Moment in time

Iwas early for a meeting on a grey November morning in 1992. Deposited in a meeting room of a brokerage firm overlooking Bay Street, I impatiently prowled the circumference. On the wall by the heavy oak door was a painting of the founder, an earnest gentleman leaning forward sternly from his ornate chair. Next to him was a framed debenture issued eight decades earlier to a long-gone mining company. The brokerage’s first underwriting. Investment banks prize such tokens. The debenture paid 4.5 per cent interest. Mortgage rates in 1992 started at 8.25 per cent. I was paying more than that.

I remember thinking this debenture was a bizarre artifact of history. That the modern world would never—could never— see interest rates so low ever again. It was an aberration. A singular moment in time. I could not imagine how the circumstances of an era that produced such a low-interest rate could never be repeated. That no one would ever accept such a low return on secure capital again.

I had grown up in the 1970s, an era defined by runaway inflation. After a series of failed attempts to break the cycle of spiralling wages and prices, policymakers concluded the only way to rescue the economy was to run it into the ditch. That only a deep, brutal recession would break the fever. It mostly worked. But to do so, interest rates soared. By 1980, many homeowners were paying 20 per cent interest, or more, on their mortgages.

Forty years later, a generation is getting their first taste of inflation and interest rate hikes. They have never known interest rates at five, six, 10 or 19 per cent. They hardly believe it possible.

Moreover, the moment feels temporary. Something to ride out. Maybe. Yet, those who must renew a mortgage—or apply for a new one—are feeling the pointy end of the interest rate stick.

For reasons that should be apparent by now, I don’t make economic predictions. I don’t know where inflation or interest rates are headed. But it sure feels like an important moment to have our eyes open.

In 2021, the federal government spent $23 billion paying down debt. According to the Parliamentary Budget Officer, it will spend $46.5 billion this year. $51 billion next year. It will spend more servicing debt this year than it does on Child Care or Employment Insurance. This is what higher interest rates do to government finances. It eats the money we need to pay for the things we like.

At the provincial level, it took a century for Ontario’s debt to grow to $200 million. It took just 14 years for it to double. Ontario’s debt expanded last year despite an operating surplus in provincial finances. Interest expense is expected to be $14.5 billion in this fiscal year—a bit less than it spends on education.

Meanwhile, Ontario households are faring a little better. Collectively, we now owe more than $2 for every $1 of disposable income.

None of this is necessarily a cause for alarm. Our debt as measured against income (or our ability to pay our obligations) is currently manageable. Strained, for sure, but manageable. But incomes have been fuelled by big (and necessary) government spending these past few years. Can it be sustained? Is there enough juice in our aging demographic to bring back a vital, growing economy? Do we feel any urgency to change our course?

Maybe. But the risk is greater now than it was when borrowing costs were near zero.

Which brings us to the County.

Shire Hall successfully appealed the limit the province imposes on its borrowing. Ontario prescribes municipal borrowing repayment not to exceed 25 per cent of revenue it derives in the municipality through taxes, user fees and interest.

Shire Hall argued that debt related to Wellington waterworks and construction grant for HJ McFarland redevelopment should not count against the limit. The Ontario Land Tribunal agreed that neither posed a risk to the County’s finances—as the construction grant is a provincial commitment and upfront financing agreements with developers backstop Wellington waterworks debt.

Maybe.

Shire Hall believes the pile of subdivision agreements it is currently wading through means thousands of new homes will be sprouting from the ground soon. And forever. That upfront development charges will carry it through the first decade—until property taxes, more charges, and other fees come gushing forth into Shire Hall coffers

Maybe.

I suspect that if I spent my days listening to developers, buoyed by their enthusiastic pitches, the sheer volume of what they promise might inspire bullishness on the County’s growth prospects.

But debt isn’t to be trifled with. And promises aren’t security.

The scale of the infrastructure renewal underway in the County is breathtaking. It is bold and imaginative. And it is unprecedented—as in, it has never done this before. Shire Hall tells itself it is fixing 25- year-old neglect. And that it is readying this place for a golden age of growth. And… it may work.

But it’s risky as hell.

With every level of government having maxed out their credit cards, Shire Hall has no safety net. No backstop. The risk is being entirely borne by County residents and waterworks users. Buckle up.

rick@wellingtontimes.ca