February 13, 2019

Waters Starting to Rise, Canada’s Bad Balance Sheets, a CATA Op-Ed, Paul Labarge & John Reid, Innovation Council members

Waters Starting to Rise, Canada’s Bad Balance Sheets

Related: CATA Jump Starts federal Pre Election Advocacy for Advancing Canada’s Competitive Innovation Nation agenda

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. Most of us understand the concept.

But should we care about the health of Canada’s balance sheets as 2019 begins?

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 to keep things going.

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.

Waters Starting to Rise (factoids) 

  • The Office of the Superintendent of Bankruptcies reports a 9.4 percent rise in consumer insolvencies, the most since 2016, prompting a quote from Insolvency trustee, Hoyes, Michalos & Associates Inc., “The tide has turned, and the waters starting to rise.”
  • In addition to rising insolvencies, the federal statistics agency reports that liabilities are taking a much larger share of disposable income. Canada’s debt service ratio climbed to 14.51 on an adjusted basis in the third quarter, the highest in a decade, when we spent our way out of the 2008 downturn.
  • Furthermore, investments in Canada for machinery and equipment are down 4.7 per cent between 2012 and 2017.  Similarly, investments in intellectual property (IP) are down 14.8 per cent. Both measures are important for productivity and economic growth.
  • And, Canadians now look more and more to offshore for economic opportunities; investment overseas has risen 74 per cent from 2013 to 2017. Concurrently, foreign direct investment dropped a staggering 55.1 percent from 2013 to 2017.
  • According to the Parliamentary Budget Office, Canada’s deficit is expanding to $30 billion per year, a massive deficit, perhaps not surprising to some, given the recent report by the Department of Finance,  which predicted a balanced budget only by the year 2040.
  • According to Statistics Canada (2017), Canada’s trade deficit in charges for use of IP ($9.9 billion) increased to account for 16.4 percent of 2017 Canadian foreign trade deficit. The more trade surplus in R&D, the more money Canada lost (i.e., trade deficit) in charges for the use of IP, especially in patent and software licencing.
  • In the normal course, sound policy for the government is to be balanced over the cycle on current expenditures, while capital expenditures should be debt-financed to the extent this makes sense (on the same principles as apply in the private sector). Since we do not do capital budgeting in Canada, it is hard to draw conclusions (i.e., piloting in the dark) about the actual soundness of the current federal capital structure (financing through taxes versus through debt).
  • Household debt to disposable income ratio is around 174 percent of disposable income, a closely watched Statistics Canada metric.  In other words, the average Canadian owes about $1.74 for every dollar of income they earn per year, after taxes. That ratio is a Canadian record, and up from about 100 percent 20 years ago. Canadians are struggling to live within their means.
  • According to an Ipsos poll conducted for MNP, nearly one half (48%) of Canadians are $200 or less per month away from not being able to pay all of their bills or debt obligations each month, including 26% who say they already don’t make enough money to cover their bills and debt payments.
  • The number of consumers seeking debt relief jumped 5.1 per cent to 11,320 in November from a year earlier, the Ottawa-based Office of the Superintendent of Bankruptcy reported on Jan. 4. October and November combined saw 22,961 consumer insolvency filings, the most for those two months since at least 2011.
  • Regarding 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 in an uncertain environment. The broader economy is also vulnerable because companies with more debt have to cut back whenever downturns hit.

These are but a few of the perils of debt accumulation. Budgets, whether personal or for the country do not easily balance themselves without causing much pain.

Further complicating matters, and weighing in on revenue forecasts are factors such as delays in the TransMountain pipeline, lower commodity prices, trade agreement challenges, obstacles to trade diversification, new Carbon taxes and a compromised job creating small business sector in Canada due to recent adverse tax changes.

Call to Action

These are some of the facts about the rising debt waters.  There is a clear need to reverse the tide and a first step is with a statement of policy principle as well as a commitment to manage finances in a transparent and measurable way, rather than one that becomes politically motivated to ever moving targets.

We are calling for all federal parties to adopt balanced budget policies with realistic targets, including 5 All Party Recommendations in this election year and to recognize that contingency funds or reserves from balanced budgets may well be needed to meet economic downturns that require stimulus, and that social safety nets in a fair society depend on wealth creation and wise fiscal management.


 About Paul Labarge

About John Reid

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