Canada’s Record-Setting Debt Level May Not Be… Too High?

This blog has often reported on the rising level of debt relative to income in Canada: currently, we are among some of the highest in the world in terms of this metric, at a recent measure of 170.4% or roughly $1.70 of debt per dollar of household disposable income.

The ratio of debt-to-income has been above 90% since the 1990s, and has been studiously tracked as an indicator of the current and future effects of debt accumulation. Economists generally want to know what the potential effects might be if all this debt were suddenly unable to be paid off – and in the case of ratios over 100%, that effect borders on the disastrous.

However, in a document recently obtained by the Canadian Press, Finance Minister Bill Morneau made an interesting comment. 

“While the debt ratio is high historically speaking, there is no way of precisely determining whether the current ratio is too high,” said the memo, which was written last August.

“There is no estimate of the exact ‘optimal’ level of household debt.”

This may come as a bit of a shock to Canadians who are looking to find a way out of personal debt – however, Morneau’s assertion is factually correct and it’s not as strange as it seems. Just by making static calculations about the debt ratio, we cannot tell for sure whether or not the economy and livelihoods of Canadians will be affected in a certain way. For instance, if I tell you I have five cars (here your humble author excuses a bit of exaggeration), you won’t be able to tell me if that’s too many or too few without a whole other portfolio of supplementary and contextual information.

Morneau goes on to make a key observation that many Canadians might take to heart when examining their own finances and working out a plan to get themselves out of debt.

“Ultimately, what drives the sustainability of debt is whether carrying it is affordable and whether the distribution of that debt poses any systemic financial risk”

We’re often asked how, in the context of credit repair and consolidation as well as debt repair, it is that partnering with Progressa is simply not a case of adding more debt to your debt. The quotation above provides some insight into that quandary. Namely, there are few forces in the world that can outright wipe a debt away with no consequence. Finding solutions to making it more affordable and less risky to carry over time as you take steps to rebuild your financial strategies, however, are goals that are both achievable and powerful.

Leave a Reply

Your email address will not be published. Required fields are marked *