Federal intervention in the form of new mortgage rules designed to moderate Canada’s overheated housing markets might be appropriate in the current economic climate, but a team of analysts maintained that such steps will be ineffective in ensuring borrowers’ fiscal security as long as the government does not rein in its spending.
In a contribution to the Financial Post
, Fraser Institute analysts Charles Lammam, Hugh MacIntyre, and Ben Eisen noted that the amount of new debt that the Canadian government could rack up over the next five years would be at least $113 billion, and as much as $200 billion in “more realistic spending scenarios.”
“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,” the analysts wrote.
“To put that in family finance terms, the government is racking up credit card debt to buy consumer goods rather than borrowing to invest in hard assets such as a new home,” they added. “You have to love the irony. While the federal government increases regulation of household debt, it racks up more of its own debt with no end in sight.”
In this light, the harsher “stress test” on borrowers mandated by the regulatory changes would be more than a bit hypocritical, the Fraser Institute academics argued.
“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,” the trio stated.
“[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’.”
Most crucially, the federal government’s spending patterns at present do not bode well for the Canadian economy in the long run.
“Running large deficits during non-recessionary times puts Canada’s finances at risk should the economy experience a significant slowdown or recession,” the analysts said. “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.”
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