Conditions in the economy are as good as it gets for consumers right now, yet spending growth has been on the sluggish side.
It’s encouraging news from a personal finance viewpoint because a lot of households have too much debt. If spending growth tapers, it suggests people are moving money over to debt repayment or saving. But while households are getting more careful with their finances, political parties can’t stop talking about their plans to lavishly spread money around through spending and tax cuts.
Both politically and at a household level, the social acceptability of debt is one of the most important financial shifts of the past 10 or so years. Weak economic growth has kept governments and individuals from feeling richer while also clearing the way for interest rates to reach historic lows. We adapted by using debt to live beyond our means.
The federal election campaign so far has been mainly about spending and tax cuts, a contrast to the admirable level of self-control households seem to be exerting on their finances. A report from TD Economics earlier this week said “spending on goods has effectively flatlined from 2018 onwards.”
Economic conditions are actually close to ideal for consumer spending these days. TD noted that our population is the fastest-growing in the Group of Seven leading industrialized countries, job creation is strong, wage gains are averaging in the 3-per-cent range (solid by recent standards), and some interest rates have fallen this year.
The reasons for this lower than expected rate of growth in spending include high debt levels, measures to curb excesses in the housing market and the end of a long rally in car sales that seems to have filled almost everyone’s need for new wheels.
Spending, not restraint, is the theme of the federal election campaign. The Conservatives used to say they’d balance the federal budget in two years; now, they’re saying they’ll take five years. The Liberals have dropped entirely a promise made in 2015 to balance the budget by 2019, and the platform they released a few days ago projects deficits of more than $20-billion a year for four years.
The Green Party also says it would balance the budget in five years, partly through various tax increases, while the NDP says it will ensure that Canada’s debt-to-GDP ratio falls over a 10-year period. Here, we arrive at the current justification for governments running deficits. With interest rates as low as they are, it’s possible for countries (or provinces) to expand their economies at a faster rate than their debt rises.
If a country or province’s ratio of debt to gross domestic product is falling, then the debt is considered to be manageable and not a risk to future generations by way of tax increases. But voters seem to have grasped something about managing debt that politicians haven’t. It’s a lot easier to do when economic conditions are favourable.
Personal finance is a lot about telling people what they’re doing wrong. Here’s a chance to point out something that is being done exactly right. The economy is delivering decent job and income growth right now, and people are taking advantage and diverting some of their gains away from spending. There are also signs they’re diverting money away from investing, which is fine. For a lot of people, debt reduction is the most important financial goal.
Taking their pre-election read of the mood of voters, the federal political parties obviously saw something that told them that people want spending more than restraint. The Liberals did win the previous election with that approach.
Now, there are signs that people are pivoting to restraint over spending in their own lives. Uneasy about their debt levels, they’re taking action to return to a balanced household budget. Not drastic measures, but still something tangible.
We’ve seen households turn their attention to paying down debt before and then jump back into overspending and racking up debt. We may need an economic shock of some sort to remind us how lightening up on debt gives us flexibility in bad times.
For now, though, households are showing admirable restraint. Keep it up, everyone, and tell your local election candidates what you’re doing. Looks like federal politicians need a good example set for them.
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