Not only do Canadians hold a lot of debt, it is growing at a feverish pitch. Consumers alone hold almost $900 billion of mortgage debt with chartered banks. If you account for other mortgage lenders the figure is more than $1.1 trillion, almost 2/3 of the country’s GDP. More troubling is its pace of growth – more than doubling over the past two years. The most troubling aspect is that mortgage debt is only a small drop in the bucket. Add government and corporate debt into the mix and we’re a country a spendthrifts, regularly spending much more than we earn (and increasingly so).
Maybe it’s not a big deal. After all, “we owe it to ourselves”, right? Even if we are trillions of dollars underwater at the moment, when Jane Smith pays her mortgage the proceeds will be returned to Joe Anderson. A debt repayment to one is an income stream to another.
That’s one way of looking at it, but it’s wrong.
Canadians also owe foreigners money, and a lot of it. For the past four years the country has run a current account deficit. This deficit occurs when Canada buys more goods and services from foreign countries than they buy from Canada. Since Canadians are buying more than they are selling, they need to get financed. This financing comes from loans that a foreigner gives to a Canadian to enable him to purchase his foreign-made goods.
Last year, Canadians ran a current account deficit of $62 billion, or about 3.4% of their total output. This deficit allowed Canadians to consume more than they could produce, something that I’m sure no one complained about at the time.
The flip side to all this is that at some future point we will have to repay this debt. When that happens, Canadians will have to consume less than they produce. This means that they will spend money paying back a debt owed to foreigners, and this will not result in an income stream to a Canadian. In this case, it is obvious that the debt does not matter because “we owe it to ourselves.” Those debts that we owe foreigners do matter, in the sense that they will consume our income and not allow us to enjoy the fruits of our labour.
The more current account deficits Canada runs, the greater becomes the amount of debt that must be paid back to foreigners. Canada’s net foreign debt stands close to $231 billion. This may not seem like much compared to the trillions of total debt outstanding, but it is significant because it is debt that we don’t owe to ourselves.
As Canadians pay off this debt – and it will have to be paid off someday, if not today – their income will not be free to purchase goods to make them happier, or make investments to make them wealthier. The repayment of this debt will instead be payback for consuming or investing too much in the past.
A large part of this current account deficit is caused by the government. Since 2008 the federal government has regularly spent more than it brought in via tax revenue. Last year the government borrowed about $26 billion, or almost 1.5% of GDP. That’s a lot. If we are looking at a total current account deficit of 3.4% of GDP, we can see that the federal government alone is responsible for 44% of it!
If the repayment of this foreign-owned debt seems like a ticking time bomb, perhaps the sooner we get this country’s fiscal house in the order, the better. Regular Canadians would do well to tighten their belts, and maybe try saving for a change. The federal government, instead of telling the rest of us to do so, should be obliged to do the same. Getting the federal deficit under control would do much to reduce our reliance on foreign loans, and also reduce the future pain to come when we must repay it.