Bank of Canada Governor Mark Carney, Finance Minister Jim Flaherty and Prime Minister Stephen Harper recently made separate statements about their concerns with Canadians’ rising debt levels. Risk taking by Canadians has increased to the point where we are now more indebted on the average than the Americans south of the border. This is the first time since the late 1990s that such a situation has occurred.
Flaherty reckoned that “Our parents were more inclined to pay off that mortgage as soon as possible, and some Canadians are not as inclined to do that now … I encourage them to do it.†Yet while offering advice to his fellow Canadians, Flaherty seems not to take his own advice. Canada has a debt-to-GDP ratio of over 75 percent. This places the country as the 18th most indebted country in the world, right behind Portugal. With news coming out of Europe concerning its own crisis daily, and that Portugal may be the next domino to fall, we might start to question whether Canada might someday suffer the same fate.
Under Flaherty’s reign as Finance Minister since 2006, gross Canadian federal debt has increased from a “paltry†460bn. odd dollars to over $520bn today. It is projected to increase to over $540bn by fiscal year 2012/13. This 13 percent increase in debt (to date) under his watch does little to set an example for others to start paying off their debts.
Mark Carney thinks that Canada’s economic recovery could be threatened in the future by elevated debt levels. Unfortunately, he fails to mention that this increase in debt by Canadians has come under his watch.
Since becoming Governor of the Bank of Canada in 2008, Carney dropped the overnight policy rate from almost 5 percent to its current 1 percent level.  CPI inflation was almost 2 percent this October compared to a year earlier. With negative real borrowing rates, Canadians are being given a large incentive to continue their debt-fuelled spending binge. As inflation reduces the purchasing power of the dollar, that dollar borrowed today will only need to be paid back in the future with a less valuable dollar. This somewhat rare situation we live in has negative real interest rates where it is actually profitable to borrow money and do nothing productive with it until it is repaid – the loss of the purchasing power alone being sufficient to incentivise Canadians to borrow.
Meanwhile Stephen Harper has noted that the government cannot “exaggerate†the extent to which the government can control Canadians’ propensity to borrow. As he clarified: “We are a free country and people are entitled to make their own financial decisions … This is a matter that is of concern to the government, we continue to warn Canadian households that interest rates are unlikely to go down.†While it is assuring to hear that the Prime Minister has no desire to directly control the financial affairs of Canadians, it is less positive that he neglects the indirect ways that this is currently being done.
The Bank of Canada may be nominally independent of the Canadian government, as protected by the operational independence granted to it through parliament. But what parliament grants it can soon take away and it is increasingly difficult to view the BoC as being politically independent. The federal government may not intervene directly in Canadians’ spending patterns, but through the manipulations of the dollar through the BoC, the government can do so indirectly.
Over the past decade the Canadian dollar has lost over 20 percent of its purchasing power. No longer willing to see their hard earned dollars continually be eroded, Canadians have increasingly decreased their savings. While the U.S. savings rate has tripled from about 2 to 6.5 percent of disposable income over the past three years, Canadian savings have halved to about 2½ percent. Debt financing has grown leaps and bounds as inflation benefits debtors repaying their loans with depreciated dollars.
Most troubling we see a government with little concern for its own fiscal imbalances. While chastising Canadians’ debt-based promiscuity, Canadian public sector debt – both federal and provincial – shows no signs of abating. Ontario, whose economy comprises about 40 percent of Canadian GDP, now has a public debt 10 times that of troubled California on a per capita basis. While California is engulfed in a fiscal crisis requiring immediate belt-tightening and cost-cutting, Ontario seems to not notice its own fate.
With all its debt, the State of California has bond ratings only slightly higher than Croatia. While the Canadian economy has remained relatively buoyant throughout the current recession, it is questionable how much longer this can persist. Drinking binges always result in nasty hangovers. Debt fuelled binges end no less painfully.
Instead of giving empty talk, Canadian officials should turn their attention to their own affairs. Not only are Canadians far from the only indebted bodies in Canada, the individual is also far from being solely to blame. A series of government policies, from Bank of Canada mandated lower interest rates to prolific government spending at all levels, has resulted in a dangerous fiscal situation. Held together by a tenuous global recovery, any fall in tax receipts would cause the public coffers to turn south the way of our Southern neighbours. While we should welcome such a fiscal tightening if it came from tax cuts, more likely it will result from decreased business activity.
Putting its money where its mouth is and cutting back on spending would go a long way in giving the Canadian government credibility over the current fiscal situation. Removing the inflationary policies currently directed by the Bank of Canada would be a step in the right direction.
Tags: Bank of Canada, California, Debt, Debt to GDP, economics, GDP, Housing Bubble, interest rate, Jim Flaherty, Mark Carney, Stephen Harper
