Sunday, August 07, 2011

5% GST Will Cost Canadians $156 Billion By 2016

When you're at a gas station buying that impulsive chocolate bar, do you still think of the two cents that the 5% GST saves you? No? That's good, because it soon won't.

In fact the lowered GST will soon cost you more money than you save, and every year after, it will cost you more and more.

Sure you don't lose pennies at the cash register at Wal-Mart, but this year, you and the rest of us, are losing 3.84 billion dollars in government savings from reduced debt charges. And in total by 2016, just 10 years since reducing the GST began, we will have a national debt 35% bigger than what it would have been if the GST was left at 7%.

The reason why a 5% GST is so costly compared to a 7% rate is that it reduces government revenue and as a direct consequence reduces its ability to pay down our debt. This is important because if the government had more money to pay it down, not only would the debt be smaller but so would all subequent interest charges. Smaller interest charges in turn would provide more future revenue to be used to further pay down our debt and this would continue in a positive cycle of debt reduction.

Using figures and projections from recent federal budgets, if Canada never reduced its GST, by 2015-16 we would have increased revenue by 114.69 billion and we would have saved an additional 42.28 billion in debt charges. If Canada had maintained its 7% GST we would have only suffered three deficits instead of six and by 2016 we would not only have a $156 billion smaller debt, we would be paying 25% less in annual debt charges.

Table 1 shows the federal government's current projection of our public debt with the 5% GST. Even using the revised figures that include yet to be determined spending cuts by the Strategic and Operating Review our national debt continues to rise to $610.94 billion by 2013-14. In addition, because of increases in the public debt charge rate, payments on the interest of our debt will only continue to increase in the foreseeable future.

Table 2 displays what our debt would have looked like using the same debt levels, spending, and public debt charge rates, but if we also maintained the 7% GST and used that additional revenue to pay down the debt. The estimated additional revenues that a 7% GST would have generated are from the 2006 (pg 21) and 2009 (pg 245) federal budgets. By 2015-16 the additional revenues alone would total over 114 billion dollars.

It is important to note that with a 7% rate public debt not only goes down because of the additional GST revenue going towards it but also because of the decrease in public debt charges that result from a smaller debt.

In comparison to the debt charges in Table 1, by 2015-16 the 7% GST would reduce our annual payments by over $10 billion or 26%. The savings are so great because of the foregone compounding interest on our debt. The savings in reduced debt charges would annually increase as much as the interest that the reduced debt prevented. Or to put it another way, just as compounding interest increases exponentially, the reduced debt that prevented that interest would create savings of the same magnitude.

With increased revenue and with decreasing public debt charges, Table 3 shows that if Canada had kept its 7% GST we would have weathered the recent global economic stability with far greater ease. Instead of suffering six deficits as currently forecasted, it would only be three, with this year being the last.

Perhaps the most astounding outcome of the comparison between having a 5% and 7% GST is that by 2015-16, a 7% GST, if its revenue was used to pay down the debt, would have reduced the debt by $156.97 billion. That is 26.2% less than what the debt is currently scheduled to be with our current GST rate.

Critics will argue that reducing the GST to 5% helped the economy and they are right, that is if they do not compare what the economy would have been under a 7% rate.

The higher GST would not only have brought in more revenue, but from lowering debt charges it would have saved money that the 5% GST couldn't. By 2015-16 the 7% GST's savings would almost pay for the tax itself, as the annual savings would be more than $10 billion and the cost of the tax would be just $14.6 billion. It is even possible, because the tax revenue grows slower than the amount saved from lower debt charges, that in a few years the 7% GST savings would annually exceed the difference in cost while still generating more revenue than our current tax.

In the end disagreements may persist, arguments over details may continue, but if anything can be agreed upon, certainly compared to a 5% GST where debt is not paid down, a 7% GST that decreases debt is to be preferred.

We can't go back and change the decision to reduce the GST, but in knowing that our 5% rate has cost us a better alternative that would have lowered the debt and increased savings in debt charges, we can hopefully make better decisions in the future.

Reducing the GST squandered an opportunity not just for fewer deficits yesterday, not just for less debt today, but billions of dollars in savings for years to come. And compared to a 7% GST, the pennies the 5% rate saves today are only worth billions of debt tomorrow.


Frunger said...

What an absurd post. Sounds a lot like a conclusion was formulated first (Conservative policy of a 5
% GST is BAD) and then an attempt was made to try to substantiate that with half baked mathematics.

You could replace the whole GST reduction with any mythical tax INCREASE. You can't project tax changes into the future while using the "same debt levels, spending, and public debt charge rates" because those things are always in flux.

The exact same analysis can be made for the "left-handed person tax" generating 17 billion in taxes and not having it "reduces government revenue and as a direct consequence reduces its ability to pay down our debt"

Absurd. said...

Frunger, the 2009 Federal Budget did exactly what you're saying someone can't do. This government in that budget estimated the revenue a 7% GST would have generated. I didn't use a mythical tax increase, I used this government's own numbers.

Mark Francis said...

Excellent post. Looking at what could have happened had government not pursued a certain policy is revealing and educational.

Certainly not absurd.

Rotterdam said...

Why did Chretien promise to abolish the GST and NAFTA altogether?
Was it because he saw a political opportunity. Instead he kept both.

Chretien can thank Mulroney for the political statesmanship on both the GST and NAFTA.

Hayekian said...

Weren't you pro stimulus? I'm all for the sudden obsession with debt reduction but you are the most inconsistent tow-the-line commentator I've read. said...

Hayekian, what line am I towing? And how does supporting a temporary stimulus contradict supporting efficient taxes? It's not or the other.

Leeky Sweek said...

Wrong, wrong, wrong.

You seem to make the suppostion that somehow the taxpayer is only saving pennies. People still buy houses and they still buy cars and that savings can be substantial. If your only camparision is the cost of a cup of coffee, you are intentionally understating the benchmark. And a lower rate encourages these purchases. Afterall, what is better for the economy...something bought and taxed at 5% or nothing bought at 7%? There is absolutely no evidence that the governments revenue stream would be as high as you suggest with a 7% tax. I would surmise it would be lower because a) people would go the U.S. more often b) the underground economy would fluorish c) fewer good and services purchased, again referring to the previously mentioned larger ticket items.

You want a way to save money? Cut out some of those ridiculous programs that you Liberals can't seem to live with out (court challenges program comes to mind). said...

Leeky, that revenue from a 7% GST was the Conservatives own projection. Are you then saying multiple Federal Budgets contain errors?

I clearly stated that the revenue projections were from the federal budgets that were prepared by this government, in the future can you please read the post before commenting.

I would also note that I have not heard of one economist who suggests cutting the GST to 5% was a good decision.

Leeky Sweek said...

When was the last time a federal project was truly on target? There are always variables including finicky consumers.

More importantly, consumers pay more for taxes in this country that food, clothing and shelter combined. And your remark about economists is only half right: they stated that cutting income taxes would be better than a drop in the GST. I would be in favour of an imcome tax solution if that was a permanent solution but govts always find a need to raise income tax to finance thier own programs. The GST is so visible it would be a political disaster for a govt to raise it. said...

Leeky, I made some reference to the fact the decision was made and we can't go back and change it. We can though in the future make better decisions by realizing the full costs of all the alternatives.