What the GST holiday means for consumers — and why some economists are worried

After the federal government announced on Thursday that it would introduce a holiday season tax break on some goods, some Canadians welcomed the move, while others said they saw right through it.

I think it’s going to be helpful for some people, which is really nice, said Leemor Valin, who was shopping in Toronto.

I really feel strongly that part of what makes this country so amazing are all the services we provide to all different kinds of people, she said. So I’m happy to pay taxes myself. I think that it’s really important, but I’m happy to hear [that] maybe it’ll help some people in tougher times.

In addition to the GST holiday, the federal government plans to cut a $250 cheque for working Canadians who made $150,000 or less in 2023, starting sometime in the spring. But Jack Knight, who was shopping at Vince’s Market, the grocery store in Sharon, Ont., where Prime Minister Justin Trudeau made his announcement, said the policies are just bribery.

All these parties do this. When it comes close to the election, they start handing out the gold bars, Knight, a resident of Barrie, Ont., said. It doesn’t wash with the public, I don’t think.

On Thursday, the federal government announced that it would slash the GST on some eligible goods and services — prepared foods, restaurant meals, children’s toys, books and Christmas trees, among other items (new window) — between Dec. 14 and Feb. 15, 2025.

Lisa Amato, who was shopping at Vince’s Market, said it was too little, too late, and that the government should consider cutting the tax forever, or at least until the economy improves. But Marilyn Reid, a senior who described herself as tired, said it would definitely help her with her shopping.

When Canadians start taking advantage of the two-month tax break, some small businesses say it will give them a much-needed holiday boost during a weak year (new window) for consumer spending. A handful of economists, meanwhile, worry about what a spending rush will mean for the economy.

WATCH | Canadians react to a two-month GST break:

Canadians react to federal government’s 2-month GST holiday

Prime Minister Justin Trudeau on Thursday announced a two-month suspension of GST on selected goods as part of a suite of new measures meant to help Canadians deal with cost-of-living pressures. We asked Canadians what they thought about the temporary tax break.

What small businesses are saying

Standing next to a wall of colourful stuffed animals, Toronto business owner Sam Care said she’s glad about Ottawa’s move — and expects a chaotic rush of shopping at her toy store, Playful Minds.

People are looking for deals, Care said. The economy is, you know, it’s tougher out there for a lot of families. And I think families are really going to take advantage of this.

She has a few questions about the impact on her business: Will her store be empty until Dec. 14? Will she have to adjust her staffing schedule? How much inventory will she need?

If it’s only going to be a two-month period, are people going to stock up or buy now for later? I don’t know. Everything is up in the air right now, Care said.

Dan Kelly, president of the Canadian Federation of Independent Business, said in a statement that the organization welcomes any tax-cutting measure. But he said that narrow, temporary sales tax holidays can add confusion and administrative complexity for small business owners.

While a temporary sales tax cut will help boost demand in some sectors, like restaurants, in the slow post-holiday period, Canadians and Canadian businesses really need permanent tax relief, Kelly’s statement said.

Care said that she would have welcomed a heads-up from the government but added that she and her staff will be prepared. It will be a little bit of time because we have products in our store that [are] not tax-exempt, so we have to go figure out everything and double check everything, she said.

So it will be a little bit of work behind the scenes, for sure.

Does it go far enough on affordability?

Gillian Petit, a senior research associate at the University of Calgary’s economics department, said that while the policy will help people save money at the checkout, it might actually go further for those with higher household incomes.

They have more income, so they consume more, she said. Persons with lower incomes are also going to save on the GST, but they’re not going to save as much in dollar values. They have less income, so they consume less.

With the $250 rebate reserved for people who were employed in 2023, those who might need it most are excluded, Petit said. If we really wanted to address affordability, we would target persons who are struggling with affordability [or] persons who are spending a large amount of their incomes on basic necessities.

At one food bank in Toronto, most clients are looking for basic groceries. Foods like fresh fruits and vegetables, meat, eggs and bread are already tax-exempt across the country.

The GST holiday will provide Canadians with a small break, but it’s not nearly enough to provide a meaningful impact on affordability, said Kitty Raman Costa, executive director of the Parkdale Community Food Bank.

More working people are using the food bank compared with past years, she said.

These are long-term challenges that will require long-term support. It would definitely be great for us to see more of a dedicated approach to supporting these Canadians facing income insecurity and financial insecurity.

WATCH | Record food bank use marks broader affordability crisis:

Record food bank use a symptom of larger problem, says Daily Bread CEO

Food banks in Toronto are seeing a million more visits this year than in the last, bringing the total number to 3.49 million from April 2023 to April 2024, according to a new report. Neil Hetherington, CEO of Daily Bread Food Bank, says it’s part of a broader cost-of-living crisis.

Measures could trigger inflation in spring

Reacting to the announcement, some economists said that the GST break could have inflationary consequences for the economy down the line.

Benjamin Reitzes, a managing director at the Bank of Montreal, wrote in a note on Thursday that headline inflation would likely decelerate in December and January (because the GST break starts mid-month), and then reaccelerate in February and March.

He said the stimulus package — combined with other factors like a cautious U.S. Federal Reserve and a potential upward revision to the GDP — likely means that the Bank of Canada will cut its key interest rate by 25, not 50, basis points at its next meeting.

Rob Gillezeau, an assistant professor of economic analysis and policy at the University of Toronto, called the government’s move a nightmare for economists, saying that the temporary tax break will distort people’s spending behaviour.

He said that research out of the United States, where some individual states sometimes implement (new window) tax holidays, have shown that they aren’t effective as an affordability measure.

What is the worst thing we could do with $6 billion? Maybe this is not the absolute worst, but it’s really, really down there. It’s disappointing, Gillezeau said.

The tax holiday will cost the federal treasury an estimated $1.6 billion in foregone revenue, and the $250 cheques will cost about $4.68 billion, a Department of Finance official told CBC News following the announcement.

Gillezeau echoed Petit in saying that the lowest income earners and people who don’t have any income are excluded from the policy. I don’t know how you justify that from an affordability perspective, he said.

The two measures combined — sending cheques out to a whole bunch of folks, plus getting all of this spending narrowed in this one short window — could have an inflationary impact, he warned.

This article is republished from RCI.