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Posthaste: Ottawa’s spending plans threaten a return to 7% GST, new report warns

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Good Morning!

Canadians get an update on their country’s finances Monday when Finance Minister Chrystia Freeland presents the fall economic statement.

So while we brace ourselves for that stocktaking, let’s take a look at a new study that focuses on how we are going to pay for the government’s spending plans.

Not the emergency spending for pandemic aid, but the spending that comes after.

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As you recall from the ‘This is not the time for austerity’ Throne Speech in September, the government set some ambitious post-pandemic goals. Pledges ranged from one million jobs in a green economy, child care and early learning programs, tackling homelessness and moves toward national pharmacare.

A new report from C.D. Howe Institute warns that if the Liberal government makes spending increases permanent as signalled in the Speech, Canadians should get ready to pay higher taxes.

“Taxpayers and policymakers should not underestimate the scale of tax increases needed if Ottawa increases spending as much as envisioned in the Speech from the Throne,” said the report.

Taking out the emergency spending on pandemic support programs, the C.D. Howe tax group estimates promises in the Throne Speech could add between $19 billion and $44 billion in permanent annual federal program spending. “This amount of unfunded spending would leave the country vulnerable to adverse shocks and is likely not sustainable,” it said.

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The Fiscal and Tax Working Group believes now is not the time for permanent post-pandemic spending increases or matching tax increases. But if it happens itlooked at the best way to pay for it without disrupting growth and determined that only broadly based tax increases that affect most taxpayers would come close to covering the cost.

The group looked at a range of tax options, including increasing the capital gains inclusion rate, a carbon tax, removing the small business tax preference, taxing capital gains on primary residence and wealth taxes.

But hiking the GST, though politically unpopular, was considered the best way to raise the most money with the least harm to the economy.

The group estimates that a two percentage point increase to the GST, along with a 40% rise in the GST tax credit, would raise almost $15 billion a year.

Compared with the rest of the world, Canadians are not heavily burdened with consumption taxes now. As a share of GDP, Canada’s consumption tax revenues at 5.9% rank near the bottom. Hungary at 14.4% tops the list, with the U.K. at 9.4%. We are higher than the United States though, which comes in at 2.8%.

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