The Trudeau government’s two-pronged announcement of a goods and services tax holiday on certain “essential” items and its pledge to dole out $250 to millions of people in the country have left economists scrambling to gauge the impact of Ottawa’s $6.3-billion, election-style splurge.
With Canada’s economy facing several headwinds, the stimulus cheques and the sales tax break on items such as groceries, children’s clothing, beer and Christmas trees are expected to spur consumers to open their wallets, boosting economic growth in the near term.
However, the sugar high could fade quickly, as shoppers simply shift around the timing of their purchases. And the jolt of spending – coming on top of recent hotter-than-expected inflation data – may help convince the Bank of Canada to slow its pace of interest-rate cuts.
The new big-ticket spending proposals also raise questions about Ottawa’s ability to stay within its self-imposed deficit guardrails, especially if, as some economists think, Prime Minister Justin Trudeau decides to make the sales tax changes permanent as a way to placate angry voters.
“Once politicians get the idea that, ‘Oh, playing with the GST, playing with things that are taxable or not,’ is a political winner, they’re never going to stop. And that is not good for the budget and it’s not good for tax policy,” said Stephen Gordon, an economics professor at Laval University.
Coming in at around 0.2 per cent of gross domestic product, Ottawa’s package will ripple through the economy – but it’s hardly a game-changer.
The economics team at Bank of Montreal boosted its GDP growth estimate for the first quarter of 2025 to 2.5 per cent from 1.7 per cent, but trimmed its GDP growth forecast for the third quarter, when the effect of the stimulus fades.
Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said that the tax rebates could theoretically increase GDP by as much as a quarter-percentage-point next year, especially because fiscal stimulus has a bigger impact when there is slack in the economy, as is currently the case.
“But that’s only if these cheques are permitted to raise the federal deficit,” Mr. Shenfeld wrote in a client note. “If Ottawa is merely shifting funds from what it otherwise would have spent elsewhere, in order to stick to a given deficit target, the impact could be negated.”
It’s also unclear how much the stimulus cheques will increase consumer spending, with people potentially pocketing the money or using it to pay down debt, rather than going shopping
Mr. Shenfeld said the overall package would likely have a “very marginal” impact on upcoming Bank of Canada interest-rate decisions. This view was shared by other Bay Street economists, although there was a broad agreement that Ottawa’s stimulus essentially seals the deal for a quarter-point rate cut at the next Bank of Canada meeting in December, rather than another half-point cut, as happened in October.
“On its own, this probably doesn’t move the needle so significantly because of the fact that it’s not massive and it is temporary,” said Taylor Schleich, director of economics and strategy at National Bank Financial. However, complicating that is the fact the measures come at the same time as stimulus is rolling out from other levels of government, inflation has picked up and housing markets are potentially reaccelerating, he said.
“If the Bank of Canada was on the fence about cutting 25 or 50 basis points, perhaps all of this data taken together leads them more towards a more gradual easing approach in the near term,” he said.
Bank of Canada Governor Tiff Macklem said last month that the bank is less concerned than it was about government spending fuelling inflation and working at cross purposes to the bank’s still-restrictive monetary policy now that inflation is largely under control. “We’re no longer trying to get inflation down. Government spending is not pushing against us getting inflation down, we’ve got it down,” he told the Senate Banking Committee.
It’s so far impossible to say how the two measures will impact the federal government’s bottom line, because Ottawa has yet to produce its final spending and revenue picture for the past fiscal year. However, in an Oct. 17 report, the Parliamentary Budget Officer, Canada’s budgetary watchdog, estimated the deficit for 2023-24 would come in at $46.8-billion, deeper than the $40-billion deficit laid out in the government’s 2024 budget.
The government’s own fiscal guardrail aims to maintain the 2023-24 deficit at or below $40.1-billion.
The stimulus cheques and GST changes will likely erode the government’s fiscal standing in the coming months, according to Derek Holt, head of capital markets economics at Bank of Nova Scotia, who speculated in a Friday note to clients that the planned two-month GST holiday “is very likely to turn permanent and blow through Ottawa’s finances.”
In a separate report, Mr. Holt estimated if the GST changes were made permanent, along with the stimulus cheques, the changes would result in a $14-billion hit to federal finances in fiscal 2025-26 and $10-billion a year in subsequent years. Over a five-year horizon, if the GST changes remained permanent, “the cumulative deficit would balloon by about an extra $52-billion,” he wrote.
Even if the changes remain temporary, economists tend to view these types of stimulus measures dimly, thinking of them as inefficient and poorly targeted.
“If they wanted to beef up the income support at lower income levels then you either increase the GST rebates or the Canada Child Benefit, things like that. Just across the board $250 to everybody, that’s clearly electoral,” Prof. Gordon said.
Luc Godbout, an economics professor at the Université de Sherbrooke, said the temporary nature of tax cuts will cause consumers to shift the timing of their consumption and complicate things for retailers. And higher-income individuals may also benefit disproportionately from the GST break on things such as restaurant meals.
“These are not measures that were thought out from an economic perspective, but from a political perspective,” he said in an e-mail.
Nor do the stimulus cheques or GST changes do anything to “impact our long-term growth trajectory or close the competitive gap we have with the U.S.” when it comes to attracting business investment, said Kevin Milligan, a professor of economics at the Vancouver School of Economics at the University of British Columbia.
“When you’re in a world of being in deficit and there’s not a macroeconomic need for it, I don’t see these as economically defensible measures,” he said.
