Revisions Show Canada Worse off Leave Government Little Maneuvering Room

By: Daniel Rattanamahattana on October 17, 2012

The revisions to Stats Canada’s calculating household debt have put Canadians back on alert about how far the country has slipped into debt.  There was already talk of the debt balloon soaring higher than the U.S level from four years ago before the revisions, now the worry is even the slightest bump in interest rates could ruin the lives of overburdened Canadians.

It has been since 2009 that Canada and countries all over the world set their central policy lending rates at or near zero percent to open the floodgates on stimulus and limit the damage from the global recession.  Relatively speaking compared to other countries Canada survived the worst of the damage and allowed the central bank to bring rates up to the 1 percent benchmark in 2010.  But since then the rate has been stuck at that point due to deteriorating factors in economies connected to Canada as well as difficulty bringing life back to the job market; if people aren’t working, they can’t afford to be paying more.

What the revisions have done is take the non-profit sector out of the calculations as their inclusion skewed the results downward due to the donations made to these organizations.  Those donations were still considered part of household income under the old system; now it is completely separate.  Canadian household debt has now reached a record 161.7 percent of disposable income as of the end of the second quarter.

The information leaves very little maneuvering room for either the Bank of Canada or the federal government to make changes for getting the country’s financing in line.  Yet at the same time the longer rates are kept at these low rates the more Canadians become used to them and continue spending without concern for the cost of paying it back.  The Bank of Canada has signaled its plans to raise rates in the medium term while the government has tightened mortgage lending rules to ward off further unnecessary borrowing.

Unfortunately the low rates have not led to the economic expansion that analysts were expecting and without a large investment from companies in the private sector to put more Canadians back to work, the situation is unlikely to improve anytime soon.  When the feds are faced with no choice but to raise the interest rates, the debt balloon the country has been floating on for some time could suddenly burst and floating will become falling.

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