VAT reduction is necessary but not tool used every recession: Canadian expert

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The discussion session at Ministry of Finance’s headquarters.

The main topic of the dialogue session focused on fiscal policy, including two main contents: sharing on fiscal policy management and state revenue forecasting models; sharing experiences on the fiscal risk management framework.

Exchanging Canada's experience in fiscal policy planning and tools to develop and adjust these policies, especially in the context of the Covid-19 pandemic and the complex international economic situation, Mr. Nelson, an expert from the Canadian Ministry of Finance, said that before the pandemic, Canada had developed fiscal policy packages suitable for recession scenarios. These policies include measures such as direct transfers to individuals and businesses, public investment in infrastructure.

Currently, Canada's fiscal policy focuses on building flexible fiscal instruments that can be quickly implemented or stopped when necessary. The Canadian Ministry of Finance researches and develops models to forecast and analyze the impact of policies at both the macro level and the level of specific target groups.

“The same as other countries, including Vietnam, we rely on stabilization programs integrated into the tax system. Our approach is to strengthen and enhance the capacity of forecasting models, combining both private sector forecasts as well as research from the Bank of Canada and other studies. Additionally, we research to find space to continue applying fiscal stimulus measures,” the expert said.

Sharing specifically about active stabilization programs, the expert said that the country has two programs including the employment insurance program and the support program based on the progressive tax system.

Regarding the employment insurance program, the expert said that unemployed workers will be provided with income support by the Government for a certain period of time, and this is a social security policy, not a macroeconomic stabilization program.

However, the program has limitations in terms of flexibility and the ability to adjust quickly in crisis situations. Expanding or adjusting this program requires certain changes and may lead to undesirable effects.

“The spending so much on the program, which may not encourage workers to resume work and not develop the labor market,” the expert noted.

The second program is implemented based on the income tax system. This is considered an automatic stabilizer. Accordingly, when income decreases, people's tax obligations also automatically decrease, helping to maintain disposable income. This system has a natural stabilizing effect, but it also has certain limits and is not the focus of the tax system.

At the discussion session, the representative of the Vietnamese Ministry of Finance said that one of the problems that countries are facing is the difficulty in returning to normal tax policies as before the Covid-19 pandemic. In Vietnam, in the 2021-2022 period, amid economic difficulties, the Government has implemented 2% VAT reduction to stimulate consumption. Currently, Vietnam considers solutions to shift tax policy from support to normal policy to avoid causing unwanted impacts.

Discussing this issue, the Canadian expert said that VAT is an important source of revenue, and if VAT is cut to stimulate the economy in a short time, it may still be acceptable. However, if the tax reduction is prolonged, it will affect the general revenue, because in addition to reducing VAT, governments also issue many other proactive support policies. Therefore, if there is no balance, difficulties may arise.

In addition, the expert said that the VAT reduction may lead to the situation that people may save money and wait for VAT reduction before spending. According to this expert, the policy of reducing consumer spending is not necessary a tool used in every recession. Therefore, tax policies need to be carefully balanced to avoid negatively affecting people's consumption behavior.