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Video 3 Household debt affect on national debt

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Video 3 Household debt affect on national debt

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Wed, Dec 14: As most of us are scrambling to get all our holiday shopping done - a new report reveals some depressing numbers about what we're spending. Consumer debt is on a steady incline. Jill Croteau reports.

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Household debt-to-income ratio rises to record high | Watch News Videos Online

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Wed, Dec 14: As most of us are scrambling to get all our holiday shopping done - a new report reveals some depressing numbers about what we're spending. Consumer debt is on a steady incline. Jill Croteau reports.

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Household debt to GDP/disposable income, 1990-2016 (in %)

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Household credit, 2012 -2013 (in $ millions)

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Household credit growth, 2015 - 2016 (in %)

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Although some of the information in here was stuff that I had already researched, I was really happy to find out how to better interpret some of the graphs that I was seeing on other sites and videos. I understand the graphs so much better now that I read this article in contrast with the other information I had learned.

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The federal government introduced new mortgage rules last October that were aimed, in part, at calming down record-setting household debt levels across Canada.

But looking at December data, it's tough to see whether the new rules are having their intended outcomes.

Household credit has only kept growing - and that includes mortgage debt, according to numbers released by the Bank of Canada (BoC) on Monday.

The Liberals' mortgage rules included a "stress test" for prospective homebuyers that was meant to ensure they could afford their mortgages in the event of an interest rate hike.

Not only would borrowers have to qualify for mortgages at the rates they negotiated with their lenders; they would also have to qualify at the BoC's posted rate for a conventional five-year mortgage. That rate was 4.64 per cent on Thursday.
READ MORE: New federal mortgage rules come into effect today
The Liberals sold these rules as a way to tackle high debt and housing affordability. But the results have been decidedly mixed.

Canadian new home price growth slowed in December, but the MLS Home Price Index also shows prices growing in major housing markets like Toronto.

The picture was much clearer for household credit: Canadians' personal debt pushed past the $2-trillion mark in December, reaching another record high after climbing 0.54 per cent from the previous one in November.

Household debt in December 2016 also represented a climb of 5.2 per cent over the same month in the previous year.
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A month-over-month increase of 0.54 per cent doesn't seem significant in isolation.

But that was above the monthly average (0.42 per cent) at which household debt grew across Canada last year.

Mortgage credit kept growing, too.
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Mortgage debt grew by 0.55 per cent in December (above the 0.48 per cent average for 2016) and by 5.9 per cent year-over-year.

The data was not seasonally-adjusted. But the trends nevertheless surprised Benoit Durocher, senior economist at Desjardins.

"We were expecting a slowdown at the end of 2016," he told Global News.

But December was "likely to early to see the impacts on mortgage credit growth, particularly given that some housing activity finalized in December was potentially agreed to before the new rules were in effect," said Department of Finance spokesman Paul Duchesne.

"Depending on broader macroeconomic developments, we would expect to see gradual impacts of the measures in the coming months as affected homebuyers save for larger down payments and/or purchase less expensive homes than they might have in the absence of the new rules."

"It will take time for the full impacts of the measures to be evident."

This is, however, far from the first time that changes to mortgage rules have had a questionable influence on the growth of household credit and mortgage debt.
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In 2012, the Conservative government introduced mortgage rules that reduced the maximum length of a government-insured mortgage from 30 to 25 years.

That change also came in response to concerns about household credit levels.

But, save for a dip in household credit in February 2013 (which was driven more by a fall in consumer, not mortgage credit), BoC data show the rules didn't slow debt growth very significantly.

And seasonally-adjusted data showed no dip at all.

Over-leveraged

Three months ago, Durocher issued a client note that sounded a warning about Canadian debt levels.

He noted that, at 100.6 per cent, Canadian household debt had exceeded the size of the country's economy.

It grew even more in the third quarter, hitting 101.15 per cent of GDP, according to StatsCan data.
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Canada's second-quarter household debt-to-GDP ratio was the highest in the G7, Durocher noted.

"The high level of household debt is undermining the Canadian economy and this represents a significant risk over the medium and long terms," he said.

One of the biggest risks is that households will have difficulty meeting their financial obligations if interest rates go up, Durocher told Global News.

But there are other issues that come with high household indebtedness, like "lower consumption and to lower GDP growth," he said.
READ MORE: Record debt: Canadian households sink deeper and deeper into the red
He thinks that 2017 is the year in which Canadians should start ramping down their debt, as he expects an interest rate hike in 2018.

Such a hike would take some time before it really hit certain borrowers - many people, for example, have mortgage rates locked in for anywhere from three to five years.

Durocher still thinks it's possible that the Liberals' mortgage rules could slow credit growth sometime this year - though he doesn't know when.

CIBC economist Benjamin Tal agrees.

In a report issued Feb. 2, he said mortgage rules are just one reason why the growth of new mortgages could cool in 2017.

This could come due to factors such as "tougher qualification criteria," an "increased share of less expensive (condo) units in total housing sales," higher mortgage rates and slowing activity in centres like Vancouver.

"Overall we expect mortgage debt outstanding to rise by an annual rate of around five per cent in the coming two years," Tal said.

In other words, he doesn't expect it to drop - only to grow at a rate that's about 0.9 per cent slower than it was last year.

Reducing your debt

So what can individual Canadians do to manage their debt loads?

One financial coach has a few ideas.

"Debt of this sort contributes nothing to our long-term wealth and financial well-being," Noel D'Souza, CFP®, Money Coach with Money Coaches Canada, told Global News.

"Eventually the 'debt party' ends - usually badly - and individuals and families are left with a large bill to pay and the substantial stress that goes with it," he said.

In order for households to reduce their debt, "it's crucial to get a firm understanding of your cash flow," D'Souza said.

That means finding out how much money they have coming in, how much they're spending and where they're spending it before they can make any decisions about reducing their debt.

Households also need a goal to work toward - a "motivating goal that will encourage you to make necessary lifestyle changes and resist the ongoing temptation to overspend," he said.

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The Liberals tried to clamp down on Canadians' debt. So far, it isn't working.

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The federal government introduced new mortgage rules last October that were aimed, in part, at calming down record-setting household debt levels across Canada. But looking at December data, it's tough to see whether the new rules are having their intended outcomes.

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Website 2; Debt to GDP ratio calculation

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Website 2; Debt to GDP ratio calculation

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After reading multiple articles with a strong bias in either political direction, it was refreshing to learn how to calculate and understand these numbers myself without relying on a news bias. Discusses the tipping point of 77%, the comparison of debt between companies, the way GDP levels are directly tied to the spending of the country and the growth of the country. It was still difficult to calculate the percentage myself, but nice to have the reference available when I need it.

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The debt-to-GDP ratio compares a country's sovereign debt to its total economic output for the year. Its output is measured by gross domestic product.

This ratio is a useful tool for investors, leaders, and economists. It allows them to gauge a country's ability to pay off its debt. A high ratio means a country isn't producing enough to pay off its debt. A low ratio means there is plenty of economic output to make the payments.

If a country were a household, GDP is like its income. Banks will give you a bigger loan if you make more money. In the same way, investors will be happy to take on a country's debt if it produces more. Once investors begin to worry about repayment, they will demand more interest rate return for the higher risk of default. That increases the country's cost of debt. It can quickly become a debt crisis.

Tipping Point

What's the tipping point? A study by the World Bank found that if the debt-to-GDP ratio exceeds 77 percent for an extended period of time, it slows economic growth. Every percentage point of debt above this level costs the country 1.7 percent in economic growth.

It's even worse for emerging markets. There, each additional percentage point of debt above 64 percent will slow growth by 2 percent each year.

How to Use the Debt-to-GDP Ratio

The debt-to-GDP ratio allows investors in government bonds to compare debt levels between countries.

For example, Germany's debt is $2.7 trillion, dwarfing that of Greece, which is $514 billion. But Germany's GDP is $3.8 trillion, much more than Greece's $281 billion. That's why Germany (the largest country in the EU) had to bail out Greece, and not the other way around. The debt-to-GDP ratio for Germany is a comfortable 72 percent, while that for Greece is 182 percent.

So, is the debt-to-GDP ratio a good predictor of which country will default? Not always. Japan's debt-to-GDP ratio is 228 percent. Japan is not in danger of default, because most of its debt is held by its own citizens. A lot of Greece's debt was held by foreign governments and banks. As Greece's bank notes became due, its debt was downgraded by ratings agencies like Standard & Poor's, which made interest rates rise. Greece had to find a way to raise more revenue, and undertook spending cuts and tax increases to do so. This further slowed its economy, further reducing revenue and its ability to pay down its debt.

In 2017, the U.S. debt-to-GDP ratio was 104 percent. ​That's $20.493 trillion in debt (December 29, 2017) divided by $19.739 trillion for fourth quarter GDP. But that's not a critical for a country which can issue debt in its own currency. The United States can simply print more dollars to pay off the debt. For this reason, the risk of default is very low. On the other hand, the debt holders wind up with money that's worth less. This will eventually make them avoid U.S. debt.

As a country's debt-to-GDP ratio rises, it often signals that a recession is underway. That's because a country's GDP decreases in a recession.

It causes taxes, and federal revenue, to decline at exactly the same time the government spends more to stimulate its economy. If the stimulus spending is successful, the recession will lift, taxes (and federal revenues) will rise, and the debt-to-GDP ratio should level off.

The best determinant of investors' faith in a government's solvency is the yield on its debt. When yields are low, that means there is a lot of demand for its debt. It doesn't have to pay as high a return. The United States has been fortunate in that regard. During the Great Recession, investors fled to U.S. debt. It is considered ultra-safe.

As the global economy continues to improve, investors will be comfortable with higher risk because they want higher returns. Yields on U.S. debt will rise asdemand falls.When yields are high, look out.

That means investors don't want the debt. The country must pay more interest to get them to buy its bonds.

That creates a downward spiral. High interest rates make it more expensive for the country to borrow. This increases fiscal spending, which creates a larger budget deficit, which creates more debt. A good example is the Greece debt crisis.

That's why the debt-to-GDP ratio, for all its faults, is still widely used. It's a good rule of thumb that indicates how strong a country's economy is, and how likely it is to use good faith to pay off its debt.

How to Calculate the Debt-to-GDP Ratio

To figure the debt-to-GDP ratio, you've got to know two things: the country's debt level and the country's economic output. This seems pretty straightforward until you find out that debt is measured in two ways. Most analysts look at total debt. Some, like the CIA World Factbook, only looks at public debt.

That's a little misleading. In the United States, all debt is essentially owned by the public. Here's why. The U.S. Treasury has two categories. Debt held by the public consists of U.S. Treasury notes or U.S. Savings Bonds owned by individual investors, companies, and foreign governments. Public debt is also owned by pension funds, mutual funds, and local governments.

The other category is Intragovernmental Holdings. This is the category not reported by the CIA World Factbook because it's debt the federal government owes to itself, not to outside lenders. The CIA figures if the government doesn't repay itself, so what? It's just a method of accounting between two agencies.

But it does matter a lot. The money the federal government "owes itself" is really owed mostly to the Social Security Trust Fund and federal department retirement funds. Thanks to the Baby Boomer generation, these agencies take in more revenue from payroll taxes than they have to pay out in benefits right now. That means they have excess cash, which they use to buy Treasurys. The government just spends this excess cash on all government programs.

When the Boomers retire, Social Security will cash in its Treasury holdings to pay benefits. But the cash to pay this debt will have to come from somewhere. That means the Treasury will have to issue more debt or Congress must raise taxes.

Therefore, you should always look at the total debt, not just the debt owed to the public. That's because all federal debt is eventually owed to the public. That's why Intragovernmental Holdings should be counted in the ​U.S. ​debt-to-GDP ratio.

Debt-to-GDP Frequently Asked Questions

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The debt-to-GDP ratio compares a country's sovereign debt to its total economic output for the year. Its output is measured by gross domestic product. This ratio is a useful tool for investors, leaders, and economists. It allows them to gauge a country's ability to pay off its debt.

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This series of videos throughout the article was helpful at analyzing the meaning of Debt to Gross Domestic Product ratio. I found that a lot of my reading made it very difficult to understand this concept until this site provided me with video explanations to supplement. The countries with large GDP's are able to take greater risks because of their spending and loaning power.

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What is the 'Debt-To-GDP Ratio'

The debt-to-GDP ratio is the ratio of a country's public debt to its gross domestic product (GDP). By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt. Often expressed as a percentage, the ratio can be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

BREAKING DOWN 'Debt-To-GDP Ratio'

Economists have not identified a specific debt-to-GDP ratio as being ideal, and instead focus on the sustainability of certain debt levels. If a country can continue to pay interest on its debt without refinancing or harming economic growth, it is generally considered to be stable. A high debt-to-GDP ratio may make it more difficult for a country to pay external debts, and may lead creditors to seek higher interest rates when lending.

If a country is unable to pay its debt, it defaults, which could cause a panic in the domestic and international markets. The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default. While governments may strive to have low debt-to-GDP ratios, government borrowing may increase in times of war or recession; this is a macroeconomic strategy attributed to Keynesian economics.

Debt-to-GDP Patterns in the United States

The United States had a debt-to-GDP ratio of 104.17% in 2015 according to the U.S. Bureau of Public Debt. The United States experienced its highest debt-to-GDP ratio in 1946 at 121.70%, and its lowest in 1974 at 31.70%. Debt levels gradually fell from their post-World War II peak before plateauing between 31 and 40% in the 1970s. They have been rising steadily since 1980, jumping sharply following the subprime housing crisis of 2007 and subsequent financial meltdown.

The U.S. government finances its debt by issuing U.S. Treasurys, which are considered the safest bonds on the market. The countries with the 10 largest holdings of U.S. Treasurys are Taiwan at $182.3 billion, Hong Kong at $200.3 billion, Luxembourg at $221.3 billion, the United Kingdom at $227.6 billion, Switzerland at $230 billion, Brazil at $246.4 billion, Ireland at $264.30 billion, the Cayman Islands at $265 billion, Japan at $1.147 trillion and Mainland China at $1.244 trillion.

Global Debt-to-GDP Ratios

The average debt-to-GDP ratio among Organisation for Economic Co-operation and Development (OECD) countries in 2015 was expected to be 111.2%. A number of countries had a debt-to-GDP ratio in 2015 that was over 100% including Belgium at 105.4%, France at 116.1%, Greece at 188.2%, Ireland at 132%, Italy at 147.4%, Japan at 232.5%, Portugal at 142.2%, Spain at 111.5% and the United Kingdom at 103.1%.

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The ratio of a country's national debt to its gross domestic product (GDP). Often expressed as a percentage, the ratio can be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

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ESSEC Business school uses 2015 greek debt to define the way countries work together to assist others with their debts. Investment debts of the government can benefit the countries better than operational debts. Countries can end up in a self fulfilling crisis under the effect of beliefs and ideas of their leaders.

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Website; Global News article; 2017 Trudeau Budget

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Website; Global News article; 2017 Trudeau Budget

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This Global News article was about the Canadian government predicting the upcoming year's budget; including national debt and plans of payment. First video highlights the affects of the new budget on Canadian businesses and taxpayers. Addresses how our GDP is much larger than our debt and that our economy is growing with the use of this federal debt. Addresses the lack of tax breaks on average everyday people's lives, and on small businesses; versus the large spending of government and tax breaks of the wealthier Canadians.

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The Trudeau government has unveiled the 2017 federal budget. Here's everything you need to know about how the budget will affect you.
OTTAWA - The Trudeau governmen t unveiled a budgetary crystal ball Wednesday that foresees slightly smaller deficits and a growth-lifting plan that places "big bets" on what the feds predict will be high-potential sectors.
WATCH: Eric Sorensen explains the debt-to-GDP ratio and why it matters
Finance Minister Bill Morneau's second budget projects shortfalls of $23 billion for 2016-17, $25.5 billion next year and $24.4 billion in 2018-19, not including a $3-billion contingency fund - forecasts that have each shrunk between $1.5 billion and $2.1 billion since the fall.

Later in the outlook, the annual deficits are expected to be little bigger than previously thought.
READ MORE: How the budget will affect your pocketbook
But the government once again failed to outline a plan to return the books to balance, which it promised to do in its 2015 election platform.

The leaner-than-expected deficit projections are largely tied to Canada's stronger economic outlook.

However, the government is also anticipating changes in this year's budget to boost revenues via new tax measures and higher premiums on the employment insurance program.
WATCH: Rona Ambrose wants to see 'out of control' spending halted in next Liberal budget
Ottawa's bookkeepers also found another $933 million over six years, thanks to previously planned defence commitments that were not spent as quickly as initially expected.

And while the document contained little new spending, it did offer fresh details on commitments made in the Trudeau government's curtain-raising 2016 budget, as well as sharpened strategies for enhancing skills development and driving the so-called innovation economy.

"To make the most of the opportunities that the new economy offers, the government will equip Canada's workers with the skills and tools they need to succeed," reads the 278-page budget.

"It will also make big bets in high-growth sectors of the economy, including clean technologies, digital industries and agri-food, to secure Canada's place as a world-leading centre for innovation."
READ MORE: Liberals extend parental leave to 18 months, boost childcare funding
Ottawa is banking on that plan to improve the country's growth trajectory and eventually help eliminate the deficit.

The promising sectors identified by the feds also included health sciences, clean resources and advanced manufacturing.

The budget called for the creation of growth strategies and more available cash to help each of these industries prosper.

WATCH: Justin Trudeau confident budget will benefit Canadians

The government also pledged $125 million to launch an artificial intelligence institute.

To provide further support, the budget contained commitments to expand federal investments in venture capital, to ease access to public procurement contracts for young, innovative firms and to develop an intellectual-property strategy, which is considered critical by some industry players.

"It's probably worth a shot," Scotiabank chief economic Jean-Francois Perrault said of Ottawa's plan to take a more hands-on approach by pinpointing specific sectors with potential.
WATCH: Ambrose says 'this budget is not for regular working people'
Perrault said other countries have had success in the interventionist approach for particular sectors, when it's done intelligently. He was encouraged Ottawa seemed intent on taking more of a free-market approach.

Morneau's budget also re-allocated infrastructure cash to add $150 million to a five-year, $800-million commitment the Liberals made in last year's budget to support "superclusters" - a "dense" area of business activity that includes post-secondary institutions, companies, specialized talent and necessary infrastructure.
WATCH: Federal government commits to $200 billion in healthcare spending with the provinces
When it came to the headline numbers, the finance minister gave himself more breathing room on his so-called fiscal "anchor" to lower the debt-to-GDP ratio by the end of the Liberal mandate.

The ratio - a measure of the public debt burden - is now projected to only drop below 2016-17 levels in 2020-21.
READ MORE: Big investment in affordable housing, nothing to cool red-hot markets
The budget predicted a deficit of $15.8 billion in 2021-22, the final year of its forecast horizon.

The government also reinstated a $3-billion contingency fund, which increased the projected deficits swell to $28.5 billion next year, $27.4 billion in 2018-19, $23.4 billion in 2019-20, $21.7 billion in 2020-21 and $18.8 billion in 2021-22.

Asked about the lack of a road map to return to balanced books, Morneau sidestepped and told reporters the government's approach is growing the economy.

"Our plan is to be responsible every step of the way," Morneau said. "We're making every dollar count."

WATCH: Trudeau describes 2017 budget as win for middle class

The Liberals won the 2015 election on a platform that vowed to invest billions in measures like infrastructure and child benefits as a way to re-energize Canadian growth.

They planned to run deficits to finance the investments, but promised annual shortfalls would not surpass $10 billion during the first couple years of their mandate.

The Liberals also vowed to return to balance by 2019-20. Since taking office, however, the government abandoned those promises, citing a weaker-than-expected economy.

None of the government's forecasts Wednesday accounted for the potential fallout from policy changes being discussed in U.S., which many fear would have major consequences for the Canadian economy.

The U.S. administration is eyeing cuts to corporate and personal taxes, the renegotiation of the North American Free Trade Agreement and a possible border tax.
More coming

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Federal budget 2017: Trudeau government projects $28.5 billion deficit in 2017-2018

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The Trudeau government has unveiled the 2017 federal budget. Here's everything you need to know about how the budget will affect you. OTTAWA - The Trudeau governmen t unveiled a budgetary crystal ball Wednesday that foresees slightly smaller deficits and a growth-lifting plan that places "big bets" on what the feds predict will be high-potential sectors.

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This padlet is designed to research the impact of public debts around the world