Finance Committee on Dec. 8th, 2020

[Soren Halverson, Associate Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance]

It's Soren Halverson from the financial sector policy branch.

Thank you for the question.

The answer to that question is a little more complicated than it would appear to be, in the sense that you have a debt stock, and it depends on how the debt matures.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

It's mostly short term. We heard that in the opening statement in the opening round. We heard that most of it is short term.

[Soren Halverson]

At a very high level, just to do an abstraction of that, you've got about $1 trillion in debt, and so you're looking, on a steady-state basis, at 1% of $1 trillion.

[The Chair, Liberal, Wayne Easter]

Mr. Kelly, I'm going to give you four minutes and Ms. Jansen three, because we took some time here.

Go ahead.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Okay. Thank you.

The concern is that we've just heard in the opening panel that the government has no ability to gauge when interest rates are going to rise. The minister admitted to not possessing a crystal ball, and I don't think anybody expects she does.

What has your department built into its expectations around interest rates? Are you expecting that 1% addition to our debt service cost, or is it 2%, 3%? At some point rates are going to go up, and we need to know what that's going to do to the Canadian economy and Canadian public finances.

[Soren Halverson]

If the question is focused on federal debt management, the answer is that the approach the department takes in terms of providing advice on debt management strategy is looking at a range of scenarios. It's an approach that is robust under a range of different interest rate conditions, and it's also mindful of smooth market functioning.

In the context of the crisis, the front end of debt, the short-term debt, was where the shock absorber was located. It's the easiest part of the market to place debt in, and then over time, there's a plan that has been communicated in the fall economic statement that involves terming out that debt. You're seeing a substantial increase in issuance in the 10 and 30-year range, in accordance with that approach.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

How long will it take to shift the majority of that into longer terms?

[Soren Halverson]

You are looking at a multiple between 450% to 600% increase, if you're looking at the 10- or 30-year issues right now, year on year from where they were last year. Those are big increments of debt going into specific sectors. If you were to maintain that, if you kept doing that for four years in a row, you would see a very large percentage of your overall debt burden reflected in that long end. You're sort of moving to that trajectory, but it's not a switch you can flip overnight.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Can somebody answer the question the minister failed to answer—will the government freeze existing taxes and agree to not impose new taxes next year?

[The Chair, Liberal, Wayne Easter]

That's probably a policy question they can't answer.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

They can answer whether it's been contemplated and whether their plans may have assumptions around that.

[The Chair, Liberal, Wayne Easter]

Does anybody want to take it? I believe we're into a policy area that's really the minister's responsibility.

[Andrew Marsland]

Mr. Chair, the question was posed to the minister and the minister responded. As you say, it's a policy question.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

She responded without answering.

[The Chair, Liberal, Wayne Easter]

Ms. Jansen, you have three minutes.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Thank you.

Mr. Marsland, back in July, CMHC awarded a $250,000 grant to UBC's School of Population and Public Health, which appears to be studying the idea of a home equity tax. This money was provided to a project called “Generation Squeeze”, and it has complained:

Many Canadians bank on profits from home ownership to secure their financial future and gain wealth. We need to make it so that no Canadian relies on gains in housing wealth to feel secure, and we need to rethink policies that, by encouraging financialization of housing, push the costs to buy or rent a home even further out of reach.

The UBC grant choice is noteworthy, since in 2019 UBC researchers called homeowners lottery winners with an unfair tax advantage.

Audrey-Anne Coulombe, a CMHC spokeswoman, was quoted as saying, “The objective is to identify solutions that can level the playing field between renters and owners.”

Unfortunately, these sorts of statements do not acknowledge that homeowners pay a huge portion of their income in taxes to three levels of government before they can even save for a down payment. There's no acknowledgement of the cost of owning a home, like maintenance, repairs and insurance, let alone any renovations that enhance the value of the property. We also know that government itself adds hundreds of thousands of dollars to the cost of a new home by way of zoning regulations, development charges and housing limits. The C.D. Howe Institute did a study here in Vancouver in 2018 and said it constitutes a total additional $644,000 added cost to a single detached home.

Why on earth would the government even consider the idea of implementing a capital gains tax on the homes of Canadians? Can you assure Canadians that there will not be a home equity tax implemented in order to pay for COVID-19 spending?

[Andrew Marsland]

I'm afraid I'm not going to comment at all, one way or another, on a policy question. Those are questions for the government. In terms of the particular grant, as was observed, that was from CMHC, and it is probably better placed to answer that question.

[The Chair, Liberal, Wayne Easter]

Ms. Jansen, if you have a follow-up, you have about 40 seconds here.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

I'm trying to find out whether or not that would be considered. Have you spoken about the idea of a tax on home equity? It's a really big concern for Canadians, and that's what I'm trying to get at here.

[The Chair, Liberal, Wayne Easter]

You're on mute, Andrew.

[Andrew Marsland]

I'm usually clearer that way.

Thank you again for the question, but again, I'm not going to comment on that policy question. Thank you.

[The Chair, Liberal, Wayne Easter]

It might be a question for somebody at CMHC at some point.

We will now go to Mr. Fraser and Ms. Koutrakis, who are splitting three minutes each.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you very much, Mr. Chair.

I think Mr. Halverson will be best positioned to answer my question. I want to dig in a little on the cost of borrowing, given the nature of the conversation we've had to date.

The policy rate of the Bank of Canada, which is at the effective lower bound, is currently at 0.25%. The Conservatives keep raising fear about a potential 1% increase, which would represent a 500% increase if it were to shoot to 1.25% overnight. In any event, the Bank of Canada, during the testimony before this committee, has explained that there is no plan to do that for potentially the next few years, and in any event, the conditions that would justify such a radical increase would essentially tell a story that the economy is doing very well.

Mr. Halverson, to come back to this question, you explained previously that even if there were a short-term hike in the interest rate, the existing debt would need to term out first. I assume you mean that the term for each debt that's owed would have to pass before that would become due.

In your view, does this window of time, given the remaining term on debt that we hold, create an opportunity for us to effectively refinance our debt at a much lower interest rate, given what's happened in the world, so we can save significantly on borrowings that may be required to finance spending in response to the pandemic?

[Nicholas Leswick, Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance]

Mr. Chair, can I just make one contribution to the discussion?

[The Chair, Liberal, Wayne Easter]

Yes, go ahead.