When Mark Carney leaves his post as Governor of the Bank of Canada, he will leave behind his dire warnings to Canadians about our ever growing personal debt loads. In repeated discussions on the subject, Mr. Carney has noted that he does not put much stock in the idea that the strong housing market of recent years will protect Canadians from their debt excesses. Presenting to the Commons Finance Committee in October, 2012, he cautioned that people can "get sucked into a balance sheet analysis that says 'I'm very wealthy because my assets are worth more than my debts,' but they are illiquid and they can't service their debts because they lose their jobs or interest rates go up or both."
Carney's concerns are supported by the numbers. As of January 2013, Canadians' debt-to-income ratio stands at almost 165 per cent, having spiked from 84 percent in 1990. This ratio brings us to within ten points of what the U.S. debt ratio had hit before their housing crash in 2007. Of equal concern, the average consumer debt has just hit $27,485 in January 2013, showing a shocking six percent increase in 2012. It would seem that Mr. Carney's repeated and very clear warning to Canadians, all of which have been well covered by the media, have fallen on deaf ears in most households. After all, we simply need the latest iPhone model when it comes out, don't we?
The curiosity is not just that people have DADD (Debt Attention Deficit Disorder), it's that many are seemingly quite content with their debt loads multiplying like the flu virus. In fact, the Conference Board of Canada reported in January that consumer confidence has actually increased to its highest point since 2011. This, despite economists' forecasts for only modest growth in the Canadian economy in 2013, repeated warning from Mr. Carney about skyrocketing personal debt and the fact that housing prices are flattening out, or outright dropping, in the country. Add to all that the reality that interest rates will rise (it's a matter only of when, not if) and we have a few good reasons to view this consumer confidence as a bit of a disconnect. Canadians don't seem to "get it," as they say.
The question for many, however, becomes something along the lines of "so what?" Popular opinion is that if a family can't control its own debt, it alone will bear the consequences in the form of less disposable income on through to outright insolvency. But is this, in fact, the case? Are there not broader socio-economic implications when our personal debt reaches historic highs? In a country that prides itself on its social safety net, one could argue that the current personal debt story is really a story of an endangered future for the things we hold dear as a society.
Consider a few core issues. Even with retirement being postponed and part time work in retirement a new reality for many, our Canadian demographic is poised to have the smallest tax base in history within a couple of years. This tax base, however, will have to support the largest number of seniors and centurions in Canadian history, the very group most dependent upon universal health care and other pillars of our social infrastructure. Not looking to drift off into a macro-economic thesis here, but suffice it to say that household math might suggest that a shrinking tax base, supporting larger social costs, could have some challenges.
So what then happens when the households that make up that tax base face increasing challenges to simply make their own monthly bill payments? As interest rates rise (and they will), the monthly bill payments required to service all that personal debt will also rise. When this happens, will debt-ridden Canadians be supportive at election time of paying more in taxes to maintain, let alone increase, universal health care, or programs like expanded pharmacare? Or, will they develop an appetite to cut back in these core social services, based on their own fiscal frustrations? How will they view the rising costs of elder care and child care for others when they feel they can't make ends meet at home?
Aside from suggestions that sky high debt could enable the public to support policy changes to our social safety net at election time, consider what happens when the consumer is finally tapped out and has no disposable income left to stimulate the economy in the form of retail spending. What happens then to those business and corporate taxes? What happens to our ability to sell bonds on the global markets when the net worth of our country's citizens flattens, or even declines?
Mr. Carney will be leaving his post in Canada to mount a war on another country's debt and fiscal crises. Let's hope his warnings to Canadians will not remain ignored, as the consequences could be far reaching. Our personal fiscal cliffs may not end up being so personal after all.