B.C. Business Matters:
Ken Peacock >>
HST Era Food Services Receipts Rose and Fell, But Stronger Growth has Followed the Return to PST
By Ken Peacock
BC reverted back the PST system on April 1st of this year. It is still too early to determine what specific impacts this important change in tax policy will have on BC’s economy. Economists and public finance scholars are virtually unanimous in believing that shifting back to the PST will have negative long-term consequences in key areas such as business investment, productivity and the growth of real wages. However, the picture is a bit less clear from a shorter-term perspective.
One sector where the return to the PST may have a favourable near-term impact is the food services industry. This is because the HST raised the tax-inclusive price of meals purchased from food services establishments, whereas restaurant meals are not subject to the PST – meaning the retail price is lower for consumers. While it is still early, data on restaurant sales receipts are available through July of this year, providing a full quarter of sales figures under the reinstated PST. The graph below shows the total value of all food services receipts in BC (full service and limited service food establishments, drinking places and special food services such as caterers). The data are seasonally adjusted to better show short-term changes and trends.
In the months following the introduction of the HST in 2010, food service receipts fell. This response would have been expected, as the application of the HST to restaurant meals increased the cost of dining out relative to preparing food in the home. The key issue is the magnitude of the consumer response. Because there are many factors apart from sales tax that affect consumer behaviour at the same time (strength of the economy, job growth, increases/decreases in tourism activity, weather which was different from usual patterns and so on), this is difficult to evaluate. There are a few general points to note, however. Growth in restaurant receipts was weak prior to the introduction of the HST. Although the impact of the Olympics makes it difficult to assess, receipts were trending a little lower in advance of the adoption of the HST. In the second quarter of 2010 (after the Olympics but before the HST came into effect), food service receipts grew by just 0.9% from the same quarter the previous year (the weakest growth among all provinces by a significant margin). Also note that sales started to grow again in early 2011, roughly six months after the HST was adopted.
When the PST was reinstated and restaurant meals were no longer subject to the additional 7% tax, there appears to have been a positive response by consumers patronizing restaurants – as one might expect. However, as was the case when the HST came into effect, the size of the response is difficult to gauge. What is clear is that restaurant receipts started trending higher in late 2012 and early 2013, well before the PST was reinstated (thereby eliminated the tax on restaurant meals. In the month when the province first reverted to the PST (April 2013) receipts actually slipped a bit from the previous month. But June and July each saw higher receipts. On balance, it is fair to say there was a positive response to the reduction in tax on restaurant meals, since for the second quarter of 2013 annual growth in food service receipts reached 5.6%, the biggest gain since the HST was introduced. Still, this conclusion is tempered by the fact that receipts were actually trending higher prior to April 2013. And if one just looks at individual months, the largest month-to-month increase in restaurant receipts was in January 2013, well in advance of the HST being removed.
Trend comparisons with other provinces
The figure below compares the trend in food service receipts across the larger provinces. In the graph, it is clear that growth in food service receipts in BC has not kept pace with other provinces. While the implementation of the HST may have dampened receipts, they were more or less flat in the years prior to the HST. With this context, it is difficult to conclude that the HST, in isolation, was a major factor keeping food services receipts down.
The bottom line is this: the growth in overall food service receipts has been weak in BC for several years. Amid this generally soft environment, in the months following the switch to the HST restaurant receipts did slip. Receipts started growing again six or seven months after the HST was implemented, suggesting that consumers adjusted to the tax (albeit spending on restaurants had fallen to a new lower base level). Restaurant sales, however, did seem to advance more strongly in the early months following the repeal of the HST.