Sunday, September 09, 2012

How Reducing The GST Increased Your Debt

With declining productivity, higher unemployment, and deficit after deficit, it should be obvious the Canadian government would do anything to strengthen the economy, however it is not so obvious what that same government has done to weaken it.

In a 2008 report it was predicted that the Conservative government in lowering the GST from 7% to 5% would increase the indebtedness of Canadians. Last week the repercussions of that decision six years ago became clearer; Moody's warned that growing household debt could tip the Canadian economy back into recession.

Shortly after the federal government reduced the Goods and Services Tax to 5%, the Certified General Accountants Association of Canada released a report criticizing the move and predicted that it would increase the personal debt of Canadians.

The CAG report concluded that "Lowering consumption taxes creates little incentive for a household to save or for a business to invest. To the contrary, lower consumption taxes may further increase household indebtedness as the large-scale purchases (which also bring the most savings in the GST) are often made through credit."

The CAG report also suggested that the Conservative government should have reduced income taxes, which instead of giving Canadians an incentive to spend more and increase their debt, would have enticed them to work more and increase overall productivity.

With six years of Canadians being encouraged to spend more it is no surprise that just a few days ago The Globe and Mail reported that the Canadian economy faces a 20 per cent risk of falling into a second recession with Moody's Analytics warning "Canadians’ sky high debt loads could push the economy over the edge."

It might not be obvious how we can improve the economy, but the Conservative government's responsibility in weakening it in the first place is a different story. A very different and very obvious one.

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