{"id":11126,"date":"2021-09-20T19:00:49","date_gmt":"2021-09-20T23:00:49","guid":{"rendered":"http:\/\/www.irasmithinc.com\/blog\/?p=11126"},"modified":"2021-09-20T14:00:45","modified_gmt":"2021-09-20T18:00:45","slug":"canadas-debt-burden","status":"publish","type":"post","link":"https:\/\/irasmithinc.com\/blog\/canadas-debt-burden\/","title":{"rendered":"CANADA’S DEBT BURDEN: CANADIAN WEALTH SOARS RELATIVE TO DEBT"},"content":{"rendered":"
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We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic.<\/p>\n

Ira Smith Trustee & Receiver Inc.\u00a0is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.<\/p>\n

If you would like to listen to the audio version of this Brandon Blog, please scroll to the very bottom and click play on the podcast.<\/p>\n

Canada’s debt burden growing for Canadians: 2021 Edition<\/strong><\/em><\/h2>\n

Canada’s fiscal policy faces many challenges, according to the Fraser Institute.\u00a0 The federal and many provincial government<\/em>s face serious financial challenges due to budget deficits<\/em> and increasing accumulation of debt<\/em>.\u00a0 As interest payments increase, there will be less money<\/em> left for tax cuts, education, and social services.\u00a0 In the aftermath of COVID, the federal and provincial government<\/em>s must develop long-term plans to address Canada’s growing debt problem<\/a><\/em>.<\/p>\n

Canada’s debt burden<\/strong><\/em> continues to be the talk of the town in this age of global statism. It’s always cited by statists that Canada’s federal debt is 100+ percent of GDP compared with 80 percent in the early 1980s. \u00a0It’s even considered a threat to Canada’s sovereignty, a moral hazard, and a burden on future generations by some. However, individuals’ personal share of Canada’s debt burden<\/em> may not be growing.\u00a0 I will explain some interesting Statistics Canada<\/em> reporting in this Brandon Blog post<\/em>.<\/p>\n

Canada’s debt burden:\u00a0 The coronavirus is why provinces need financial assistance now<\/strong><\/em><\/h2>\n

In 2020, the Premier of Newfoundland and Labrador wrote to Justin Trudeau, saying that his province faced an “immediate and urgent financial crisis” and was unable to raise short- and long-term funds.<\/p>\n

During the critical period, the letter explained, the government has no alternative methods of funding provincial government<\/em> operations, including its health care<\/em> system. The Bank of Canada<\/a><\/em>\u00a0offered to buy 40 percent of all new provincial bonds four days after the letter was sent.<\/p>\n

The province has been hit with a public health crisis of unprecedented proportions, and their provincial peers, who have similar debt-to-GDP ratios<\/em>, are not far behind. \u00a0It is likely that the government can do the same for provinces and municipalities that have to shoulder heavy coronavirus-related costs if it can provide zero percent loans to small businesses<\/em>.<\/p>\n

By law, it can.<\/p>\n

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Is Canada’s debt burden a cause for concern?\u00a0<\/strong><\/em><\/h2>\n

Following a federal budget deficit of $354.2 billion last year, the Trudeau government budget documents<\/em> show that the Feds anticipate a deficit of $154.7 billion in 2021\/22, and deficits of at least $30 billion for another four years thereafter. There has been a significant increase in debt accumulation. During the next two years, the country’s net debt-to-GDP ratio<\/em> is expected to rise to 55.3 percent. In spite of low-interest rates, government program spending in 2021\/22 is expected to increase by more than 40 percent over 2019\/20. Despite the prime minister’s vague promise that a balanced budget<\/em> will be achieved at some point, there is no timeline for that.<\/p>\n

Can Canadians expect a bout of inflation<\/em> to continue rising? \u00a0Can we expect an increase in interest rates? Do you expect a depreciation of the exchange rate? Is it possible that the government will default at some point? \u00a0Are there any limits on the size of the debt?<\/p>\n

Over the years, various economists have noted that federal government<\/em> debt is not the same as “debt” in the way that the term is commonly understood. \u00a0Even if it means working harder or cutting back on our spending, we expect to have to pay back debt at some point.<\/p>\n

Unlike a government, a household has a finite lifespan. \u00a0The government, however, can, in principle, refinance (rollover) its debt indefinitely while a household must eventually pay off its debt. Governments do not have to worry about involuntary defaults when they finance themselves with convertible debt.<\/p>\n

As a burst of inflation<\/em> has already begun, we should prepare for possible temporary spikes. \u00a0Governments borrow money<\/em> because they don’t spend all of their income<\/em> right away. Some of it is saved until later. Therefore, future tax revenues can be increased without increasing current taxes. Thus, as real incomes increase, consumer spending increases<\/em>, which in turn generates additional tax revenue. Therefore, the economy grows more rapidly than it would ordinarily.<\/p>\n

How does the government handle overspending? \u00a0Governments need to reduce spending sooner than later when they run up a level of borrowing that is unsustainable. If it does not, then raising taxes is the only option left. Those who are old enough to recall the 1970s know that high taxes tend to slow down economic growth<\/em>.<\/p>\n

Although prices haven’t risen too much so far for Canadians, their rise is inevitable and the end does not seem too close right now. Inflation<\/em> concerns seem to be making daily headline news<\/em>.\u00a0 Nonetheless, many people fear that living costs will continue to rise forever.<\/p>\n

So that is the government.\u00a0 What has happened to individuals and their contribution to Canada’s debt burden<\/em> over the last 18 months?<\/p>\n

Canada’s debt burden: \u00a0Canadian Debt To Assets Falls To Nearly Two-Decade Low<\/strong><\/em><\/h2>\n

According to Statistics Canada<\/a><\/em>, family financial debt is at its lowest level in the last two decades as a percentage of the overall household assets. Throughout the last twenty years, the debt-to-assets proportion has actually never ever been below its long-term average as it is now.<\/p>\n

Therefore, Canadians are less likely to file for bankruptcy than in the past. This is supported by statistics on bankruptcies over the past 18 months. David Madani, senior director at Capital Economics, called it rather remarkable.<\/p>\n

According to CNBC, Canadian consumer credit rose 0.5%, but non-financial corporate borrowing of business loans<\/em> declined 1%. Lending to consumers is up. \u00a0Consumer lending annual growth<\/em> is primarily fueled by a substantial increase<\/em> in mortgages and home equity loans<\/a>, as I mentioned in previous Brandon Blogs. \u00a0Debt on credit cards has steadily reduced during the pandemic. Three billion dollars more than expected was borrowed by non-financial companies.<\/p>\n

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Canadian Household Wealth Soars, Canadian’s Debt Burden Drops Amid Pandemic: Statistics Canada<\/strong><\/em><\/h2>\n

I will now turn my attention to the household wealth side of the ratio now that I have discussed the debt side. \u00a0What’s behind the rise of wealth? \u00a0The rise in wealth can be attributed to a number of factors:<\/p>\n