Ordinary Canadians are certainly feeling the economic pressures now, more strongly than ever before, after a very long period of unsustainable growth based on low interest rates and rising household debt. The new reality is an acute affordability crisis as housing, food and other costs outstrip wage gains, and the cost of servicing debt soars as interest rates rise.
The hike in interest rates over the past 18 months has worsened the acute housing affordability crisis, resulting in strong political pressure on governments to support rental housing with a bag of policy tools, from scrapping the GST on new apartment construction to directly subsidizing new rental housing developments
However, deficit financed public investments in housing, which are big enough to make a real impact, would likely prompt the Bank of Canada to hike or to maintain high interest rates. The Bank of Canada has only one tool: interest rates. This policy tool is applied bluntly to the whole economy, with effects on housing activity.
It is true and important to say that inflation is the result of supply side shocks due to the pandemic and other factors, rather than the economy “overheating” and operating above capacity. The Bank of Canada, however, has largely rejected that reasoning, and it alone controls the monetary policy lever.
The sacred texts of neoliberal economics say that fiscal and monetary policy should work in tandem, and that fiscal austerity should prevail until we return to the official 2% inflation rate. This policy set chooses to ignore how many people cannot make rent or afford soaring mortgage payments or pay for their groceries as inflation continues to rise alongside the price of debt. As a key case in point, former Bank of Canada Governor David Dodge has called for limits on public debt, and possibly outright spending cuts, to complement tougher monetary policy.
But there are clear political limits to fiscal austerity. Even the Conservatives favour new fiscal measures for housing that would raise the deficit, despite calling for tougher measures to reduce public debts. The Liberals and the NDP have additionally promised new social investments, from affordable housing to pharmacare.
There is an obvious contradiction of pushing the fiscal accelerator at the same time as pumping the monetary brake, and there is one clear way to reconcile this policy incoherence: hike taxes on the affluent to finance needed public investment without significantly raising the deficit and public debt.
Aggregate demand in the economy would stabilize if a rise in public investment was offset, in whole or in large part, by tax revenue generated by the wealthy.
The federal Liberal government has a patchy, but reasonably progressive, record in terms of social spending, compared with the previous years of neglect. But they have largely sidelined progressive tax reforms which are needed for a necessarily ambitious program.
We can invest greatly in affordable housing in part by collectively spending less on McMansions for the already well housed, vacation properties and other luxury goods and services.
To start, limiting the non-taxation of capital gains on owner occupied housing and special tax treatment of investment above a reasonable threshold, could be used, and popularly backed, to invest in social housing. That would still be a major political challenge.
Still, the unpalatable alternative is to defer desperately needed housing programs until the economy has undergone a perhaps extended period of stagnation if not outright deflation. For even those focused-on indicators of economic growth, public investment in housing should be a necessary policy tool, despite what their monetarist interlocutors may say.
Ordinary Canadians will certainly feel the heat from the price of housing when monetary policy adds fuel to the fire while their pay cheques freeze.