and again in 2022, to support low- and modest-income Canadians during the pandemic and to strengthen economic recovery.
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Many economists also view it as an effective way to improve financial security for lower-income households and enhance the progressivity of Canada’s tax and transfer system. The Affordability Action Council, for instance, identified the GST/HST credit as the federal government’s best option for reaching vulnerable families. In 2023, the council proposed restructuring and expanding the credit to deliver more income support amid elevated food and shelter costs. Available analysis suggests recipients do indeed use the additional funds for household necessities – food, rent and heating – as intended.
Some questions remain, however, around the five-year timeline for the policy. Presumably, the government doesn’t anticipate a protracted economic slowdown requiring more than half a decade of fiscal stimulus.
Does Ottawa expect food prices to remain elevated for five years before returning to normal? In the decade preceding the pandemic, food inflation tracked closely with general inflation, suggesting it wasn’t responsible for pre-existing cost-of-living concerns. Since the policy aims at helping those whose essential necessities constitute a larger portion of their consumption basket, justifying the credit’s removal in five years would require food inflation to run below general inflation over that period, allowing relative food prices to return to prepandemic levels.
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Unless inequality and poverty rates decline substantially – which might justify reducing tax system progressivity – or the fiscal situation deteriorates sharply, winding down this measure in five years will prove politically difficult. The government surely understands this reality.
So, one explanation for the five-year horizon may be an attempt to limit the reported impact on deficits and debt, thereby blunting criticism from fiscal conservatives. Greater transparency on this rationale would have been welcome.
In the end, the announced measure attempts to satisfy public demand and limit opposition criticism while making Canada’s tax system more redistributive. Given its fiscal costs, is it sound policy?
The government has limited ability to address high food prices in the short term. Yet it must respond to Canadians’ legitimate concerns. The danger in such circumstances is implementing policies that appear responsive but inflict long-term economic damage. The National Energy Program of the 1980s, intended to shield Canadians from soaring energy costs, stands as a cautionary tale.
By that standard, an expanded GST credit, particularly when coupled with structural measures targeting some root causes, represents a relatively prudent choice, if it doesn’t have a legacy beyond its requirement.