Is CANADIANs’DEBt tOO HIGH? OttAwA DOEsN’t KNOw

“While the debt ratio is high historically speaking, there is no way of precisely determining whether the current ratio is too high,” said the memo, which was written last August. “There is no estimate of the exact ‘optimal’ level of household debt.”

The Finance Department document, labelled “secret,” was obtained by The Canadian Press under the Access to Information Act.

Policy-makers keep an eye on the debt ratio, which is one of several ways experts monitor household debt, in their efforts to gauge the severity — and potential fallout — of the country’s yearslong borrowing binge.

The Bank of Canada has assessed the economic risks of consumer debt in order to determine how quickly it can raise interest rates without piling on too many debt-servicing costs for overstretched households. The central bank has called Canadians’ debt burdens an area of top concern.

Still, in response to the stronger national economy, the bank has increased its benchmark rate three times since last summer. When the An analysis prepared for Finance Minister Bill Morneau says household-debt-to-disposable-income ratio has been rising since 1990. economy is close to full capacity, the bank hikes its rate to keep inflation from rising above its two per cent ideal target.

Even if it is uncertain where the danger zones begin for the household-debt ratio, the briefing note to Morneau said there are “clear negative consequences” for the economy if the number gets too high or too low. High household debt can lead to “deeper and more protracted recessions,” while levels too low among those who can afford it could push home-ownership rates down to sub-optimal levels, the memo said.

But the document notes that static calculations about debt fail to account for many other factors that can affect the entire picture, such as policy changes aimed at slowing debt accumulation.

“Ultimately, what drives the sustainability of debt is whether carrying it is affordable and whether the distribution of that debt poses any systemic financial risk,” said the memo, which was partially redacted.

The memo presented two primary ways higher rates will affect the economy — they will make existing debt loads costlier to service and they will make interestsensitive spending, like expenditures for cars, housing and business investment, more expensive.

On the household-debtto-disposable-income ratio, some experts see it as just one number out of many and insist that consideration must be given to the composition of the debt, such as how much of it is high risk.

“It’s masking more than it’s revealing,” Benjamin Tal, CIBC’s deputy chief economist, said of the ratio. “The fact that (Finance officials) are saying, ‘there’s no optimal level, we don’t know if it’s really very high,’ suggests that at least there is some rational thinking when it comes to this ratio, which is very refreshing.”