The introduction of the Harmonized Sales Tax in Ontario and British Columbia may alter the patterns of economic growth, but won’t have a big impact on the overall results, and should deliver lasting benefits, says TD Economics.

In a report on the recent adoption of the HST in both provinces, TD notes that major tax changes such as harmonization can have significant macroeconomic implications. “And since these provinces make up 50% of overall Canadian economic activity, any impact harmonization may have on their performance will ripple through to the national headline economic figures,” it says.

Overall, that ripple shouldn’t be too powerful, it suggests. It notes that the timing and composition of consumer spending is likely to be affected in the short term, although the accompanying boost to business investment should offset much of that impact to the economy overall.

“We believe that some of the recent strength in consumer spending and housing construction reflects households bringing purchases forward to beat the HST,” it says, and that means spending should slow as consumers pushed certain purchases forward into the first half of the year. Housing may be most affected.

“However, even as overall Canadian consumer prices are expected to rise permanently by 0.4%, trend consumer spending is not expected to be greatly affected as tax relief programs in Ontario and British Columbia largely offsets the higher consumer tax burden,” it adds.

And, at the same time, it suggests that “business capital spending will receive a permanent boost, as the HST and other tax cuts for businesses reduce the effective cost of investment.” As a result, it predicts gains of 10%-15% in overall Canadian business investment in machinery and equipment during the next four quarters.

“The bottom line is that we don’t anticipate a significant near-term impact on consumption and overall economic growth from harmonizing the provincial sales tax with the federal sales tax,” it says. There may be a short adjustment period for consumers, it says, but this will largely be offset by the boost to business investment and the export sector.

Moreover, it doesn’t expect this to have a significant impact on monetary policy. “We don’t believe the HST implementation will have a major effect on real economic activity or the Bank of Canada’s estimate of the output gap. As such, harmonization is unlikely to alter their view on inflation past the first year of harmonization, nor the anticipated path of monetary policy,” it says.

It believes that the Bank will continue on a gradual path of 25 basis point rate hikes through 2010 and most of 2011, finishing 2010 with an overnight rate of 1.5%, rising to 3.0% by the end of 2011.

“The true lasting benefits of harmonization will be indirect, in the form of higher employment, personal incomes, and overall standard of living,” it notes, as the rise in business investment leads to higher productivity.

IE