Interest rate rise may slow economy

Report says increase will add costs to Ontario residents paying down their household debt

TORONTO — Rising interest rates could have a “significant” impact on Ontario’s economy as the already ballooning household debt is projected to continue to grow, warns the province’s fiscal watchdog.

The Financial Accountability Office said in a report released Tuesday that an average Ontario household owed nearly $154,000 in 2016, up from $119,000 in 2010. Its analysis shows that paying down that debt cost an average Ontario family about $12,500 in 2016. As interest rates rise, those repayment costs will grow by nearly 25 per cent to $15,500 a year by 2021, it said.

“That really is money that will have to come out of discretionary incomes,” said the office’s chief economist David West. “It’s money that will otherwise be spent on goods and services that now will have to be diverted towards debt payments.”

West said that the change in consumer spending would slow the economy and could impact government revenues as a result.

“Consumer spending is one of the main drivers of the Ontario economy,” he said. “Going forward in our forecasts we anticipate consumer spending will slow to 1.8 per cent growth by 2021. It will steadily ramp down.”

The report attributes the growth in household debt primarily to residential mortgages.

West said the FAO has been raising the issue of household debt and financial vulnerability in its reports for some time.

“A sharper than expected rise in interest rates would increase these payments even further and force households to scale back,” he said. “This could have significant negative implications for the economy and ... that will, of course, have an impact on the government’s fiscal position.”

A spokeswoman for Finance Minister Charles Sousa said the report demonstrates that not everyone in the province is benefiting from the province’s growth and added that it makes policy changes like the increase in minimum wage necessary. PC finance critic Vic Fedeli said the report shows that life is becoming increasingly unaffordable in the province.