Soaring household debt leaves Liberals with ‘extremely complicated’ task of winding down COVID-19 support

National Post

Undoubtedly, rising household debt will further increase pressure on the Canadian economy in the coming months, leading to the liberal government grappling with the difficult question of how and when to undo its massive support programs.

Likewise, it is worth mentioning that Canada has maintained for years some of the highest levels of household debt among developed nations, something in focus in the midst of the COVID-19 pandemic. In this way, Justin Trudeau must begin the “extremely difficult” job of adjusting and reducing his costly assistance programs to avoid a wave of defaults after those supports are removed, according to CIBC economist Benjamin Tal.

Certainly, a skillful hand on the part of Ottawa will be needed, in which programs may need to be expanded, reduced, or adapted to meet the individual needs of workers.

High indebtedness for households

It is clear that debt holders have enjoyed very favorable interest rates for more than a decade after the 2008 economic downturn has driven borrowing costs to record lows. Still, it needs to be noted that economic blockades aimed at slowing the spread of the coronavirus have skyrocketed unemployment rates, putting a renewed focus on high household indebtedness in Canada, even when rates remain low.

Likewise, the policy has provided temporary relief for some, but will not reduce mortgage costs once the deferment period ends, at a time when many people may still be unemployed or work on a limited basis. If Ottawa at the same time begins to liquidate programs such as its $ 2,000 per month Canadian Emergency Response Benefit, or if people who return to the workforce on a limited basis are not eligible for support, mortgage tensions are likely to build up.

Now, according to the Bank of Canada, household debt as a percentage of GDP has increased sharply in the last 20 years, from 58% in 2000 to 99% in 2019. Without a doubt, the pandemic could lead to that figure up to 130 percent for the third quarter of this year, according to CMHC projections. In comparison, household debt as a percentage of GDP was 75 percent in the United States before the pandemic, and 61 percent in France.

It is clear that debt difficulties will be particularly difficult to manage as the economy reopens in gradual segments, leaving some workers ineligible for programs like CERB, but unable to work full time.

Source: Jesse Snyder | National Post

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