Economists say temporary tax cut, relief cheques play into rosier growth picture

TORONTO — The federal government’s “meaty” move to pause federal sales tax on a long list of items and send cheques to millions of Canadians this spring could factor into an improving outlook for growth in 2025, economists say.

The plan, which will cost about $6.3 billion, could put some upward pressure on inflation, Bank of Montreal chief economist Doug Porter said in an interview Thursday.

“It’s important to point out just how meaty this is. It’s quite a substantial move and it’s important to note that the much bigger impact here will not be on the high-profile GST holiday. It’s much more on the (rebate cheques),” he said.

When combined with provincial government rebates promised in Ontario, Porter said the money is likely to offer a significant boost to incomes and consumer spending at the start of the new year.

But he noted that the measures come at a time when inflation has cooled and policymakers are looking to boost the economy rather than tamp down price growth.

“This is now actually working in the same direction as the Bank of Canada has started to shift to,” he said.

Porter said he still expects the central bank to continue rate cuts.

“They might take a somewhat more cautious stance,” he said.

The Bank of Canada lowered its key interest rate by half a percentage point to 3.75 per cent in October, moving by a larger-than-typical amount as inflation has stabilized.

The government spending measures make it more likely that the central bank will stick to a quarter-point cut at its next rate announcement in December, economists said Thursday.

Royce Mendes, managing director and head of macro strategy at Desjardins, said sales tax exemptions will mechanically lower inflation, but the Bank of Canada will look beyond that.

“Central bankers will be more interested with the impacts on growth and underlying price pressures,” he said in his note to analysts.

Mendes said a 25 basis point rate cut in December is likely, with quarter-point cuts the norm in 2025, as the Bank of Canada carefully continues its rate-cut cycle. (A basis point is a one-hundredth of a percentage point.)

“The announcement should all but close the door to a 50-basis-point cut next month,” he added.

Canadians who worked in 2023 and earned up to $150,000 would also receive a $250 cheque in the spring. About 18.7 million people will receive the cheques.

The GST break, which would begin Dec. 14 and end Feb. 15, applies to a number of items including toys, diapers, snack food, restaurant meals and beer and wine.

Benjamin Reitzes, managing director of Canadian rates at BMO Economics, said he is assuming “a good chunk of the stimulus cheques will be saved but the GST/HST rebate will drive additional spending.”

BMO raised its growth forecast for the first quarter to 2.5 per cent from 1.7 per cent.

Second and third quarters of 2025 could see a smaller upward move while the third quarter growth forecast was trimmed as the impact fades, the BMO note added.

Medes also forecasts a “noticeable boost to growth in the first half of next year.”

There will be a temporary but direct effect on inflation numbers as cheques boost consumer spending, Porter said.

“It’ll be relatively short-lived,” he said. “We could get some pretty mild inflation readings in December and January before they then kind of nudge back up in February and March.”

This report by The Canadian Press was first published Nov. 21, 2024.

Ritika Dubey, The Canadian Press