Interesting.......

This has sooooo much to do with behaviour economics.

Anyhow, maybe this GST cut can temporary hold back consumer spending - which is the major factor that has been fueling the Canadian economy lately.

On the other hand, it will only "temporary" cool things off, as people will resume their planned expenditures once the GST is cut, which should be in July.

I can't wait for those Stats Can numbers to come out in the 4th quarter, on sales (i.e. on consumption) , to show the comparison of consumer spending just before and after the GST cut.

Also, it could prove (or disprove) the Euler Condition (in the Macroeconomic prospective), if consumers are really trying to max out their utility by allocating their spending between period 1 and period 2.

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POSTED AT 4:02 AM EST ON 27/03/06

Consumers holding back

The thrill of saving money has some delaying their big-ticket buys

STEVEN CHASE

From Monday's Globe and Mail

OTTAWA — Sean Lee is shopping for a high-definition TV to watch his beloved Blue Jays, but the prospect of saving money by waiting until Ottawa lowers the GST has given him reason to delay the purchase.

"I'd be willing to wait a few months for the GST cut to happen," the 35-year-old Toronto account manager said.

Economists say there will be more and more consumers delaying big-ticket item purchases as the Conservative government readies itself to fulfill an election pledge to cut the goods and services tax to 6 per cent from 7 per cent.

This could create a backlog of consumer spending, as car buyers anticipate saving hundreds of dollars and new-home purchasers envisage a discount worth thousands.

Mr. Lee doesn't mind waiting to get a discount on his purchase, even if it only amounts to $40 or $50 on a TV retailing for $4,000 or $5,000. "[It] doesn't seem that much off the price of something that big, but then again, before tax, that's probably like $80 or $90 of income and that's like a half-day of work."

Toronto-Dominion Bank chief economist Don Drummond said he knows a couple of people who plan to buy expensive cars and are holding off until the GST cut.

"Presumably, the prospect of cutting the GST is hurting big-ticket sales right at this moment," he said. "A frugal person who doesn't have a particularly urgent need to consume will no doubt have been waiting since the election results were heard," Mr. Drummond said.

The Tory government says cutting the GST will be part of its federal budget -- expected by late April or early May. But it's staying mum on whether the reduction will take effect immediately on budget day -- or at a later date such as July 1, to provide a transition period for businesses.

Finance Department spokesman David Gamble said the question of whether the budget will cut the rate immediately is "getting into matters of budget confidentiality."

One argument for delaying the cut to July 1 -- the start of the next fiscal quarter -- is that it would benefit some businesses that need time to adjust their cash registers and accounting.

Economists warn that Ottawa must cut the GST on budget day -- or shortly thereafter -- to avoid creating a greater pileup of consumer demand.

Canadian Taxpayers Federation director John Williamson said it's incumbent on Ottawa to let companies know exactly when the cut will take effect.

"The government should already be signalling to business that the one-point cut would come very, very quickly after the budget is tabled. The delay should be days, certainly no more than a week or two."

Mr. Drummond said the greatest incentive to delay a purchase is on new homes, where the biggest potential GST saving lies.

"Few people think about this, perhaps because the GST partial rebate on housing is a bit complicated," he said. "There is no rebate on homes costing more than $450,000, so the savings there is $4,500 and up. The savings per point of GST on a $300,000 new home is still a whopping $1,920."

Canadian Automobile Dealers Association spokesman Huw Williams said his group is pressing Ottawa to move quickly "to avoid the scenario of it starting to be a drag on consumer expectations."

Dale Orr, chief economist at Global Insight (Canada) said the cash-pressed Tory government benefits from delaying the GST cut because it saves $400-million in revenue each month it holds off reducing it.

"There's such a huge incentive for them to delay it as long as possible and they're just going to have to keep their political antennae out and see how long the public will let them get away with it," Mr. Orr said.

Purchase price: $4,500

With 7% GST (current rate): $4,815

With 6% GST (after promised cut): $4,770

Savings: $45

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