Federal government doubles GST credit and doubles down on poorly targeted spending

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 provides assistance to some 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.

This last 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 where the parents do not qualify for the GST credit.

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), which 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 at least $100,000. That’s 11.2 per cent of all GST credit recipients. More than 70 per cent of those young people were in school. Put simply, it’s not clear how spending approximately $340 million last year on young people who work part-time, go to school and live in high-income households is a good use of taxpayer money or targets assistance to people in need.

Unfortunately, the poor targeting of the GST credit underscores a larger problem in Ottawa. A 2020 analysis of several federal programs initiated in response to COVID, totalling nearly $82 billion in spending, found that up to 27.4 per cent of spending was poorly targeted, representing more than $22 billion.

Consider one of the federal government’s principal responses to COVID, the Canada Emergency Response Benefit (CERB). The study found that up to $11.8 billion of total CERB spending (for 24-week benefit) was on young people ages 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 meant to provide financial support to parents with children. Compared to the two previous programs, spending on the CCB increased by roughly 25 per cent, and the CCB will cost an estimated $24.9 billion this year.

And yet, according to a recent analysis, after the government replaced the two programs with the CCB, there’s been a marked shift in total spending away from lower-income families towards middle- and upper-income families. Specifically, 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) while families with incomes between $60,000 and $180,000 experienced an increase in their share of spending from 49.2 per cent to 66.8 per cent. Clearly, had CCB payments been better targeted, lower-income families could have received more assistance—at a lower overall cost.

Finally, all this poorly targeted spending is taking place within an environment of continued debt-financed spending by Ottawa. Despite a deluge of unexpected revenues ($37.5 billion according to the Fall Economic Update), the federal government only reduced the deficit by $16.4 billion because it increased spending (excluding interest costs) 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 continues to poorly target assistance, and spends more money than is necessary to help Canadians in genuine need while continuing to finance extra spending with debt.