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THE HERALD Wednesday October 18 1989 Page Business Page GST may cause inflation at first Diane Maley Your Bus It is fact that sales tax in creases add to consumer prices Why then does Finance Minister Michael Wilson say his new goods and services tax will not fuel inflation Inflation happens when people pass on pnce increases like hot potatoes The cost of heating oil rises so factories raise the of wholesale goods to retailers Retailers in turn raise the to consumers Consumers meanwhile are be ing hit from more than one side They arc paying higher pnces because the cost of making and selling goods is rising They are also paying higher prices for home heating oil So they respond by demanding higher wages or by charging more for their services It s a vicious circle This vicious circle is crucial to inflation getting out of hand This is what happened in response to the two big oil price increases by the Organization of Petroleum ting Countries the 1970s If one group somewhere along the price chain had absorbed the price shock rather than passing it on inflation never would have soared to 12 per cent in 1980 The result was interest rates of 22 75 per cent and the worst recession since the 1930s OPTIMISTIC VIEW Mr Wilson seems to be betting that we have learned our lesson and we won t make the same mistake with the GST John Crow governor of the Bank of Canada agrees with him Speaking to students at University in Ottawa last week Mr Crow explained that inflation is a sustained increase in the general level over a period of time It is not a onetime jump in pnces as will happen with the GST As long as workers don t ask for higher wages and manufacturers pass on the savings thev will enjoy under the new tax system all ivill be well Mr Wilson and Mr Grow believe They may be optimistic It all depends on the ecopomic environ ment in which the new tax comes to be If growth is booming in the GST will indeed fuel inflation If growth is slow as many forecasters expect people will simply pull in their horns ding less to escape the tax reach A similar argument applies to higher interest rates The high cost of money adds to inflation on the one hand while curbing it on the other Again it is a question of how long the higher pnces are sustain OPPOSITE EFFECT As prices nse in response to higher interest rates people buy fewer goods and services Weaken ing demand forces pnces down again The ebb and flow of supply and demand paints a different picture for the GST one in which prices may dip or glide along unchanged rather than soar Services will cost more so people will use them will eat in restaurants less for example Restaurateurs see ing their business shrinking may decide to absorb the GST rather than pass it on More likely though the GST will be mildly inflationary but the in effects will be offset by the high cost of money fortunately high interest rates add to the federal deficit So whatever money the government brings in in new taxes will be offset by what it 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