The number once used to summarize the profligate indebtedness of Canadian households now tells an encouraging story.
The debt-to-disposable-income ratio is a statistical blunt instrument in that it lumps all household debt together and compares it to after-tax income. But it remains our best way of measuring debt trends on a national basis.
While we wait for the federal government to report on its finances for 2024, it’s worth taking a look at what’s happening at the household level using the debt-to-disposable-income ratio. Ottawa, pay attention. On an individual basis, this country’s debt problem has started to ease.
The latest ratio is 175.5 per cent, which basically means $1.76 in household debt for every $1 of after-tax income. That number is gross by the standard of 20 years ago, when the ratio was 126 per cent. Two decades of soaring indebtedness is a counternarrative to gains in wealth through rising home prices and investments.
But let’s not dwell on the past, because households today are taking a more responsible approach to debt. The debt-to-disposable-income ratio came close to 185 per cent in 2018 and hit that same level during the pandemic in 2022.
The ratio has now fallen for five straight quarters, a period in which the federal deficit has apparently been rising. We don’t know for sure because the Finance Minister has delayed the fall economic update, usually presented in November, until Dec. 16. The deficit last year was supposed to come in at $40-billion, but the Parliamentary Budget Officer says it could be close to $47-billion.
Like the federal government, households are still taking on debt. They’re just doing it more responsibly. Between the first quarter of 2023 and the second quarter of this year, total household debt increased 4.3 per cent while disposable income grew 8.5 per cent.
The Canada of five years ago probably would have soaked up that nice little rise in disposable income with debt-fuelled spending. But the world is different today in that it feels more uncertain and precarious. Today’s trend at the household level is to use debt in a more sustainable way.
The federal government has not reflected this shift when you assess its financial style using a measure called the deficit-to-GDP ratio, which compares the deficit to the level of economic output. In its last budget, the government committed to a declining deficit-to-GDP ratio in 2024-25 and then to keeping deficits below 1 per cent of GDP starting in 2026-27. The PBO estimates the ratio at 1.6 per cent for 2023-24.
These numbers are the shaky fiscal backdrop for two recent federal government announcements: a two-month GST holiday for certain goods and the promise of $250 payments for people who worked in 2023 and made $150,000 or less.
You can get away with borrowing and spending more if you offset this with even bigger increases in income or economic growth. But the federal government isn’t doing that. While the economy has avoided the recession some feared for 2024, it’s growing weakly. Federal economic policy has been more about spending than building the economy, hence the expectation of a larger deficit.
It’s only going to get harder to balance revenue with spending and debt. At the household level, wage increases are starting to pull back from levels well above inflation. There’s growing optimism that the economy could pick up next year, but Donald Trump’s threat of 25-per-cent tariffs on Canadian goods could derail that. Ottawa is also under pressure to ramp up defence spending by billions of dollars.
Looking ahead to 2025, there’s also reason to wonder if households will rediscover their comfort with debt. Home sales are on the rise, new vehicle sales are cooking and overall consumer spending has ticked higher. Realistically, improvement in the debt-to-disposable-income ratio could stall and possibly backtrack some.
But let’s say this for households: they were presented with an opportunity to be a little more financially responsible in recent years and they took it. The federal government has not picked up on this spending vibe of self-control.
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