PARLIAMENT HILL, Ottawa—Canadians need a lesson in money management according to Finance Minister Jim Flaherty and others.
As Christmas approaches and charge cards heat up from being run through terminal machines, personal debt levels have the government and Bank of Canada worried, but not the average Canadian.
A generational shift has seen people moving from saving for purchases to carrying more debt than ever before and that has Patricia White, executive director of Credit Counselling Canada, concerned.
Her group, an umbrella association of not-for-profit credit counsellors and government agencies, has been raising a red flag over debt levels and a trend that sees more Canadians borrowing against their mortgage to consolidate other debt.
She said it came as no surprise when Statistics Canada said Monday that the ratio of credit market debt-to-disposable income has hit a record high of 148 percent. That’s the highest since Stats Can started recording the statistic in 1990 when the ratio was 87 percent. That’s a trend that has economists worried.
Roughly translated: the average Canadian owes almost 50 percent more at any given time than their annual after-tax income.
White says few have extra cash on hand for an emergency, let alone long-term savings.
“We just seem to be in a culture that says we don’t even want to think about saving for retirement.”
A trip to the school of hard knocks may be the only solution, she suggested.
“This is a ticking time bomb,” said Liberal Deputy Leader Ralph Goodale, a former finance minister under Paul Martin.
“For every dollar of disposable income in the hands of the average Canadian family today, there is $1.47 in household debt. That is a ratio that is simply unsustainable.”
Goodale said the average family has debt very close to $100,000. “That is why the governor of the Bank of Canada has been very vociferous on this subject,” he said.
“He is quite right to raise the alarm bells.”
On Monday, Bank of Canada Governor Mark Carney told the Economic Club of Canada in Toronto that turbulence in Europe is a reminder how fragile the global economy remains and said it will take years to fix a world “awash in debt.”
Carney said low interest rates lure households and business to take on more debt than they can carry.
“Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.”
[xtypo_dropcap]F[/xtypo_dropcap]inance Minister Jim Flaherty said Monday that he may again raise the bar for those hoping to get a mortgage, something he has done twice before—in 2008 and earlier this year.
Goodale, however, said that would punish Canadians and the government should instead put more money into education, pensions, and other social programs.
Flaherty said there is no immediate plan to tighten mortgage rules, but they are watching the situation closely. He said there is no reason for “extreme caution now. But there is reason for concern.”
“I hope that Canadians will be conscious of the level of credit that they have, that they’ll make sure they can manage it, that they’ll assume that interest rates will go up because they’re not going to go down in the medium term.”
The trick is to balance the amount of credit available against job creation and not stall a fragile economy by closing the taps too soon. Flaherty said the concern is that if debt keeps rising and interest rates jump or employment falls, people won’t be able to manage.
In other words, if Canadians aren’t ready for harder times, bankruptcies could sprout like fungus.
But there is another solution to Canada’s debt problem, one aimed more at cultural roots of consumer overspending. Flaherty said that solution—financial literacy—isn’t as sexy as tweaking mortgage rules, but it is important.
“We can have all the rules in the world but if people don’t understand what compound interest is, if they don’t understand how credit card interest is calculated, if they don’t understand the benefit of a tax-free savings account, if they don’t understand the benefit of paying down their mortgage each year when they can, then they’re not going to be advising themselves well.”
To that end, Flaherty appointed the Task Force on Financial Literacy in 2009 which has toured the country to gather intel for a report to be published early 2011.
In an interim report, the task force noted that a lack financial education in schools and easy credit are partly to blame for Canadian’s financial illiteracy.
But coming down on credit card companies is not the solution, said Flaherty.
“It will just end up distorting credit markets and restricting some availability of credit. That’s what happens when this has been done in other places. Credit is not an evil thing. Credit helps the economy run . . . but it has to be used cautiously.”
Canadians looking for help dealing with their credit problems can contact one of Credit Counselling Canada’s member groups or visit www.creditcounsellingcanada.ca for more information.
As Christmas approaches and charge cards heat up from being run through terminal machines, personal debt levels have the government and Bank of Canada worried, but not the average Canadian.
A generational shift has seen people moving from saving for purchases to carrying more debt than ever before and that has Patricia White, executive director of Credit Counselling Canada, concerned.
Her group, an umbrella association of not-for-profit credit counsellors and government agencies, has been raising a red flag over debt levels and a trend that sees more Canadians borrowing against their mortgage to consolidate other debt.
She said it came as no surprise when Statistics Canada said Monday that the ratio of credit market debt-to-disposable income has hit a record high of 148 percent. That’s the highest since Stats Can started recording the statistic in 1990 when the ratio was 87 percent. That’s a trend that has economists worried.
Roughly translated: the average Canadian owes almost 50 percent more at any given time than their annual after-tax income.
White says few have extra cash on hand for an emergency, let alone long-term savings.
“We just seem to be in a culture that says we don’t even want to think about saving for retirement.”
A trip to the school of hard knocks may be the only solution, she suggested.
“This is a ticking time bomb,” said Liberal Deputy Leader Ralph Goodale, a former finance minister under Paul Martin.
“For every dollar of disposable income in the hands of the average Canadian family today, there is $1.47 in household debt. That is a ratio that is simply unsustainable.”
Goodale said the average family has debt very close to $100,000. “That is why the governor of the Bank of Canada has been very vociferous on this subject,” he said.
“He is quite right to raise the alarm bells.”
On Monday, Bank of Canada Governor Mark Carney told the Economic Club of Canada in Toronto that turbulence in Europe is a reminder how fragile the global economy remains and said it will take years to fix a world “awash in debt.”
Carney said low interest rates lure households and business to take on more debt than they can carry.
“Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.”
[xtypo_dropcap]F[/xtypo_dropcap]inance Minister Jim Flaherty said Monday that he may again raise the bar for those hoping to get a mortgage, something he has done twice before—in 2008 and earlier this year.
Goodale, however, said that would punish Canadians and the government should instead put more money into education, pensions, and other social programs.
Flaherty said there is no immediate plan to tighten mortgage rules, but they are watching the situation closely. He said there is no reason for “extreme caution now. But there is reason for concern.”
“I hope that Canadians will be conscious of the level of credit that they have, that they’ll make sure they can manage it, that they’ll assume that interest rates will go up because they’re not going to go down in the medium term.”
The trick is to balance the amount of credit available against job creation and not stall a fragile economy by closing the taps too soon. Flaherty said the concern is that if debt keeps rising and interest rates jump or employment falls, people won’t be able to manage.
In other words, if Canadians aren’t ready for harder times, bankruptcies could sprout like fungus.
But there is another solution to Canada’s debt problem, one aimed more at cultural roots of consumer overspending. Flaherty said that solution—financial literacy—isn’t as sexy as tweaking mortgage rules, but it is important.
“We can have all the rules in the world but if people don’t understand what compound interest is, if they don’t understand how credit card interest is calculated, if they don’t understand the benefit of a tax-free savings account, if they don’t understand the benefit of paying down their mortgage each year when they can, then they’re not going to be advising themselves well.”
To that end, Flaherty appointed the Task Force on Financial Literacy in 2009 which has toured the country to gather intel for a report to be published early 2011.
In an interim report, the task force noted that a lack financial education in schools and easy credit are partly to blame for Canadian’s financial illiteracy.
But coming down on credit card companies is not the solution, said Flaherty.
“It will just end up distorting credit markets and restricting some availability of credit. That’s what happens when this has been done in other places. Credit is not an evil thing. Credit helps the economy run . . . but it has to be used cautiously.”
Canadians looking for help dealing with their credit problems can contact one of Credit Counselling Canada’s member groups or visit www.creditcounsellingcanada.ca for more information.
