The LIBERALS and the rise of household debt

Photo Le Journal de Québec, Simon Clark
After the financial crisis of 2009, it is a bit as if the State had transferred its responsibility for the household.

Bertrand Schepper

Friday, 9 march 2018 13:00

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Friday, 9 march 2018 13:00

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When the output of the financial crisis of 2009, countries have used various strategies to promote economic expansion. However, through this crisis, Quebec has opted for a strategy of intervention that is contrary to what he put in the past. In this sense, the State has abandoned the strategies of massive investments that have served in crises of 1982 and 1991, to advocate for pricing policies and austerity that we know today.

This strategy suggests that the economic expansion would be achieved through the increase of household consumption. Actually, if this is not the State that spends in the economy, this will be the individuals. Moreover, the lower interest rates of the bank of Canada, which increased from 4.25% in 2008 to 0.5% in 2009 to stay below 1.25 %, also tends to facilitate the growth of the debt and of household consumption.

If these policies have had the advantage of not overly burdening the public finances, they have had a perverse effect on the personal finances of québec·es who suffered the consequences of the fare increase and, subsequently, those cuts in services through austerity, on their standard of living.

Although in the long term, this strategy has been good for Quebec, it is necessary to put some of the elements in their contexts. On the one hand, unlike other economies, Canada has not been affected only moderately by the crisis of 2009. On the other hand, the decrease in the price of oil of 2015-2016 has had a positive impact on the industries in Quebec, as they were able to take advantage of lower production costs and the effect of the decrease in the price of a barrel of oil on the canadian dollar.

The following graph shows the evolution of real GDP in Quebec in the wake of the three most recent economic crises, on a base 100. It is assumed, for the fiscal year, the GDP of 1982, 1991 and 2009 would be equivalent to 1 year prior to the arrival of their economic crisis, respectively. The year ” 0 ” allows you to see the impact of the crisis on the GDP. The years from ” 1 ” to ” 4 ” can see the speed at which the GDP has been expanding following the economic crises in Quebec.

Evolution of real GDP in Québec, following the crises of 1982, 1991 and 2009

Source : Pineault, Eric et al, This time, is it different ?: The recovery financialized in Canada and in Quebec, IRIS, June 2013, 36 p., online, https://iris-recherche.qc.ca/publications/reprise-financiarisee.

We note that the public policy investments by state, 1982 and 1991 have resulted in a significant increase in economic activity that the strategy of pricing in 2009, despite a crisis stronger. This strategy, based on consumption, has had other negative effects on households, as it has contributed to the increase in their debt. It’s a bit as if the State had transferred its responsibility for the household.

Indeed, when one looks at the graph below, we note that the expenditure of the households have experienced an increase of 33.1 % between 2007 and 2016, while the remuneration was believed to only 19.2 per cent during the same period. In 10 years, the consumption of québec has therefore increased at the same savings or household debt. To note, the demarcation between these amounts proves to be more important after the crisis of 2009.

During the same period, we also observe that the share of loans non-mortgage personal held with banks and Desjardins had an increase of 105 % in 10 years. Considering that these loans represent all personal loans that are not related to the purchase of a house, we can understand that households go into debt to maintain their standard of living. Let us note here that the growth of debt is particularly high between 2008 and 2011, through the period affected by the crisis in quebec in 2009.

Source : Statistics Canada Table 281-0027, data Bank of official statistics on Québec, final consumption Expenditure of households, data Bank of official statistics on Québec, the Loan held by depository institutions., calculation of the author.

Of course, the numbers do not tell the whole story. The 105 %, which include a share of loans that will never be repaid due to bankruptcy, for example. In addition to these loans, the savings that some households have used to support their pace of life.

However, the increase of loans granted by financial institutions to individuals is significantly more rapid than that of their compensation. This lets even assume that the interests had a significant effect on the increase of debt of households. Of course, this increase in the debt exceeds the simple fact of the transfer of the debt from the State to the households. You can’t accuse the government of being solely responsible for this debt, the trend of social being to increase consumption at a rate that is difficult to absorb.

Having said that, in deciding to opt for an exit from economic crisis in 2009 focused on the individual consumption rather than on an increase of its spending, the liberal government has left trainer the economic recovery. In addition, he has transferred his debt to the individuals who have least means to support it.