Debt-ridden Canadians are doing just fine. Their governments, not so much
A new report from the Fraser Institute suggests that despite record debt, Canadians are being more responsible about their finances than their governments
Household debt is at record levels, but so is household net worth, and a new study says our governments could learn something from Canadians.
Household Debt and Government Debt in Canada, released by the Fraser Institute Tuesday, noted household debt has expanded from $357 billion in 1990 to $2 trillion in 2016, but household assets, including real estate, pensions, financial investments and equity in businesses, jumped from $2.2 trillion in 1990 to $12.3 trillion during the same period.
“Despite alarmist headlines, concerns about Canadian household debt levels can be overblown. When looking at debt levels, it’s important to consider the degree to which Canadians are also using it to increase their net worth,” said Livio Di Matteo, author of the report and a senior fellow with the Fraser Institute and professor of economics at Lakehead University.
The paper notes that from 1990 to 2016, total financial liabilities of the government sector grew from approximately $700 billion to $2.5 trillion while its net debt grew from over $400 billion to $970 billion.
“Hypocrisy is a strong term, but I would call it inconsistent behaviour (from government). On the one hand, you are worried about household debt but, on the other hand, you don’t see the same types of arguments applied to government debt,” said the professor, who notes consumers have to service their debt by paying interest on a loan with a goal of repayment.
“Most governments don’t make it a priority to pay down the principal of whatever loan they have. They tend to carry it forward for decades on end.”
Another key consideration, the paper contends, is that about two-thirds of household debt is made up of low-rate mortgages, with 29 per cent in consumer credit and five per cent in other loans. That debt is about 170 per cent of household disposable income, up from 90 per cent in 1990, but Di Matteo contends that’s a rational response to low interest rates.
“The Bank of Canada rate fell dramatically from nearly 13 per cent in 1990 to 0.75 per cent at the end of last year,” he argued in his paper, noting that as the cost of borrowing has dropped, Canadian households have borrowed more.
The drop in interest rates has actually reduced the burden of servicing debt. Interest payments on household debt now consume six per cent of disposable income, compared to almost 11 per cent in 1990, the paper contends.
The professor acknowledges that rising rates could become a factor for indebted consumers but, even with the 0.25-point increase from the Bank of Canada last week, matched by all banks in their prime rates, consumers are still borrowing at historic lows. “We’ll need quite a few sustained increases piled on to make a difference,” he said.
On the government side, the collective net worth of Canadian governments was a negative $129 billion in 1990, compared to negative $97 billion last year, the paper says.
“While governments may acquire some financial assets and there is investment in assets like human capital and physical infrastructure, the bulk of debt acquired through deficit financing often supports spending on the compensation (wages and benefits) of government employees and transfers to individuals,” Di Matteo argues.
He said there is no prospect for debt to decline anytime soon from the federal government and a number of provincial governments.
“Household debt is starting to slow down after some accumulation but government debt just keeps picking up speed,” said Di Matteo. “Households have to service debt and governments have to service their debt, too, but in the end who has to service that too? It’s households, through higher taxes. Governments are concerned with higher household debt, but one way to give a full expression to that concern would be to keep an eye on their own debt.”
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