March 11, 2018

Prime Minister Trudeau’s Bad Balance Sheets are Bad News for Canada

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Prime Minister Trudeau’s Bad Balance Sheets 

A balance sheet is a snapshot of what’s owned and what’s owed. The snapshot can be applied to consumers, governments and the private sector. I think most of us understand the concept.

But should we care about the health of Canada’s balance sheets?

If consumers, governments and the private sector load up on debt during the good times, then they struggle to repay those debts when the economy takes a turn for the worse.

Forecasters have done a poor job in estimating when collapses will actually occur, but they will occur and make no mistake about it, there will be economic and social consequences, including a further proliferation of user fees. 

We will then have to decide what we can and cannot afford, and also accept a lower standard of living with higher unemployment as the marketplace forces us to take steps to strengthen our balance sheets.

Having a strong balance sheet, on the other hand, is the key to surviving a downturn. Strong balance sheets go hand and hand with the sustainability of social programs and safety nets.

So how are we doing?

Canada’s debt and deficit

Combined federal and provincial net debt nearly doubled from $833 billion in 2007/08 to a projected $1.4 trillion in 2016/17. This combined debt equals 67.5% of the Canadian economy or $37,476 for every man, woman, and child living in Canada.

Canadian governments (including local governments) collectively spent $62.8 billion on interest payments in 2015/16. That works out to 8.1% of total government revenue that year and $1,752 for each Canadian.  The total amount spent on interest payments is approximately equal to Canada’s total spending on public primary and secondary education ($63.9 billion, as of 2013/14, the last year for which we have finalized data).

This is a far cry from the Prime Minister’s election campaign vow to balance the public books before the end of his government’s four-year mandate — a pledge that was central to the Liberal election platform.

While the PM is not responsible for the finances of every province and municipality, his government is setting the pace.

Simply put, we are over leveraged.

Household, personal debt levels in Canada

The OECD reports Canada’s household debt-to-GDP ratio had ballooned to 101 percent — significantly higher than any of the 35 developed and developing countries the OECD monitors.

The rapid accumulation of household debt for Canadians leaves our economy particularly vulnerable to shocks. Even a modest increase in interest rates will leave many Canadians in trouble.

The Private Sector

There’s a misconception that companies are cash rich while, in fact, they are actually drowning in debt. 

In June 2017 the Canadian Centre for Policy Alternatives (CCPA) reported corporate debt increased $671 billion the past six years.

Canada now leads advanced economies in private-debt accumulation, which is one of the best predictors of economic crises, according to CCPA economist David Macdonald, the author of the Report.

A few strong companies do hold cash but debt is ballooning at other, weaker businesses, as investors rush to lend them debt-based investment capital.

These investors could face losses, perhaps significant losses, if economic growth falters. The broader economy is also vulnerable because companies with more debt have to cut back whenever downturns hit.

Economic Warnings

The government is leading us into a high risk dynamic in which we are a small fish in a big interconnected pond with significant branch plant ownership.  Planned Liberal tax and regulatory changes will weaken balance sheets, putting us out of sync with major trading partners, especially the U.S.

As Canada changes risk to reward ratios downward, investment capital and talent pools will decide to go elsewhere or choose not take on the risk of starting and growing businesses in Canada.

As a case in point, the federal government is now advancing tax policy changes that adversely affect the small business community’s ability to grow and prosper. Insights into these negative changes are outlined in a new statement entitled, ” Coalition for Small Business Tax Fairness reacts to the federal government’s revised tax proposals.”

In January, 2018, Ontario increased its minimum wage an unprecedented 20 percent. This was followed by the loss in January of 59,000 part time jobs in Ontario. Across the Nation 137,000 part time jobs vanished, the biggest job decline in 9 years.

Also in January, the Bank of Canada increased the central bank rate by another quarter percent, the third increase since last summer. The Bank’s Governor, Stephen Poloz noted some economic warning signs, including uncertainty over the NAFTA Trade deal and that trade-policy uncertainty is expected to reduce investment by two percent over the next two years while in the past 16 months new foreign investment in Canada has fallen.

Canada’s Balance Sheet has been in decline for the past six months according to the Bank of Canada and the Bank warns that it is likely to continue to fall.

Faced with these realities, we need a Prime Minister who is focused on strengthening, as opposed to weakening, Canada’s balance sheets.

John Reid, Pres. & CEO, CATAAlliance, Canada’s One Voice for Innovation lobby group

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