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Editorial: Debt is a trap for all of us

Nov 17 2012

Canadians - and especially British Columbians - have developed a remarkable, and risky, level of comfort with debt. British Columbia consumers now owe an average of $39,600 in short-term debt, according to a report by TransUnion, a credit-reporting agency. Car loans, credit cards, lines of credit - we happily borrow against the future to get the things we want today. That's 50 per cent higher than the Canadian average debt of $26,800.

Paradoxically, high mortgage debt is likely a factor in people's willingness to borrow for other things. Once homeowners owe $500,000, an extra $25,000 for a new car or vacations doesn't seem all that significant.

Debt is not inherently bad. British Columbians are using all that borrowed money to buy goods and services, giving the economy a useful boost at a difficult time.

But Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have warned that the current levels of household debt pose a threat to the economy. Carney said last month debt is too high, creating the risk people will decide - or be forced - to cut spending to pay off loans. A "sharper-than-expected deceleration in household spending" could mean slower-than-expected growth for the economy.

Carney even suggested interest rates might have to rise to encourage people to borrow less.

High levels of debt do mean people are at risk should circumstances change. Carney's warning notwithstanding, interest rates are not likely to rise significantly. But increases are always a possibility, pushing up the costs of debt. Any slowdown that brings job losses will leave some people unable to keep up their payments.

Those kinds of developments could create individual hardship, and a future drop in consumer spending that hurts the economy.

Even without changes in the economic situation, the reality is that the money borrowed today has to be repaid at some point. Debt has grown four times as fast as average incomes over the past five years; future repayments will take a significant share of family budgets. Again, potential bad news for the economy.

Some of the debt boom, economists say, has been prompted by a decade of rising house prices. People felt comfortable taking on debt as the equity in their homes has risen.

That raises the spectre of a sharp drop in spending by nervous consumers if housing prices fall.

There's an odd contradiction here. Canadians tend to laud virtues of thrift and living within your means - but for other people.

And, of course, for governments. This week the B.C. legislature finance committee reported that it heard great concern about government debt and deficits in its pre-budget tour. But the taxpayer-supported debt in B.C. is $8,800 per person - less than one-quarter the average consumer debt.

It's time to start working harder at living within our means. Those debts we're racking up are inevitably going to come due - and the reckoning could be tough for families and the economy.

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