Debt problem worse than topline suggests

By Vikram Barhat | June 14, 2011 | Last updated on June 14, 2011
3 min read

Canadians are slowly waking up to the fact that putting the brakes on spending is not enough to battle household debt.

According to the latest debt report from the Certified General Accountants Association of Canada (CGA-Canada), Canadian families are faced with household debt that’s reached a record high.

“The debt of a typical household is rising,” says Rock Lefebvre, CGA-Canada’s vice-president of research and standards and co-author of the report. “And the financial situation of certain groups of households is much worse than average and continues to deteriorate. This is concealed if you focus only on the national or aggregate picture.”

The report illustrates that while consumer spending may be down in the first quarter of 2011, many Canadians continue to struggle with household debt that has reached a new all-time high of $1.5 trillion. The situation has hit those already feeling the pinch of lower or stagnant incomes, or personal circumstances, even harder.

The survey-based report reveals several alarming trends, as single-parent families, retired Canadians, and those with annual household income of less than $50,000 face a bleak financial situation.

“The report confirms that more than half of indebted Canadians are borrowing just to afford day-to-day living expenses like food, housing and transportation,” adds Anthony Ariganello, president and CEO of CGA-Canada “For these individuals, there is little hope for improved financial condition.”

Some of the key findings of the report show more Canadians are carrying debt into retirement, with one-third of retired households carrying an average debt of $60,000 and 17% carrying $100,000 or more. More than half of indebted respondents (57%) singled out daily living expenses as the main cause for their increasing debt. The single-parent family is the only category where debt increases with age.

If household debt was spread evenly across all Canadians, a family with two children would owe an estimated $176, 461.

Lefebvre says that a number of measures taken by the government to address some identified shortcomings have not helped improve household balance sheets.

“It’s important that the dynamics of household indebtedness remain high on the radar of policy-makers,” said Lefebvre, “particularly when it comes to policies and incentives that encourage Canadians to improve their finances.”

With the Bank of Canada likely to delay rate hikes, an effective deterrent to debt can be discounted. At a time when household debt has reached a record high, low interest rates could prove somewhat counterproductive as they may tempt more Canadians to take on debt.

Canadians can expect borrowing costs to remain near record lows for the rest of the year, according to the quarterly economic forecast issued today by TD Economics.

“That’s because the pace of the economic recovery is expected to slow sharply in Canada, the United States and much of the world,” said the report, credited to Craig Alexander, chief economist, TD Economics.

As a result, the Bank of Canada will likely refrain from raising its key interest rates until 2012. This will make it easier for Canadians to continue borrowing, burying themselves deeper in hock which will take years to clear.

Debt is partly contributing to a slowdown in Canadian growth as households are too overstretched to further stimulate the economy, thus creating something of a vicious cycle that many global economies are struggling to break.

Vikram Barhat