The Trudeau government is in a debt spiral that threatens both public services and economic stability
Rising interest rates are threatening Canadians who have mortgages on their homes.
The federal government has taken some steps to deal with this situation. It has put forth a Mortgage Charter that makes some marginal changes around remortgaging but still leaves borrowers exposed to higher interest rates.
A recent Manulife survey found that one in three mortgage holders fears that they will be forced to sell their home because of the higher monthly payments caused by the increasing interest rates.
This situation was not supposed to happen. Stress tests, which require mortgage seekers to demonstrate financial capacity not only to handle the mortgage they are taking on but also to continue to manage their current mortgage should interest rates rise, have been introduced. However, many existing mortgages were issued before this requirement came into effect.
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Stress tests are not popular. They do limit access to home purchases for some. However, the consequences of not having stress tests can be severe, as demonstrated in the financial debacle in the U.S. in 2007/08.
U.S. homeowners were seen as good, tax-paying citizens. Using backward logic, it was thought that if you could make more people homeowners, they would become middle-class taxpayers. Mortgages were showered on people regardless of their ability to repay.
Consequences were not long in coming. Borrowers in way over their heads reneged on their loans, and the individuals and institutions that had directly or indirectly funded those mortgages were hung out to dry. The impact was felt throughout the economy.
Stress tests safeguard mortgage holders from the dilemma that so many Canadian homeowners are now facing. Instead of allowing low- and middle-income people to acquire mortgage debts that they cannot afford now or in the future, subsidies or other means should be used to increase access to housing. Less expensive construction techniques and more flexible zoning could work.
A stress test limits the borrower’s ability to take on more debt than they can handle. The recent federal fiscal update indicates an area other than home mortgage lending where financial stress testing is sorely needed. This is in the federal government.
On-going deficits indicate that the feds have consistently and regularly spent more than their income. The amount of each year’s deficit is added to the national debt. This debt is currently greater than 40 percent of Canada’s overall annual output and will grow this year by at least the $40 billion deficit that is now being projected.
Like mortgage holders, the government faces increasing interest payments on its debt. The rising market rates are the primary cause. An additional reason for interest on the national debt to increase is a reduced credit rating caused by the greater risk that a larger debt entails. So far, Canada’s credit rating has not fallen, but the rising debt makes this occurrence more probable.
And the debt will continue to rise. Nowhere in any of its economic or fiscal statements does the government make any mention of actions to pay down the debt or even to stop it from increasing.
There is much talk about fiscal restraint, which, unfortunately, is not about moving to a balanced budget to control the debt. Rather, it is merely to try to control the growth of the annual deficits, and even this limited measure is predicted to last only for the next two years.
Another anticipated measure of fiscal restraint is the expectation that the increasing debt will constitute a smaller proportion of our national GDP. Projected reductions fall within the range of one to two percentage points. However, achieving even this modest goal appears doubtful, as it hinges on a more robust rate of economic growth than what many experts are currently predicting.
Some argue that government borrowing and, consequently, spending cannot be constrained by stress tests or other measures, as it supports the provision of essential public goods and services such as healthcare.
At present and in the foreseeable future, it is the government’s debt that hinders and will continue to constrain its capacity to deliver essential services. In the fiscal year 2025/26, the federal government will allocate $53 billion of taxpayers’ dollars to service the national debt, a figure likely to increase in tandem with the growing debt load.
Canada’s current and anticipated fiscal state starkly illustrates the compelling need for the government to subject its own borrowing to the same stringent restrictions it imposes on the rest of its citizens.
Dr. Roslyn Kunin is a public speaker, consulting economist and senior fellow of the Canada West Foundation.
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