Will the Liberals’ ‘tax holiday’ pay political dividends? What it signals

The Liberal government announced a suite of affordability measures Thursday that Ottawa says aims to put more money in Canadian bank accounts, a move experts say is likely to boost Canada’s economy and could register with voters who are still feeling the pinch of a higher cost of living.
Prime Minister Justin Trudeau was in Toronto to unveil a GST/HST “holiday” on select grocery items and other consumer goods ranging from video games to Christmas trees. He also announced the Working Canadians Rebate — a plan to send $250 cheques this spring to every individual who worked in 2023 and made up to $150,000.
“We’ve been able to get through the past couple of years. Everyone had to tighten their belts a little bit, and now we’re going to be able to give a tax break for all Canadians,” Trudeau said Thursday.
While inflation has cooled back to the Bank of Canada’s two-per cent target, the last few years of rising costs have left a mark on Canadians.
Ipsos polling conducted exclusively for Global News in late August showed that more than six in 10 respondents (63 per cent) are concerned they wouldn’t be able to absorb any unexpected costs of $1,000 or more; that figure rises to 72 per cent among parents.
Sahir Khan, executive vice-president of the Institute of Fiscal Studies and Democracy, tells Global News that recent easing inflation hasn’t necessarily made life easier as years of living with rising costs compound on Canadian families.
But the latest measures also come as the governing Liberals fall far behind the challenging Conservative Party in the polls and affordability issues continue to top the list of voter priorities.
Sending voters a cheque or showing them a tangible impact when they tap their card at the grocery store provides recognition that Canadians may associate with the Liberals, Khan says. That’s a political message that has been missing from the carbon pricing rebates, he notes.
“The cheque in the hands of people, I think there’s an immediacy to it politically,” Khan says.
“There’s an advantage of that very direct relationship between the entity that’s collecting your taxes and the one that’s paying you right back for it.”
The reaction to the Liberal proposals on Parliament Hill was swift. NDP Leader Jagmeet Singh took credit for pressuring the Liberals into the “winter tax holiday,” while Conservative Leader Pierre Poilievre called the proposals a “tax trick.”
Bloc Québécois Leader Yves-François Blanchet accused the Liberals of abusing the public purse to improve their position in the polls.
“The Liberals have shown that when they need billions of dollars in order to literally buy votes, they find it,” he told reporters Thursday.
Khan says that Canadians ought to be mindful of where the money is coming from heading into an election year.
“We also have to remember, they’re kind of bribing us with our own money here, as governments like to do sometimes,” he says. “It’s a question of whether we value it and find it useful at the time, and, I imagine, remember it at the polls.”
The Liberals claim that the GST holiday will amount to $1.6 billion in tax relief — in other words, forgone revenue for the federal government.
Ottawa did not provide an estimate for how much the $250 cheques — dubbed the Working Canadian Rebate — will cost, though the Liberals said they expect the money will flow to an estimated 18.7 million Canadians.
Royce Mendes, chief economist at Desjardins, estimates the total cost of the affordability package will be roughly $6.3 billion, or 0.2 per cent of Canada’s gross domestic product. He added in a note to clients Thursday that the spending could result in a “noticeable boost” to GDP growth in the first half of next year.
BMO also pegs the fiscal costs of the new measures around $6 billion. Benjamin Reitzes, BMO’s director of Canadian rates and macro strategist, notes that the Ontario government’s plans to send out stimulus cheques early in the new year will ratchet the total fiscal boost up to 0.3 per cent of GDP in early 2025.
As such, BMO is now raising its call for real GDP growth in the first quarter of next year to 2.5 per cent, up from 1.7 per cent before the announcement.
The Liberal moves come as the Bank of Canada is well-entrenched in a monetary policy easing cycle. The central bank has so far delivered four interest rate cuts in a row as confidence grows that inflation is back under control.
Trudeau claimed Thursday that the Liberal measures would not reaccelerate inflation, which ticked back up to two per cent in October, in line with the Bank of Canada’s target. He also credited the Liberals’ fiscal restraint and efforts to reduce the costs of dental and childcare in Canada as helping to rein in costs and set the central bank up for lower interest rates.
“It allows us to make sure that we are putting money in people’s pockets in a way that is not going to stimulate inflation, but it’s going to help them make ends meet and continue our economic growth,” he said.
Reitzes said in his note that headline inflation will take a noticeable dip during the GST holiday in December and January before accelerating in February and March.
Mendes said that the sales tax exemptions will “mechanically lower inflation,” but the Bank of Canada will “look through” those effects and instead be more concerned about the impacts on growth and underlying price pressures.
With expectations that the Liberal affordability measures could stimulate spending and economic growth, Mendes said he sees the central bank moving cautiously with 25-basis-point cuts heading forward.
Both Reitzes and Mendes agreed that a larger, 50-basis-point cut like the one seen in October is likely off the table for the Bank of Canada’s final rate decision of the year in December.
Asked about the sustainability of the proposed spending, Trudeau defended the government’s fiscal position.
“Canada is on a solid footing. Our macro economy is doing well, but that’s why we’re choosing to put that in service directly of Canadians.”
While Trudeau has touted the government’s declining debt-to-GDP ratio and other fiscal anchors, the Parliamentary Budget Officer has called into question the accuracy of the government’s projections.
Last month, the fiscal watchdog said the Liberals were likely on track to miss pledges to cap the federal deficit at $40 billion in the last fiscal year.
The PBO said in its economic and fiscal outlook that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year. It also projected that the deficit would decline to $46.4 billion in the current fiscal year — but that was before the latest slate of measures was announced.
Khan says that the Liberal government, knowing it was likely to blow past its fiscal anchors, likely decided it was better to miss in a way that benefits the party and Canadians.
“I think they’ve made that calculation that if you’re going to go past the $40 billion, you might as well do something that you think appeals to Canadians when the anxiety is kind of at its highest,” he says.
“If they were going to go past it by $6 billion, as the PBO suggests, what’s the harm in going a little further?”
Khan says that the measures are temporary and therefore unlikely to have a lasting impact on inflation. He adds that $6 billion in a $3-trillion economy is a “broadly” sustainable measure.
He adds that one measure does not define the government’s entire fiscal track.
The Liberals have yet to signal plans for a fall economic statement this year, and otherwise would have to present a more complete fiscal picture at the 2025 federal budget in the spring.
The government may have other spending commitments that it will cut, Khan notes, and may be wise to consider leaving some of its “firepower” in reserve as signs of a softening economy and fears of trade wars bubble beneath the surface.
Khan says that, after nearly 10 years in office, the Liberals also need to show they are committed to a new fiscal direction that will invest in growth rather than spend its way to a rising GDP.
“Transfers to individuals alone, while they can solve a whole bunch of important problems, you do need an economic engine that’s generating wealth for people, but also for this government, too,” he says.
“If you want progressive policies, you need to be able to pay for them.”
— with files from The Canadian Press