On July 1st Ontario’s version of the Harmonized Sales Tax (HST) will come into effect adding an additional 8% tax hit to products and services. Like most Ontario residents I’m not excited about this additional cost that will be placed on simple items such as gasoline, utilities and services I use. As a respectable taxpayer I take it in stride and wonder how the effect will really translate to the economy, investing and my own pocket.
I understand the “inefficiencies” that the government quotes knowing that these politicians really don’t understand what they’re talking about by quoting research that suggests a specific number of jobs being created by the new HST. If we asked them where the jobs will be created and they avoid, deflect and change the subject because they really don’t know. It sounds all good that businesses will save money and pass along the savings but they won’t really and I think most consumers and investors understand this.
The mutual fund industry is a perfect example; any savings in efficiency won’t be passed along to the individual investor. Likewise consumers won’t see a drop in the utilities rates, prices at the pump or for services from lawyers, contractors and other trade work. Businesses might initially reduce prices to attract business but tracking the savings being passed along will be difficult if not futile because of the reluctance of businesses to save the consumer some money.
I freely admit that the additional cost that we’ll experience in our monthly spending will have a direct result on how much I save & spend. The effect will be measureable (about 4.5% of my monthly budget) and enough that it will affects our savings rate accordingly. We still save about 15% of our income at present but that’s down from the nearly 20% average over the past 12 months.
Eventually consumers and businesses will adjust and the government will benefit from the additional revenue but the effect on an economy, housing market and employment likely will be measured over the next 12 months.
Consumers will continue to spend on discretionary items but I have to wonder how much the savings rate of the general family will be affected since savings rates have recently been at very low historical levels. The absence of any incentive for Ontario families to save and instead receive cheques in the mail (our own money) tells me the government really dropped the ball on an opportunity to introduce some meaningful program(s) to help families adjust to the current change in their financial landscape.
Enjoy your blog, but I disagree with some statements here. We agree that businesses will save money as a result of HST, and that consumers will have to pay more for certain items unless prices come down.
Well, if businesses just hoard the extra profit, where will that money go? It will go to investors like yourself, and it will attract investment since profit margins are permanently higher for some of the industries you discuss.
What's likely to happen, however, is that extra profits will not be there for the taking. Competition will force businesses to lower prices such that their profit margins are the same as what they were. If a company kept its price the same, it would lose out to the competition.
As a result, it is the businesses that now have to charge more taxes that are the most against the HST, even though it appears that consumers feel those companies are the ones that will benefit (by charging the same but having lower costs), because those companies know they cannot charge the same. (If they could have charged an extra 8% and raised profits in so doing, they would be charging higher prices already!)
I get what you're saying Saj but is there not an assumption that although management of private businesses can take advantage of effiencies that the government will create them effectively? Each management team will choose to spend their resources in various ways; not all passing along the savings or maintaining/increasing margins.
I see business suffering more in the short-term than the consumer. Look at the discrepancies between cross border shopping and prices without taxes. Those efficiencies should be clear and apparent yet large price gaps exist because businesses (especially in Canada) are able to maximize on consumer behaviour.
I see the HST as a wash overall in the long-term but it will still affect my monthly budget in a negative way without much of a break in terms of my costs. The Ontario government is essentially paying me with my own money and I doubt my utilities and/or other core costs that increase will be offset in any meaningful way. I just think you'll see less investment in the way of consumerism but I'll still continue to invest what savings I have.
I agree with much of what you're saying, but it's a generalization to suggest that "additional cost" will be placed on "utilities". Electricity and heating costs such as natural gas and oil will increase by 8 per cent, but many household services including municipal water, cable television, home phone, home insurance, and cell phone will remain unchanged.
I hate the HST! =( Went out for my "last supper" tonight because I know tomorrow there will be the added HST.
I don't expect to see any prices being lowered as a result of the HST, but I do expect to see a rise in the price of certain items by 8%. My savings rate won't go down much, but the return on my savings will, due to the HST on MERs etc. What scares me is that heat (in Northern Ontario!), electricity and vehicle fuel are going up. I will be keeping an eye out to see how much this rise will affect my discretionary spending.
Please quantify how an increase of 8% on a limited number of goods is increasing your monthly spend by 4.5%.
I live in Alberta, so this change hasn't affected me, but out of curiousity I checked through my monthly budget to figure out how much it would cost me if a brand new 8% value added tax were introduced on all items currently eligible for GST. The answer was about $70 as my budget is heavily weighted towards non-taxable goods (groceries, mortgage, public transit, student loan payments) Given a similar reduction in income taxes to Ontario's switch, the net difference to my life would be about half that. Making a small dent in the roughly $600/month that goes to savings and debt reduction.
In order to reduce you're disposable income by 4.5%, you would have to spend 56% of your net income on items which are eligible for HST but not PST. I'm having a hard time seeing a situation like that.
"In order to reduce you're disposable income by 4.5%, you would have to spend 56% of your net income on items which are eligible for HST but not PST. I'm having a hard time seeing a situation like that. "
And of course, doesn't include the savings from the income tax cut. Or the quarterly income tested HST credit. Or the property tax credit.
What makes me laugh is the Liberal ad I saw in an elevator that said "83% of what you normally buy is the same tax cost under HST!" Oh really? Well what about the other 17% that you added on?! That's the part everyone's angry about. They shouldn't try to spin it so as to hide it. It's a tax increase no matter how you slice it.