One area where there was virtually no discussion from any of the federal parties during the election campaign was the economic circumstances of average Canadians. While the Harper government has continued to argue that the economy is sound, the reality is that, over the last five years, many Canadians have been rapidly slipping deeper into debt in order to support themselves.
The facts are stark. In Canada, the average family debt is now $100,000 and the household debt-to-income ratio is at a record 150 percent (which is higher than in the United States). Of particular importance, this ratio has been climbing for the past 20 years. In 1990, the average debt was $56,800 with a debt-to-income ratio of 93 percent. Consequently, the current number represents a real increase of 78 percent over 20 years.
As one would expect, a number of other indicators are also problematic. First, saving rates decreased from 13 percent in 1990 to 4.2 percent in 2010, taking all flexibility out of the hands of the average Canadian. Second, more than 17,000 households have fallen behind in their mortgage payments by three or four months and credit card and bankruptcy rates are also higher than they were before the recession. Third, 57 percent of students are financing their post secondary education with loans, which translates to an average debt of $18,000 when they graduate. Fourth, while jobs are being created, those who lost their jobs during the recession are not the ones who are landing new ones and many of the recently unemployed are finding work that does not pay as well as their old jobs.
It is therefore not surprising that Katherine Scott of the Vanier Institute of the Family observed in a recent study that “the state of Canadian family finances continues to be fragile in many households.”
In a more alarmist tone, Breakthrough Britain (a U.K.-based social policy think tank) has recently stated that “personal debt is the most serious social problem facing the UK today.” This assertion is based on observation that between seven and nine million people in Britain claim to have a serious debt problem. As in Canada, debt in the U.K. is part of the now familiar cycle of poverty.
So, what are the reasons for this growing social problem? As with all social policy issues, the explanations are complex and multifaceted. However, the experts appear to agree that it is too easy to get into debt because currently lenders are too willing to lend and borrowing costs are low. Second, the lenders are targeting the most vulnerable people in society through aggressive marketing and a lack of transparency in calculating the cost of borrowing. Third, financial literacy is low among those who go into debt. For example, in a MORI study in the U.K., only 30 percent of the adult population could calculate correctly the interest on �2,000 at 4% over two years. Finally, there is a growing consumer culture in the developed world that pushes away the traditional values around savings and thrift.
In the U.K., interventionist options have been suggested such as increasing the number of organizations that can offer credit to consumers in order to stimulate more competition, capping the interest rates that can be charged to consumers, and encouraging consumers to increased their savings rates. Closer to home, the Bank of Canada recently issued a warning that “it is the responsibility of households to ensure that in the future, they can service the debts they take on today.” This benign statement is not likely to be enough of a response to what will likely produce a calamitous outcome for many Canadians in the not too distant future.
There is no single policy response that seems readily apparent. The remedies require either intrusive government interventions or policy changes within the financial services sector that are designed to move consumers away from this risky behaviour.
Without the benefit of any public discussion and stakeholder involvement, some modest first step solutions might involve developing educational programs that result in consumers having a better understanding of the consequences of debt. Or the publication of a code of behaviour for financial institutions that explains their obligations in dealing with consumers but especially those with limited financial means.
In any case, action is required before the burden of debt for many Canadians takes away all of their options.
David Zussman holds the Jarislowsky Chair in Public Sector Management in the Graduate School of Public and International at the University of Ottawa (dzussman@uottawa.ca).
