Doomsday for the Middle Class

The year is 2030.

Carbon taxes and inflation are driving up the cost of everything, the housing crisis has made home ownership a distant dream for our kids, and the gap between rich and poor has never been larger.

This might sound like some far off doomsday prediction. It’s not. In fact, it’s a simple restatement of headlines from this year, 2023. The doomsday scenario as we move towards to 2030 is much worse: The disappearance of Canada’s middle class.

Since the Second World War, our economy and society has greatly benefitted from having a strong middle class. It has afforded us social cohesion, higher levels of education, improved healthcare, not to mention scientific and technological advancement.

Yet for decades, the pressure on the middle class has grown more acute, with the cost of living outstripping wage growth. And every step of the way our politicians have promised to do better while objectively making things worse.

While governments like to crow about economic growth, the fact is the growth we are experiencing today is not lifting living standards. By one estimate, food prices have risen by 41 per cent since September of 2013, while hourly wages have only increased by 24 per cent. The numbers are even worse for housing, as various levels of government have simultaneously restricted supply while increasing demand.

The current federal government’s decision to keep increasing its inflationary carbon tax at the same time it vastly increased the money supply was just gas on the fire.

But that isn’t even the whole story. The federal government alone increased taxes on Canadians in five areas in 2023 alone, imposing a second carbon tax, ramping up mandatory CPP and EI contributions, and hiking liquor taxes. Here in Alberta, the government gave with one hand while it takes with another. Yes, the province suspended provincial fuel taxes, but it also hiked its industrial carbon tax with committing to Net Zero 2050 objectives, which will drive up the cost of electricity and heat for decades to come.

Is it any wonder that cost of living/inflation is the top concern of 69 per cent of Albertans, according to a recent poll? In fact, the Angus Reid’s economic stress index suggests 39 per cent of Albertans are struggling financially. This is the second highest result in Canada, behind only Manitoba at 42 per cent.

In the short term, however, Canada faces a much larger problem: Interest rates.

To fight inflation, last year the Bank of Canada started ramping up interest rates, from 0.25 per cent to 5 per cent today.

Officials started out dismissing concerns about short-term rate increases because inflation was “transitory.” More than a year later, Bank officials are now warning the high interest rates might be here to stay.

So what’s the big deal?

Our country has the highest levels of household debt in the G-7, and three quarters of that debt is mortgage debt. About two thirds of that mortgage debt will need to be renewed prior to 2026, with half in 2024-25. Higher interest rates will mean substantially higher payments.

We’re seeing the spike already. In February 2022, the average monthly mortgage payment was $1,460. It’s now above $1,900, up more than 30 per cent. Those payments could rise another 15 per cent by the end of 2024, 30 per cent by the end of 2025 and potentially 45 per cent by the end of 2026.

In practice, this means billions in disposable income disappearing, all while mortgage defaults start increasing. It also means a once in a lifetime recession that can’t be papered over with borrowed money.

The temptation, for politicians, will be to simply extend amortization periods for mortgages, and carry on as usual.

This passing-the-buck solution allows them to keep doing what they have grown accustomed to doing - keep increasing spending, keep running up debt, keep hiking taxes, keep printing money, and keep whittling away at the middle class. Given the opportunity, most politicians would be happy to keep whistling as the economy falls of a cliff.

The better long-term solution is for government to come to the realization that inflation is caused by inflationary policies, and reverse those policies. This means abandoning pointless green energy schemes that do nothing for the environment while making people’s lives more expensive. It means ending corporate welfare for subsidy-dependent industries that the private market does not support. It means reducing the burden on taxpayers, particularly the working class.

If politicians ever get serious about reducing inflation through government policy, it would allow the Bank of Canada to decrease interest rates sooner. Of course, that approach requires governments to do what families do and live within their means.

At this point, I’m not taking bets that politicians are interested in doing the right thing… even if it means doomsday for the middle class.