Questions to Senator Peter Harder, Government Representative in the Senate, regarding concerns over increasing household debt and government overspending creating inflation.
Hon. Larry W. Smith (Leader of the Opposition): My question is also for the Leader of the Government in the Senate.
In a report released yesterday, the Parliamentary Budget Officer warned Canadians that “. . . the financial vulnerability of the average household would rise to levels beyond historical experience.”
Yesterday Senator Woo implied that the Bank of Canada alone was responsible for influencing inflation. In basic economic principles, increasing the money supply by borrowing what you don’t have creates inflation. The Bank of Canada’s response is to raise rates, effectively tightening supply. For those living off a trust fund, high interest rates are positive; but for the average hard-working Canadian with a mortgage or business loan to pay, high rates of interest cause concern.
The PBO estimates that if the Bank of Canada were to raise key interest rates from the current 0.5 per cent to 3 per cent, the average Canadian family would have to use 16.3 per cent of its disposable income for debt repayments by the end of 2021. As mentioned in my speech earlier, the CMHC, Moody’s and other major organizations are concerned about the dangerous level of mortgage debt in markets like Toronto and Vancouver.
Given that we are heading toward massive deficits and higher interest rates and currently facing instability in the housing markets of several cities, what will the government do to promote change in the trajectory it has set in place by dangerously overspending?
Hon. Peter Harder (Government Representative in the Senate): I thank my honourable colleague for his question. I would, of course, take issue with a number of points in the premise of his question. I do not believe nor does the government believe that its spending is outrageous and uncontrolled. It is a fiscal plan that matches the economic circumstances of the time. It is deliberate and prudent, and the investments being made in infrastructure are necessary for preparing the Canadian economy for the future.
With respect to interest rates, I would also suggest that our interest rates are at historic lows, and that is unsustainable over the long term of the economic cycle. However, the government believes that the risk of explosive interest rate growth is not in the foreseeable future, although some flexibility in interest rates does take place, as the honourable senator will know.
With respect to the housing market, the government has undertaken a number of measures, particularly through CMHC, to better prepare consumers for the challenge of a changing economic and interest rate environment and is also working in particular markets, particularly Toronto and Vancouver, and at the provincial level. I’m happy to report, as the senator will know, that effects are already being shown in the housing markets in those locations.
Senator Smith: As a supplementary, if I have a house valued at $300,000 with a $200,000 mortgage, and I’m at 3 per cent today and it went up to 5 per cent, I would be paying almost a double rate for each $100 or $100,000 of debt. We don’t have to have significant rate increases, but if we have a rate increase that takes us from 3 to 4 or 3 to 4.5, it is significant enough, even at a lower level. Once you get into one and half or one and three quarters of your base amount, even at a low interest rate, it can be very difficult for the average Canadian family.
This leads to our greater question: Do you foresee a period of time when we actually will start to look at trying to control the debt and get ourselves back to some form of balance, or will this just go off to the next 10 years and we will try to equate it to the time of our infrastructure expansion program?
Senator Harder: Again, I thank the honourable senator for his question.
Let me repeat what the Minister of Finance stated in his economic documents and most recently in the budget. It is the view of the Government of Canada that in the reporting period of the fiscal plan there will continue to be deficits, but there is also in the ongoing plan a lowering of the debt-to-GDP ratio, which is the fiscal anchor for this government.