Great Essay ; Fed Debt vs Consumer Debt

Once again the Fraser Institute produces some excellent work.

Ottawa recently announced a series of new regulations for the housing market to “protect the long-term financial security of borrowers and all Canadians.” You have to love the irony. While the federal government increases regulation of household debt, it racks up more of its own debt with no end in sight.

Among the new regulations, the federal government will mandate a “stress test” that requires all homebuyers taking out insured mortgages (mortgages with less than 20-per-cent down payment) to qualify for a loan at the Bank of Canada’s benchmark five-year fixed mortgage rate (4.64 per cent), which is significantly higher than mortgage rates (two to three per cent) typically offered to actual homebuyers.

Canadian families are taking on debt more responsibly and for much better reasons than Ottawa is.

What are we to make of this new rule? For one thing, it suggests Ottawa thinks Canadians are poorly managing their debts and that financial institutions are improperly screening mortgage applicants. That’s a bit rich, given that the federal government is not exactly a model of rectitude when it comes to fiscal management.

For example, the federal government has piled on $162 billion in new debt since 2007–08, for a total of $619 billion. Just like households, the federal government pays interest on debt, which costs $26 billion each year. That’s close to what Ottawa collects from the GST ($33 billion).

And over the next five years, the federal government will add at least $113 billion in new debt with no plan for a balanced budget. We say “at least” because a recent Fraser Institute study found the new debt over the next five years could total up to $200 billion under more realistic spending scenarios. And a new TD Bank report released Thursday pegs the five-year cumulative deficit at $17 billion more than was forecast in the government’s March budget.

‘Critically, very little of the debt-financed spending is being used to invest in growth-enhancing infrastructure. Instead, much of the debt is being used to finance increased spending on current government operations and transfers. In fact, just $4 billion of the $29.4 billion projected deficit this year is for spending on new infrastructure.

To put that in family finance terms, the government is racking up credit card debt to buy consumer goods rather than borrowing to invest in hard assets such as a new home.

Meanwhile, Canadian families are generally accumulating debt responsibly and for much better reasons. As Philip Cross, the former chief economic analyst at Statistics Canada, concluded in a Fraser Institute analysis last year: “Overall, there is little evidence that Canadian households (unlike some governments) are being irresponsible in taking on new debt. The long-term increase in household debt has been leveraged into a much larger gain in household assets, boosting both incomes and net worth.”

Yet the government is behaving as if Canadian families can’t be trusted to manage their finances responsibly. Perhaps Ottawa should undergo its own financial “stress test.” It’s digging deeper into debt at a time when the economy is growing, albeit slowly. But what happens if the economy falls into recession or if interest rates spike?

Running large deficits during non-recessionary times puts Canada’s finances at risk should the economy experience a significant slowdown or recession. Unexpected slowdowns can markedly and quickly reduce revenues, and if the government is already in a deficit position when a recession hits, the result can be a rapid run-up in debt. The government’s own estimates show that a one-percentage point drop in inflation-adjusted economic growth would increase the annual deficit by $5.0 billion.

Federal finances could also be strained by a spike in interest rates, which would require higher interest payments, increasing the cost of carrying debt — the very risk Ottawa believes Canadians are unprepared to assume. If the federal government does not get better control over its own debt, it risks losing credibility in continually trying to deter consumers from doing their own, more responsible borrowing.

Charles Lammam, Hugh MacIntyre and Ben Eisen are analysts at the Fraser Institute (


2 thoughts on “Great Essay ; Fed Debt vs Consumer Debt

  1. Brian, the West is facing many challenges. Among them, in my opinion, none greater than fiscal collapse due to massive Debt from easy Credit subject to Compound Interest. Countries live beyond their means and pay for it with borrowed money from private banks until those same private banks decide it’s time to “pay the piper”. Among the countries already trying to deal with the fallout from the banks ” calling in” loans are Iceland, Cyprus, Ireland, Greece and the territory of Puerto Rico. Under great pressure are Spain, Portugal, Italy, Japan and now, though not technically the West, Egypt. The Banks are now running the governments of countries through their demands for austerity under threat of insolvency. Austerity always meaning Tax and Cut in order to pay up. Right here in the Motherland, the Gov’t takes in between $7.5 and $8 Billion annually. $4 Billion is committed to Salaries and Wages and $1.1 Billion is committed to Interest on about $20 Billion of Debt. That leaves $2.5 to $3 Billion to provide Programs and Services to the people and pay additional Interest on further borrowing which is planned for each of the next 4 years. The Feds are doing likewise only in larger amounts. Without oil at $100. a barrel, where will NL&LAB get the money to service more debt? That’s a no brainer isn’t it? They will Tax and/or Cut. How much more taxation and cuts before there is a REAL revolt? Think about this for a moment Brian. They are already giving 17 cents from every dollar they take from me to the Banks for Interest. In Japan it’s 41 cents. We’ve paid nothing on Principal for years. Canada is on the same path. Nonetheless, and you can check this out for yourself, the IMF and World Bank at their meeting in Washington in December want Morneau and Poloz to lobby the G20 to borrow and spend into their economies, just like Canada is doing, in order to stimulate growth. The very condition of fiscal prudence which the IMF holds Canada up as a shining example of, is the very condition that will change if countries do what the IMF wants. Along with International Trade Agreements and Globalization, Banking practices are nothing short of a conscious, concerted effort to enhance the lot of the 1% at the expense of the 99%. Sorry. I’ve gone on to long again. But it is what it is.



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