Avoiding more consumer debt might be the best Christmas present this year

HAVEN’T EVEN STARTED YOUR Christmas shopping yet? Maybe you should just take a pass on it this year – or at least show some restraint – in recognition of the increasing number of warnings about consumer debt.

Retailers may not be amused by the thought, but they needn’t worry, as most of us aren’t paying attention. We continue to spend, spend, spend … on credit.

We’re maintaining our middle-class lifestyles mostly through debt. Easy credit and low interest rates have fueled the borrowing, but it’s our spending habits that have got the better of us: bigger homes, new cars, electronic toys and so on. Our wants are limitless. Our wallets, not so much.

Worse still, our real incomes and net worth are in decline, meaning we’re borrowing just to maintain the status quo.

More of us are getting caught between falling incomes and growing household debt, which reached an all-time high of $1.7 trillion as of the last quarter, up from $1.58 trillion a year ago (The average consumer debt is $22,081, up 3.6 per cent from last year). Worse still, increasingly the borrowed money is being used to finance day-to-day expenses rather than consumer goodies.

A large portion of the working population is living pay cheque to pay cheque, unable to save, and worried about their local economy, according to the Canadian Payroll Association’s eighth annual Research Survey of Employed Canadians.

Many working Canadians are barely making ends meet. Almost half (48 per cent) report it would be difficult to meet their financial obligations if their pay cheque was delayed by even a week (consistent with the survey’s threeyear average of 47 per cent). Illustrating just how strapped some employees are, 24 per cent say they likely could not come up with $2,000 if an emergency arose in the next month.

“Survey data suggests that household income growth has stalled, as respondents reporting household income above $100K has hardly increased in five years,” says Alec Milne of research provider Framework Partners. “In fact, real incomes have actually declined when inflation is taken into account.”

While pay has remained largely unchanged, employees’ spending and debt levels have affected their ability to save. According to the survey, 40 per cent of employees say they spend all of or more than their net pay, and 47 per cent are able to save just five per cent or less of their earnings.

More than a third (39 per cent) of working Canadians feel overwhelmed by their level of debt, up from the three-year average of 36 per cent. Debt levels have risen over the past year for 31 per cent of respondents. And 11 per cent do not think they will ever be debt-free.

This state of affairs is no accident, nor is it the result of the financial crisis that began with the meltdowns of 2008, as the middle class has been under assault for more than three decades. The recession and “recovery” that followed collapse caused by the financial services industry is indicative of the trend: corporate profits and executive bonuses quickly bounced back, while unemployment remains high and those with jobs work longer and harder to tread water.

Corporations have been sitting on those profits, hording cash or speculating in the markets rather than investing in real economic activity that would create jobs and get the economy back on track.

Greater productivity and a concerted effort to seek customers in emerging markets would do wonders for the Canadian economy – and, ultimately, the global situation – if only firms would do something useful.

This would be good for Canadian companies and good for Canada – a virtuous circle of increased investment and increased productivity would increase the debt-carrying capacity of all, through higher wages, greater profits and higher government revenues.

That’s mostly wishful thinking, however, as governments have done nothing to encourage that kind of behaviour. Just the opposite, in fact, given the emphasis on corporate tax reductions, deregulation, mobile capital and a host of other measures that have reduced corporate accountability. Those who call for tax policies to prompt companies to spend accordingly – taxing at a much higher rate profits not put back into productive use, for instance – have been dismissed by the business lobby, which continues to exercise tremendous influence despite the self-made crises.

This kind of bad behaviour is nothing new. Look at the history of automation and productivity gains in industry. They were supposed to bring us a higher standard of living and more leisure time. Instead we got neither. In fact, just the opposite happened. Corporations did in fact make larger profits, but the money was shuffled into the hands of a few and into dubious financial transactions. At first, workers in Canada, the U.S. and other advanced economies were displaced by the productivity gains. Real wages fell as unemployment levels rose, putting more downward pressure on incomes due to the competitive job market. Later, of course, more of the jobs were transferred offshore to low-wage countries, a trend that continues today. The result? More profits, with almost all of the gains concentrated in a few hands.

Governments routinely aid and abet the shift. That the likes of the Bank of Canada and its European counterparts are making even low-key mention of the inequities means those who’ve created the lower standard of living are taking note of the social unrest that’s starting to bubble to the surface.

In an economy based on consumerism – a problem in its own right – debt-based spending is unsustainable, as is a shrinking middle class. In the short term, heading out to the mall with your shopping list provides an economic boost. In the long run, we may have to curb our enthusiasm … at least until the bills that will arrive in the New Year have been paid off.