How much is too much debt?

By Dian Cohen
How much is too much debt?
Dian Cohen (Photo : Courtesy)

Going into the COVID-19 economy, Canadian households were carrying $175 worth of debt for every $100 they had to spend. Commentators were up in arms, exhorting Canadians to pay off their debt and get their finances under control.
COVID-19 relief via government subsidies has changed that. We now owe $158 for every $100 of disposable income. According to Statistics Canada, “That’s due to an 11 per cent increase in household disposable income, while the stock of credit market debt remained relatively unchanged.” In other words, government income support is more than Canadians were earning before COVID-19, making the debt we’re carrying seem proportionately less.
So is this good or bad? Well, it’s complicated.
To begin, Canadian households in general have way more assets than they have debt – $14 trillion in assets (like our homes and savings etc.), versus $2.2 trillion in debt (like our mortgages and consumer debt). In general, Canadians have six times more assets than debt. But to say “in general” doesn’t paint a complete picture. Clearly, at the top of the income curve, people have significant savings room to cut back expenses and pay down debt if they have to. But if you’re making only moderate wages, have minimal savings and lose your job, you’re in trouble. More than 700,000 Canadians asked for mortgage deferrals in the last 6 months, and more than 400,000 asked for credit card payment deferrals.
In the Throne Speech, the prime minister made it clear that his government was intent on continuing to support Canadians well into 2021. The problems, if they come, will be when the government begins withdrawing its support.
The opposition parties ex the NDP, as well as a number of think tanks are already sounding that alarm. Says the C.D. Howe Institute, “ …One reason to dislike borrowing is that it erodes our fiscal capacity and limits our future choices. … a government in deficit is depleting its capacity to provide future services… another (reason to dislike borrowing) is that it promotes waste. … We now have confirmation from the fiscal snapshot and Statistics Canada’s second-quarter GDP numbers that government income supports vastly exceeded the pandemic-related decline in Canadians’ incomes.”
This is certainly true, and we must prepare for the day when we have to pay and repay the piper. I think it would be wise to review your own personal financial situation and make a plan now. It’s not hard to do, but you have to be honest with yourself. You would be wise to review and adjust your budget if:
• You’re receiving more support income than your pre-COVID-19 income;
• your personal finances are not terribly out-of-whack, but you have consumer debt;
• you might not be able to cover your deferred mortgage payments when they come due;
• you’re already using 40 per cent or more of your monthly income to pay for your current debt.
Better to be thinking about your ability to carry large amounts of debt now than when interest rates begin to rise and/or this or another government starts to rein in support payments.
There are places to get help. The Financial Consumer Agency of Canada website has many suggestions, from making a plan to be debt-free to getting help from a credit counsellor. Quebec’s Office de la protection du consommateur has suggestions for communicating with your creditors. If you have a financial planner, start there. If you don’t, begin to review your budget with an eye to cutting back in order to free up some cash. Yes, it could be tough. But better sooner than later.
Dian Cohen is an economist and a founding organizer of the Massawippi Valley Health Centre.

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