Ever since our household debt to income ratio climbed above 150 per cent, people have been worried about this country. Not just by the amount of debt we’ve taken on, but seemingly even more so by the fact that this debt is dangerously close to where those debt levels were in the U.S. in 2007 before they crashed. And anything that happens over there has got to be our same fate, right? Well, that’s what pessimistic economists would have you believe. But Diana Petramala, economist at TD Economics, isn’t happy with such a simple calculation, and she has dug a little deeper to find out where our debt really stands.
Although Petramala has gone much further than most in her own digging, her findings are what some non-naysayers have been touting for years. That you simply can’t calculate our debt the same way and believe the numbers that you end up with.
“There are differences in the methodologies used to calculate both debt and income,” she says. “There are also differences in how health care is funded in Canada and the U.S. that should be factored into the amount of personal disposable income households have to help service their debt.”
Canada’s current debt to income ratio is at 163 per cent. Just before the economy in the United States blew up, their ratio was at 177 per cent. Already a huge difference, but when you take into consideration all the different ways of coming to these numbers, you could see that there’s not that big of a difference right now – and that neither country is really in a dire situation.
Interest payments on non-mortgage debt is always the first variable in the equation that you need to look at, considering that Stats Canada eliminates this payment from disposable income. The U.S. does not. Therefore, if you were to add it back in, it would lower the amount of debt of Canadians because it’s a debt they’re paying off every month.
The other issue is non-profit organizations, and it’s a big one. The United States includes these organizations in their debt calculation, while Canada does not. And in fact, Stats Can had been mistakenly adding this to our debt levels when they sat around the 153 per cent mark. It was only when they were taken out that our levels skyrocketed to the 163 per cent that it sits at today; and that alone shows just how big of a difference one small calculation can make.
No elements of the calculation are more complicated than health care though. Because we pay more tax in Canada to cover health care, Canadians in general have less disposable income. However, in the U.S., residents pay more out of their own pocket for medical attention and care, and that gives them less disposable income to add to the ratio. When you take all of that, and the fact that Americans also have costly health insurance, those in the U.S. pay about 8 per cent out of pocket for health care, while Canadians only pay 4 per cent.
Once Petramala calculated in all of those differences, she came up with two different household debt ratios. The stat for the States would actually sit around 152 per cent, while in Canada we’d be looking at a ratio of around 156 per cent. Still a ratio that’s too high for comfort, but one that we’re continually working to bring down. Since we hit that record high in 2012, we’ve done nothing but lower the amount of our household debt since.