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Economy Lab

A gasoline tax cut is no stimulus policy Add to ...

Mike Moffatt is a chemical industry consultant and a Lecturer in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business





My recent post on the Ontario NDP proposal to halve the HST on gasoline purchases, “Ontario NDP cure for gas-price pain has serious side effects” received a number of thoughtful responses and questions. There are four questions in particular that should be addressed. The first of which is as follows:



“The Ontario economy is struggling right now. Cutting the HST on gasoline would put $500-million a year into the pockets of Ontarians and provide a much needed stimulus to the economy.”



There are a number of points we could debate. How effective is fiscal stimulus? Is fiscal stimulus appropriate given the current state of the Canadian economy?. Would we not be better to use stimulus at the federal level or use monetary policy instead? But we will put all those questions aside and assume that stimulus policy at the provincial level is appropriate.



Policies designed to stimulate an economy should be short-run in nature. Crudely put, fiscal policies designed to influence the economy are used by putting money into the economy during periods of poor economic performance and to taking money out of the economy during economic booms.



But that is not what is being proposed here. Would the Ontario NDP raise the HST on gasoline back up to 8 per cent when the economy has fully recovered? Would they raise it to 12 per cent when the economy goes into a boom? There is absolutely no reason to believe they would.



Stimulative programs should be short-term in nature. Since the HST tax cut fails that test, it should not be advocated as a stimulus policy.



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