Opinion: Doubling GST credit doubles down on poor targeting

Stage two COVID reopening in Ontario
Stage two COVID reopening in Ontario

By Jason Clemens, Nathan Li and Milagros Palacios

In October, the federal government doubled the GST credit for six months, ostensibly to help alleviate the pressures of inflation on Canadian families. Unfortunately, like so many other federal initiatives, the GST credit is not well targeted to those in need, which means it costs more than it should and assists, we figure, more than a million people who don’t genuinely need it.

The GST credit is a quarterly tax-free payment intended to help low-income Canadians offset the effects of the Goods and Services Tax. Canadians are automatically eligible for the transfer based on income tax filings, assuming they meet varying definitions of low income and are at least 19 years old. In 2022-23, GST credit payments can be up to $467 for individuals, $612 for a married or common-law partner and $161 for each child under the age of 19.

The age qualification is the problem when it comes to targeting assistance. Because Canadians over age 19 (who file taxes) are considered individuals, they may qualify for the GST credit even if they reside in a high-income household with parents who don’t qualify.

To estimate just how much of the GST credit is poorly targeted, we used Statistics Canada’s Social Policy Simulation Database and Model (SPSD/M). It includes databases covering more than a million people in over 300,000 households with more than 600 variables for each person, including earnings, taxes and demographics.

According to data from the SPSD/M, in 2021 an estimated 11 million people received the GST credit, which cost approximately $4.9 billion. Of those, an estimated 1.2 million people were between the ages of 18 and 24 and living with their parents in a household with total income of $100,000 or more. That’s 11.2 per cent of all GST credit recipients. More than 70 per cent of those young people were in school. How is it a good use of taxpayers’ money to spend approximately $340 million, as the government did last year, on young people who work part-time, go to school and live in high-income households

The poor targeting of the GST credit underscores a larger problem in Ottawa. As demonstrated by a 2020 analysis that the three of us and Niels Veldhuis co-authored, in several federal programs initiated in response to COVID and costing nearly $82 billion, up to 27.4 per cent of spending (more than $22 billion) was poorly targeted.

Consider one of the federal government’s principal responses to COVID, the Canada Emergency Response Benefit (CERB). Our study found that up to $11.8 billion of total CERB spending (for 24-week benefit) went to young people aged 15 to 24 living as dependents in households with incomes above $100,000.

These problems exist in non-COVID programs, as well. Take the Trudeau government’s signature reform in its first term, the Canada Child Benefit (CCB), which replaced two existing programs providing financial support to parents with children. Compared to the two previous programs, spending on the CCB was roughly 25 per cent higher. This year the programme will cost an estimated $24.9 billion.

And yet, according to a recent analysis two of us co-authored with Steven Globerman, replacing the two programs with the CCB has involved a marked shift in total spending away from lower-income families towards middle- and upper-income families. To be specific, families with incomes of less than $60,000 experienced a reduction in their share of total CCB spending (from 42.9 per cent to 29.7 per cent) even as the share that went to families with incomes between $60,000 and $180,000 rose from 49.2 per cent to 66.8 per cent. Had CCB payments been better targeted, lower-income families could have received more assistance at a lower overall cost.

All this poorly targeted spending is taking place within an environment of continued borrowing. Despite a deluge of unexpected revenues ($37.5 billion according to the Fall Economic Update), the federal government reduced its deficit by only $16.4 billion — mainly because it has increased its non-interest spending by $13.3 billion since the spring budget. Total federal debt is expected to reach nearly $1.9 trillion in 2022-23 compared to $1.1 trillion in 2015-16 when the Trudeau government first took office.

Simply put, the federal government is targeting assistance poorly, spending more money than necessary to help Canadians in genuine need and financing its extra spending with debt.

Jason Clemens, Nathan Li and Milagros Palacios are economists with the Fraser Institute and co-authors of Federal Government Wasting Billions on Poorly Targeted Assistance.