Look Who's Talking .....And Borrowing

Canadian goverment debt has risen much faster than household debt since 2008

John Shmuel | Nov 1, 2012 10:44 AM ET | Last Updated: Nov 1, 2012 11:36 AM ET

Chastising Canadian households for their high levels of debt is a favoured past time of economists and policymakers in this country. But a new report from BMO Capital Markets argues that more of the chastising should be focused at government debt.

“In the past two years—when the hectoring of households began in earnest—public sector debt has risen much more notably than household debt,” said Douglas Porter, deputy chief economist of BMO Capital Markets.

Mr. Porter points out that since 2008, when the financial crisis broke out, government spending has risen much more quickly than household debt. Before that, rising household debt was actually on par to surpass government debt as a percentage of Canada’s gross domestic product. Check out the graph from BMO Capital Markets below:

 

 

To be fair, the blame can’t be placed solely on Ottawa. The Conservative government has reduced its budget deficit and debt-to-GDP at the federal level has stabilized in the last year. Unfortunately, however, provincial governments have not done the same. The chart below from BMO shows how other levels of government in Canada continue to see their debt levels rise:

 

The rise in provincial debt is happening even as provincial budgets are reporting smaller deficits. As Mr. Porter points out, it is not the budgets you need to pay attention to, but rather the bottom line build up of net provincial debt. And hidden in that debt build up are things like capital spending programs, which may not be immediately reflected in annual budgets.

All this is happening while households appear to be finally cutting down on debt.

“On the household side, there are plenty of signs that debt growth was moderating on its own accord, even before Ottawa’s latest tightening of mortgage rules in July,” said Mr. Porter. “Total household credit slowed to a 5.6% year-over-year pace in the third quarter, from 6.3% a year ago.”

And while Canadian debt levels are still unnervingly high — the latest data from Statistics Canada showed household debt-to-income hit a record 163.4% in Q2 — government debt is also uncomfortably high.

“Canada’s hefty current account gap (4.1% of GDP in Q2) warns that the economy is living beyond its means,” said Mr. Porter. “The current account—merchandise trade, services, and investment income—morphed from a steady diet of surpluses from 1999-2008 to a string of deficits of 3% of GDP or more, a level not seen since the early 1990′s.”

Of course, we all remember what happened to Canada in the 1990′s following the massive amount of debt the country built up, leading the Wall Street Journal to call Canada an “honorary member of the third world.”

With that in mind, Mr.Porter says it would be more productive for the debt debate in Canada to include governments as much as households.

“The focus should be less intense on households, and instead directed at the broader public sector,” Mr. Porter said. “After all, when governments point the finger at households, they should recall there are four more pointing back at them.”

 

 

Angela Kroemer, AMP

Mortgage Professional

TMG The Mortgage Group Canada Inc.

TMG Sharie Marie Mortgage Team

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New Rules -- Unregulated Prepaid Credit Card Market

Canadian government moves to regulate prepaid credit cards, ban expiry dates

Ottawa is stepping in with new rules for the largely unregulated prepaid credit card market.

Finance Minister Jim Flaherty is to announce Wednesday that in the future, issuers of prepaid cards will not be able to impose expiry dates and must be up front about hidden fees and conditions.
The move is part of the government's expanding code of conduct measures to govern credit and debit transactions, that had previously not applied to the relatively new prepaid market.
While still a small segment of the market, prepaid plastic has become an option for consumers without conventional credit or debit cards, young adults, and for parents who want to introduce their children to using credit while limiting the risk of theft and over-spending.

But the sector has also faced criticism for exorbitant hidden fees that reduced their face value and fooled customers. These can include monthly or annual fees, maintenance costs, as well as ATM charges.
The most notorious example occurred two years ago when Hollywood celebrity Kim Kardashian backed away from endorsing a prepaid card bearing her name after a public outcry over the card's usage fees, including a close to $60 activation fee.
The card even grabbed the attention of the attorney general of Connecticut.

The new regulations in Canada would require an information box disclosing the fees displayed prominently on the exterior package and other documentation prior to issuance.

A government official said the measures are in response to concerns about some features of prepaid cards issued by large financial institutions, adding that in some products, "terms, conditions, fees and limitations" were not always made clear.
The official said the government wants to make sure consumers know what they are agreeing to before making the purchase.

 The Canadian Press October 23, 2012