Calculating household debt after the 2013 federal budget

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As both the Bank of Canada and the IMF have now reported, the Canadian economic recovery slowed in early 2013. Sadly, this contains good news.

A return to economic strength would bring an increase in interest rates. This would cause Canadian households deeply in debt to dig down even deeper to make ends meet. With weakness, rate hikes are likely delayed until 2014.

How much you owe, what loan fees you incur, and at what rate you borrow are the main pocketbook issues for Canadians lucky enough to have jobs, or be benefiting from post-secondary education. Debt in the form of consumer loans, credit cards, mortgages, or student loans overshadows most lives. Politically, Conservative Party issues such as government deficits, military spending, and "crime" shrink in comparison to personal and family debt.

The fate of the Harper Conservatives is tied to growing jobs and incomes. Other than debt forgiveness -- it should be initiated for students -- household debt becomes more bearable only when disposable income rises for more people.

The Conservative economic strategy has been to weaken wages through cuts to income support, and increases in temporary foreign workers. Job seekers have to accept jobs with a 30 per cent wage cut, or be cut off Employment Insurance. Temporary foreign workers take jobs at 15 per cent below the prevailing wage. Both these Harper government measures trigger downward wage spirals.

Faced with heavy debt charges, Canadians retrench across the board. This causes debt deflation -- economic slowdown. Chronic stagnation may be good for the environment, but there are other ways to promote a green economy than watching people sink under excessive debt.

Outgoing Bank of Canada Governor Mark Carney warned growing household debt could lead the Bank of Canada to raise interest rates. The relationship between debt and interest rates means that a small increase in interest rates payable on debt represents a significant increase in debt charges for Canadians.

Imagine a loan costing two per cent. An increase in one percentage point (or 100 basis points in financial language) in the cost (from two per cent to three per cent) represents a whopping 50 per cent increase in the loan payments for the borrower.

An increase from three per cent to four per cent represents a 33 per cent increase in debt costs; and an increase from four per cent to five per cent, means the cost of a loan goes up by 25 per cent.

The Bank of Canada lending rate has been stuck at one per cent for four years. When it goes up, the banks who borrow from the Bank of Canada will see their borrowing costs go up as outlined above, and will be passing their costs on to individuals and families.

The prime lending rate is what banks give only a select few customers; it hovers at three per cent. The federal government charges students 250 basis points above prime on their loans, making the rate 5.5 per cent.

According to the Canadian Federation of Students, average student loans amount to $27,000, with over $15 billion outstanding at the federal level. This does not include provincial loans or regular bank and credit card debt. Making the banks eat one-half of this, and having the federal government forgive the other half makes economic sense. Squeezing the younger generation hurts everybody.

When the Bank of Canada does get around to making rate hikes, increases of one-quarter of a percentage point are most likely. This is fortunate because individuals and families have no capacity to increase their ability to repay -- earnings and income -- to anything close to 25 per cent. Students will be lucky to find work, let alone work in their field of interest.

If, in a low interest rate environment, any upward trend in the cost of borrowing is going to hit the indebted very hard, it follows that future and current income prospects are crucial to the ability to make debt payments. Canadians carrying loans know that their jobs and incomes are all that stand between them and bankruptcy.

A shortfall of full-time jobs with benefits exists by any legitimate measure (none of which are used by PM Harper). Incomes for most Canadians have been stagnant for over 30 years. Falling out of the job market is a too common experience.

Angella MacEwen of the Canadian Labour Congress points out that the Statistics Canada broad measure of unemployment showed 11.2 per cent of Canadians without work in March. The jobless must compete with young graduates, and other entrants to the labour market, including immigrants, refugees, temporary foreign workers, and people returning to the job market after a move, illness, pregnancy, or (less likely) skills training. High unemployment limits wage growth.

Freedom of choice has been removed from increasing numbers of Canadians by poor work prospects. Dead-end jobs, starvation wages, and other symptoms of precarious employment are prevalent everywhere. Weakening of Employment Insurance and welfare hurts people who experience chronic unemployment, forcing them into destitution.

It's More than Poverty, the McMaster University-United Way study of the Greater Toronto Area plus Hamilton painted a frightening picture. Barely 50 per cent of Canadians enjoy something approaching a middle-class existence based on their employment income.

As bad as the employment picture looks, the growth in income inequality in Canada is if anything worse. Unequal employment opportunities and worsening job prospects leads to widening income differentials.

Through taxation and spending, government policy plays a decisive role in income distribution. Industrial policy decisions of every sort have a major impact on employment creation, and therefore on income distribution.

People are bombarded with appeals to look after their personal finances. There is much less discussion of how interest rates get set, and what is the impact on the economy of spending cuts and deficit reduction targets.

The Parliamentary Budget Office has just reported that the impact of the 2013 Conservative budget will be to reduce employment and economic growth slightly this year, and more in subsequent years.

Should commodity prices crumble, the overall outlook for the Canadian economy will worsen considerably. Amid all this cheerful news, who will indebted Canadians be listening to? A political opportunity awaits the opposition party best able to address household debt.

Duncan Cameron is the president of and writes a weekly column on politics and current affairs.

Photo: Canadian Pacific/Flickr

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