The pot calls the kettle broke

‘Public debt good, private debt bad.’ The stark duality is Orwellian, but isn’t that the message we’re hearing these days from Ottawa? The prime minister is in Davos re- branding us from Energy Superpower to Infrastructure Superpower. A main reason we’re doubling down on infrastructure, he keeps saying — although he told us a hundred times during the election campaign — is that with interest rates so low, it’s a great time to borrow.

But don’t anyone who’s not the government think of borrowing, no sirree. The Parliamentary Budget Officer has a new report out adding more f uel to the bonfire of anxieties about how individual Canadians have been taking advantage of low interest rates and pushing their borrowing too high. Our debt now averages 171.1 per cent of our disposable i ncome. Of course, if our governments think that ratio is too high they could lower it instantly by raising our disposable incomes. Disposable income is just income minus income taxes, so all they have to do is lower our taxes.

Reading the PBO’s report, I got to wondering how Canadians, in our private capacity, are doing compared to our govern- ments. It turns out, not so bad. The headline number for us folk is, as mentioned, debt at 171.1 per cent of disposable i ncome. By contrast, net government debt running at under half of GDP ( a number drawn from last year’s federal budget) isn’t nearly so bad. But GDP isn’t the government’s “disposable i ncome.” Unless you’re on the far left — the NDP and maybe a third of the federal cabinet — you don’t believe the entire GDP is available for government to spend. Rather, government’s disposable income is its revenue, tax and nontax, which i s running at $ 745 billion these days ( on a national accounts basis, as reported in the Department of Finance’s Fiscal Reference Tables, if you’re into detail). And total government liabilities are $ 2.1 trillion. So the government’s obligations are 281.9 per cent of its disposable income — more than 100 percentage points higher than ordinary Canadians’.

How about ability to carry the debt, which, Mr. Trudeau is clearly right, is much easier because of our seven lean years of unprecedentedly low interest rates? The Bank of Canada just made headlines by not lowering interest rates from 0.5 per cent. Zero point five per cent. You need a microscope to see interest rates these days.

Most of us aren’t lucky enough to pay 0.5 per cent on our l oans, of course, but the low- interest years have been pretty great for borrowers. On average, interest costs are currently running at 6.33 per cent of disposable income. How are our governments doing on that score? Interest costs of $ 70 billion. Total revenues of $ 745 billion. So interest costs are 9.4 per cent of governments’ income, three percentage points higher than for ordinary Canadians

That 6.33 per cent interest ratio for private borrow- ers is a little controversial, though. In fact, Statistics Canada recently changed the way it does things so as to include repayment in people’s debt service costs. Unlike governments, who can just keep rolling debt over, we ordinary folk have to pay it back and so we do have to take repayment into account in deciding whether our debt- servicing costs are a reasonable percentage of our disposable incomes. The l atest estimate from StatsCan is that i nterest plus repayment costs are running at 14.09 per cent of disposable income. That’s a little higher than it has been lately but lower than its peak of almost 15 per cent in 2007.

The big worry, of course, is that once interest rates do start rising, debt- servicing costs will reach ratios that really are unmanageable. Banks should be worried about that. Borrowers should be worried about that. Presumably both are. But it will also be a problem for governments, given their fondness for debt.

Finally, how do people’s and governments’ debts compare to their assets? Governments’ total assets are $ 2.0 trillion. As mentioned, their total l i abili ties are $ 2.1 trillion. So their assets are 93 per cent of their liabilities. As for ordinary Canadians, their debts are $ 1.9 trillion but their assets are a whopping $ 11.2 trillion, so their assets are 5.9 times their debts.

Their current debts probably do pose risks for many Canadian borrowers. But it’s a little rich to be lectured about that by governments that, one, have been much more debt- addicted themselves and, two, have consistently pushed the abnormally low interest rates that for seven years have enabled Canadians’ debt habit.

IF OUR DEBT TO INCOME RATIO IS TOO HIGH, THE GOVERNMENT COULD RAISE OUR DISPOSABLE INCOMES.