government debt

Prime Minister Trudeau on track to set record for increasing federal debt

Trudeau expected to increase per-person federal debt by 5 per cent by 2019.

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An Analysis of Federal Debt in Canada by Prime Ministers Since Confederation

Summary

  • Over Canada’s 150-year history, prime ministers have, in various ways, helped shape the country, often leaving a legacy that affects Canadians to this day. A key aspect to any prime minister’s legacy is whether they left the federal government more or less indebted.
  • This bulletin measures the total percent change in (inflation-adjusted) debt per person over the course of the tenures of various prime ministers since Confederation—from 1870 up to the end of current Prime Minister Justin Trudeau’s term in 2019. Adjusting for inflation and for population growth allows for a comparison of debt legacies by prime ministers over an extended period of time.
  • Historical context is important for understanding debt accumulation under various prime ministers. For example, total growth in debt per person under Sir Robert Borden (188 percent) and William Lyon Mackenzie King (145 percent) took place during global conflicts (World War I and World War II) and multiple economic downturns.
  • Economic downturns, which are out of the direct control of a prime minister, contribute to the accumulation of government debt. The federal government collects less revenue and spends more during an economic downturn as Canadians make greater use of services such as Employment Insurance.
  • However, of the prime ministers who did not face a global conflict or economic downturn during their tenure, the analysis finds that by the end of his term in 2019, Justin Trudeau is expected to be the largest debt accumulator (5 percent). The only other two prime ministers to increase federal debt without fighting a world war or experiencing an economic downturn are Sir Mackenzie Bowell and Sir John Abbott who both served in the late 19th century.

The Forgotten Middle: Public Debt in Manitoba

The Forgotten Middle: Public Debt in Manitoba

Tucked away in the middle of the country, Manitoba has managed to keep a low profile when it comes to its fiscal situation, but it hasn’t balanced a budget since 2009.

Concerns over household debt in Canada are overblown

Interest payments on household debt consume 6 per cent of disposable income compared to almost 11 per cent in 1990.

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Household Debt and Government Debt in Canada

Canadians are regularly inundated with news stories about policy concerns over household debt. These concerns, however, can be seen to be overblown once we properly account for the other side of the balance sheet. Canadian households have taken on more debt over time but they have used this debt to finance assets—real estate, for example—that are appreciating over time, causing their net worth to grow, also to unprecedented levels. The same cannot be said for government debt.

Concerns about household indebtedness focus on measures such as total household debt accumulated or the ratio of household debt to income. Based on these metrics, Canadian household debt levels are indeed near historic highs. By the end of last year, household debt reached over $2 trillion, up from $357 billion in 1990. The lion’s share of this debt—two thirds in fact—is for mortgages while the remaining third is split between consumer credit (29%) and other loans (5%). Over the same period, the total financial liabilities of the government sector grew from approximately $700 billion to $2.5 trillion while its net debt grew from over $400 billion in 1990 to reach nearly $970 billion in 2016.

The over $2 trillion in household debt is now approximately 170% of household disposable income, up from just 90% in 1990. Yet, this does not mean that Canadians are being irresponsible with household debt. To start, the above data ignore the fact that household debt growth can be a rational response to falling interest rates. For instance, the Bank of Canada rate fell dramatically from nearly 13% in 1990 to 0.75% at the end of last year. Not surprisingly, as the cost of borrowing has dropped, Canadian households have borrowed more. The drop in interest rates has reduced the burden of servicing debt despite growing household debt: interest payments on household debt now consume 6% of disposable income, compared to almost 11% in 1990.

More fundamentally, the concerns about household debt fail to account for the other side of the balance sheet—household assets, which rise over the family life-cycle. While household debt has grown substantially over the past 26 years, households are borrowing to invest in appreciating assets such as real estate, pensions, financial investments, and businesses. This has meant a substantial rise in Canadian household assets—from $2.2 trillion in 1990 to $12.3 trillion in 2016. The significant investment in assets has meant that household net worth (which is total assets minus liabilities) has surged from $1.8 trillion to $10.3 trillion—a record-setting level. As well, when taken in international context, Canada’s household debt relative to income is mid-ranked amongst OECD countries when household debt is taken as a share of household disposable income.

Government officials express concern about household debt even though households have positive net worth that has trended up over time. Yet, government measures of net worth are negative and have not changed substantially. Specifically, the collective net worth of Canadian governments was negative $129 billion in 1990, compared to negative $97 billion last year. While governments may acquire some financial assets and there is investment in assets like human capital and physical infrastructure, the bulk of debt acquired through deficit financing often supports spending on the compensation (wages and benefits) of government employees and transfers to individuals.

In the end, debt is a tool and the concern should be not with debt per se but debt that is not manageable given the economic circumstances facing households. The greatest risks to the management of household debt are economic shocks that lead to job losses that make debt servicing problematic, or increases in the interest rate that raise debt servicing costs.

To date, although small increases have been forecast, interest rates have remained low and the Canadian economy is performing adequately, with relatively low unemployment rates. Moreover, while interest rates and unemployment are of concern, they should be weighed against the fact that, despite the record high levels of household-sector debt, there are also record high levels of net worth. As for public-sector debt, large deficits and increasing debt particularly at the federal level are expected to continue.

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