Oh, the irony of Ot­ta­wa lec­tu­ring Ca­na­dians on how to ma­na­ge debt

The Tru­deau go­vern­ment is not exactly a mo­del of rec­ti­tu­de when it co­mes to ma­na­ging its own debt and de­fi­cit

La Jornada (Canada) - - ENGLISH SECTION - Char­les Lam­mam, Hugh Ma­cInty­re and Ben Ei­sen are analysts at the Fra­ser Ins­ti­tu­te (www.fra­se­rins­ti­tu­te.org).

Ot­ta­wa re­cently an­noun­ced a se­ries of new re­gu­la­tions for the hou­sing market to “pro­tect the long-term fi­nan­cial se­cu­rity of bo­rro­wers and all Ca­na­dians.” You have to lo­ve the irony. Whi­le the fe­de­ral go­vern­ment in­crea­ses re­gu­la­tion of hou­sehold debt, it racks up mo­re debt with no end in sight.

Among the new re­gu­la­tions, the fe­de­ral go­vern­ment will man­da­te a “stress test” that re­qui­res all ho­me­bu­yers ta­king out in­su­red mort­ga­ges (mort­ga­ges with less than 20 per cent down pay­ment) to qua­lify for a loan at the Bank of Ca­na­da’s fi­ve-year fixed mort­ga­ge ra­te (4.64 per cent), which is sig­ni­fi­cantly hig­her than mort­ga­ge ra­tes

(two to th­ree per cent) ty­pi­cally of­fe­red to ac­tual ho­me­bu­yers.

What are we to ma­ke of this new ru­le? For one thing, it sug­gests Ot­ta­wa thinks Ca­na­dians are poorly ma­na­ging debt and that fi­nan­cial ins­ti­tu­tions are im­pro­perly scree­ning mort­ga­ge ap­pli­cants. Iro­nic, as the fe­de­ral go­vern­ment is not exactly a mo­del of rec­ti­tu­de when it co­mes to fis­cal ma­na­ge­ment.

For exam­ple, the fe­de­ral go­vern­ment has pi­led on $162 bi­llion in new debt sin­ce 2007/08, for a to­tal of $619 bi­llion. Just li­ke hou­seholds, the fe­de­ral go­vern­ment pays in­ter­est on debt, which costs $26 bi­llion each year. That’s clo­se to what Ot­ta­wa co­llects from the GST

($33 bi­llion).

And over the next fi­ve years, the fe­de­ral go­vern­ment will add at least $113 bi­llion in new debt with no plan for a ba­lan­ced bud­get. We say “at least” be­cau­se a re­cent Fra­ser Ins­ti­tu­te study found the new debt over the next fi­ve years could to­tal up to $200 bi­llion un­der mo­re rea­lis­tic spen­ding sce­na­rios. Even a new TD Bank report pegs the fi­ve-year cu­mu­la­ti­ve de­fi­cit at $17 bi­llion mo­re than fo­re­cast in the go­vern­ment’s March bud­get.

Cri­ti­cally, very little of the debt-fi­nan­ced spen­ding is being used to in­vest in growth-en­han­cing in­fras­truc­tu­re. Ins­tead, much of the debt is being used to fi­nan­ce in­crea­sed spen­ding on cu­rrent go­vern­ment ope­ra­tions and trans­fers. In fact, just $4 bi­llion of the $29.4 bi­llion pro­jec­ted de­fi­cit this year is for spen­ding on new in­fras­truc­tu­re.

In fa­mily fi­nan­ce terms, the go­vern­ment is rac­king up cre­dit card debt by bu­ying con­su­mer goods rat­her than bo­rro­wing to in­vest in hard as­sets such as a new ho­me.

Meanw­hi­le, Ca­na­dian fa­mi­lies are ge­ne­rally ac­cu­mu­la­ting debt res­pon­sibly and for much bet­ter reasons. As Phi­lip Cross, for­mer chief eco­no­mic analyst at Sta­tis­tics Ca­na­da, con­clu­ded: “Ove­rall, the­re is little evi­den­ce that Ca­na­dian hou­seholds (un­li­ke so­me go­vern­ments) are being irres­pon­si­ble in ta­king on new debt. The long-term in­crea­se in hou­sehold debt has been le­ve­ra­ged in­to a much lar­ger gain in hou­sehold as­sets, boos­ting both in­co­mes and net worth.”

Yet the go­vern­ment is beha­ving as if Ca­na­dian fa­mi­lies can’t be trus­ted to ma­na­ge their finances res­pon­sibly. Per­haps Ot­ta­wa should un­der­go its own fi­nan­cial “stress test.” It’s dig­ging dee­per in­to debt at a ti­me when the eco­nomy is gro­wing, al­beit slowly. But what hap­pens if the eco­nomy falls in­to re­ces­sion or if in­ter­est ra­tes spi­ke?

Run­ning lar­ge de­fi­cits du­ring non-re­ces­sio­nary ti­mes puts Ca­na­da’s finances at risk should the eco­nomy ex­pe­rien­ce a sig­ni­fi­cant slow­down or re­ces­sion. Unex­pec­ted slow­downs can mar­kedly and quickly re­du­ce re­ve­nues, and if the go­vern­ment is al­ready in a de­fi­cit po­si­tion when a re­ces­sion hits, the re­sult can be a ra­pid run-up in debt. The go­vern­ment’s own es­ti­ma­te show that a one per­cen­ta­ge point drop in in­fla­tion-ad­jus­ted eco­no­mic growth would in­crea­se the an­nual de­fi­cit by $5.0 bi­llion.

Fe­de­ral finances could al­so be strai­ned by a spi­ke in in­ter­est ra­tes, which would re­qui­re hig­her in­ter­est pay­ments, in­crea­sing the cost of carrying debt - the very risk Ot­ta­wa be­lie­ves Ca­na­dians are un­pre­pa­red to as­su­me. If the fe­de­ral go­vern­ment does not get bet­ter con­trol over its own debt, it risks lo­sing cre­di­bi­lity in con­ti­nually trying to de­ter con­su­mers from doing their own, mo­re res­pon­si­ble bo­rro­wing.

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