The following is an article directed by Rock Lefebvre, a Fellow Certified General Accountant (FCGA) and Vice-President of Research and Standards at CGA-Canada. He is the co-author of Where Is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge, the third study conducted by CGA-Canada on household debt.
The $1.41 Trillion Burden Of Household Debt /on Canadians
Over the last decade, Canadians have sunk deeper into debt and have increasingly relied on credit to cover day-to-day living expenses. If household debt was evenly spread across all Canadians, each individual would carry approximately $41,740 in outstanding debt; an amount which is 2.5 times greater than in 1989. A recent report by the Certified General Accountants Association of Canada (CGA-Canada) shows that borrowing has put a heavy burden on Canadians, pushing national household debt to a new all time high of $1.41 trillion in 2009.
Still Spending Despite Recession
The recent recession has had a modest effect on the rate at which households continue to spend and to take on more debt. The high levels of household debt that Canadians have assumed have left them vulnerable to the inevitable shifts and adjustments in the economy. One reasonably certain shift is that interest rates will rise in the coming years from their record low rates. In June for example, Canada became the first among G7 countries to raise its overnight rate. The Bank of Canada raised the rate further in July and again in September bringing it to 1 per cent. According to CGA-Canada research, the anticipated return to higher interest rates may prompt negative consequences for many Canadians.
Canadian Families Hardest Hit
Certain socio-economic groups are particularly susceptible to increasing debt. The most vulnerable are the hardest hit – low income families, households with children, young adults and the retired. Canadian families in particular are struggling with debt. Households with one or more children under the age of 18 reported their debt as increasing more often than those without children. As well, families with annual household incomes of under $35,000 are much more likely to have increased debt loads. Those with low income continue to fall deeper into debt and experience further deterioration in their net worth positions.
Reliance On Credit
Many Canadians are relying on the plastic in their wallets to make ends meet and are spending more money than they actually have. In 2008 and 2009, Canadians relied to a much greater extent on borrowed funds when purchasing cars and renovating their homes than in previous years. But even with the temporary relief of a credit card or line of credit, 25 per cent of Canadians say that they would not be able to handle an unforeseen expense of $5,000 and 1 in 10 would face difficulty in dealing with $500 unforeseen expense.
Both credit cards and personal lines of credit are forms of revolving credit – that is, they require only a minimum payment or payment of interest only each period – making it easy for consumers to sink into an even graver debt problem if they do not focus on paying back the principal. Revolving credit has become a prevailing part of consumer credit and can, if not properly managed, instigate or otherwise exacerbate a debt spiral. With interest rates near historic lows, it has been a good time to pay down lines of credit. Unfortunately, many Canadians have not been able to take full advantage of this attribute or to effect a meaningful reduction in their net debt-servicing burdens.
Significant Regional Differences
When the debt service ratios of particular provinces were examined, British Columbia stood out as a province with the highest household debt service burdens – 9.9 per cent of personal disposable income. In Ontario, Québec, Alberta and Nova Scotia the ratio was also high, whereas in Newfoundland and Labrador the debt-service burden stood the lowest at 6.1 per cent. Compared with the Canadian average of 38 per cent, as a few as 35 per cent of Québec residents, but as many as 47 per cent of British Columbians told us that their debt had increased.
CGA-Canada investigated further these regional differences when it was commissioned to conduct an in-depth study on household debt for the province of Saskatchewan.
Risks Associated With Debt
An inevitable risk associated with increasing debt is that some Canadians will have insufficient savings to adequately support them through retirement. CGA-Canada’s report found that Canadians are rightfully worried about this trend. Almost half of the respondents (43 per cent) do not feel confident that their financial situation at retirement will be adequate. Currently, 32 per cent of non-retired Canadians commit no resources to any type of regular savings. This can reasonably be expected to place a strain on Canada’s resources as baby boomers ease into retirement.
To survive and prosper in the modern world, families must have the financial capabilities to make informed decisions about borrowing, spending, and saving. For instance, relying on other CGA-Canada research works, it has been observed that savings vehicles available to Canadians such as RRSPs, TFSAs or RESPs are relatively underutilized despite their value. Although individuals understandably assume the ultimate responsibility for their own finances, there is ample opportunity to develop and to promote publicly accessible programs that refine the prowess of Canadians in the areas of money management, spending and shopping habits, warning signs of financial difficulty and the use of credit. The recent consultations undertaken by the Task Force on Financial Literacy sought to provide advice and recommendations to the Minister of Finance on a national strategy to strengthen the financial literacy of all Canadians – CGA-Canada has been a strong supporter of this initiative. Financial literacy is an important step that can help Canadians escape or avoid debt challenges altogether.