Obligations

I waited in a dull meeting room of a smallish capital trading firm on Bay Street. Despite its relatively modest stature, the firm had survived several market crashes, a depression, many recessions and countless corrections. In between they had managed to eke out a respectable return for their clients and had avoided being swallowed by larger rivals or the newly unleashed banks.

There was no expensive art on the wall— either as a token of their Canadian fealty or a badge of obscene wealth. Just one framed piece adorned the drab walls. I drew nearer. It was a debenture certificate, a form of debt, issued in 1902—the year the trading company had opened. The issuer was a mining company that had long since expired. What attracted my attention was the interest rate on the debt instrument. It promised to pay the bearer 5.5 per cent per year.

In my lifetime I had never known interest rates so low. It seemed a relic retrieved from an archeological dig. I had come of age when interest rates were careening toward 20 per cent. A common household mortgage bore interest of 10, 11 or 12 per cent.

Standing before the debenture certificate, it struck me that I would never know interest rates so low. It was as though I was gazing at a dinosaur bone. It was, I believed, an artifact of history.

Yet here we are. Just 25 years later. My children, to the extent they are conscious of such things, have only known interest rates of 5 per cent or less. A generation has grown up knowing only low interest rates.

A home sold this week near Yonge Street and Lawrence in Toronto. An ordinary house in a desirable neighbourhood—close to shops and the subway. The listing noted, however, that it was a fixer-upper. It needed plenty of work. Wiring. Plumbing. Heating. Everything. A handyman’s special. It sold for $1.3 million. It is a symptom of an illness.

Folks appear to be eager to pay about half that amount to exist in a concrete box overlooking the mission district—if they can claim a cool-sounding address such as Harmony or The Modern. Despite repeated warnings that Toronto’s housing market is overheated and overpriced—there seems no end to the demand. Fuelled, in part, by historically low interest rates.

Yet this too will end. How and when? I have no useful insight. But it will end. Interest rates will rise again. There will be much pain and suffering. How much, depends on choices we make now.

But alas, I fear, we will concern ourselves with the amount of debt we have accumulated over the past two decades only when we are confronted with brutal reality of spiraling payments to service this obligation. By then it will be much too late.

Ontario’s finance minister Charles Sousa signalled this week his government’s intention to miss its deficit reduction target this year. The deficit—that is the amount of money the governments spends in excess of what it takes in, in a year—will expand. To about $12 billion this year.

“I don’t believe austerity is the right decision at this time,” said Premier Kathleen Wynne on Monday as she delievered a $120 million grant to software company OpenText seeking to double its workforce.

Every dollar of her government’s largesse will be added to our debt. It is a yoke upon our future and the future of our children. Our leaders must be much more responsible in managing these long term obligations.

When the Liberal government was elected in 2003, Ontario debt was $133 billion. Today the province owes more than $272 billion—more than a doubling of the provincial debt burden in a little over a decade.

But it is worse than it looks—if that is possible. Relative to the size of Ontario’s economy, provincial debt has ballooned from 27 per cent to 40 per cent since 2003. In simple terms, this means our debt is growing much faster than our ability to pay it back.

Ontario will spend about $11 billion on interest on its debt this year. It will spend more on servicing its debt load than it spends on colleges and universities. More, in fact, than any provincial ministry except health care.

The province is currently paying an average of about four per cent interest on its debt. It has never been so low in modern times.

When interest rates rise again—and they will— Ontario will be crushed by its debt payments. Servicing the province’s bloated debtload will consume an ever greater proportion of our tax dollars, leaving scarcely little for health care, education or anything else.

It is a ruinous path.

Yet the provincial government seems not to have noticed. Or perhaps they are betting that we won’t either.

rick@wellingtontimes.ca