Madam Speaker, if this pandemic has taught us anything, it is to be prepared for the unexpected, to anticipate risks before they metastasize so that we can protect ourselves and secure our future.
Today, I rise in the House of Commons to draw the attention of members to a growing risk of danger to our families, our businesses and our entire country. It is the risk of the $8.6 trillion of household, corporate and government debt that is quickly accumulating on the shoulders of Canadians. This amount equals 387% of our GDP, a record ratio that is higher than the ratios in many countries that have in the past experienced devastating debt crises.
Before our eyes glaze over, though, I want to remind members that a debt crisis is not just something that bankers and financial analysts talk about in the Report on Business from The Globe and Mail or on BNN. Research by reputable academic institutions shows that in the case of a financial crisis, house prices can drop by a third; stock markets, meaning people's savings, can drop by half; the economy can drop by 9%; and unemployment can rise seven percentage points.
Here is the human toll of that. The University of Calgary published a study recently showing that there is a two percentage point increase in suicides for every one percentage point increase in unemployment. Imagine the human cost of 7% unemployment. More data is now showing an inextricable link between opioid abuse and unemployment. Depression and homelessness result from these types of crises.
What is the nature of the risk? How serious is it? How likely are we to face it? We have to look to history. In their now-legendary book This Time is Different, Harvard economists Carmen Reinhart and Professor Ken Rogoff wrote about what they call eight centuries of folly. They studied debt crises in 66 countries across five continents. As they write in their opening, “Each time, the experts have chimed, ‘this time is different’—claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters.” With this breakthrough study, they found definitively that experts are wrong.
They lay out five standard leading indicators for a forthcoming financial crisis. I will go through them very quickly: first, falling economic output; second, a large debt buildup; third, rising household leverage; fourth, asset inflation; and fifth, large current account deficits. Do these five standard leading indicators apply to us?
Let us start with the first one: falling output. Last year, in 2020, our GDP dropped 5.5%, blowing a more than $100 billion hole in our economy. That is a massive reduction in our economy, and it means that we have $100 billion less to service our debts. On the first test, from This Time is Different, we do have falling economic output. It does not matter who is to blame. It does not matter that it was COVID that caused it. What matters is the math, and the math does not lie.
Let us move on to the second standard leading indicator: debt buildup. The amount of debt that a country can shoulder depends on the income that it produces to service that debt. According to the great Canadian economist John Kenneth Galbraith, “All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.” That underlying means of payment, of course, is GDP, so let us look at the size of our debt and how much it has grown.
Since the beginning of 2015, our total debt, public and private, has gone from $6.1 trillion to $8.5 trillion, a nearly 40% increase in our debt. During that time, our GDP has only grown by 13%.
In other words, our debt levels are growing almost three times as fast as our GDP, the underlying means of payment. We have now reached a level of debt to GDP of 387%, as I said earlier, but I did not tell you that it is an all-time record and nearly twice the size of the typical ratio over the last 60 years in Canada.
Here is some more staggering information: The debt-to-GDP ratio of Greece when it had its massive sovereign debt crisis 10 years ago was 330%. In the United States, during the great financial crisis that came out of the mortgage bubble, their debt was 375% of GDP. In other words, our debt levels in Canada today are higher than they were in the United States and Greece when they massive, iconic and devastating debt crises in the recent past. Therefore, we need now to pay heed as to why we think we can avoid the same thing. The only difference between them then and us now is that interest rates are low, but they will not stay that way forever.
What is the composition of our debt? Where does it come from? The answer is threefold: it is government, corporate and household debt.
Let us start with government debt. This year for the first time on record, Statistics Canada shows that the gross debt of all levels of government in Canada is bigger than the GDP. It just exceeded 100%, 100.3%, to be precise, in the third quarter of 2020. That has never happened before. Our debt levels are higher than they were in the 1990s when we had our own miniature near default of the federal government. That time it was 92%, so our debt levels are higher than ever before when it comes to government.
Before the government rises to claim that we have the lowest debt in the G7, as a share of GDP, that is just wrong. The only reason that Finance Canada calculates it that way is that uses the assets of the CPP and the QPP to deduct from our overall net debt level without using the corresponding liabilities those funds must pay. As a result, if one were to ignore that and look at our gross debt, we have higher debt levels than both Germany and, I believe, France in the G7. That means we do not have the lowest debt levels in the G7 and cannot be worry-free and fool ourselves that our sustained buildup of government debt is not a problem.
This year has seen a spectacular and never-before-seen increase in that debt. Our fiscal deficit is $381 billion. That is almost seven times bigger than the previous all-time average and equals 17% of our GDP. Let us put that into perspective.
In World War I, our deficit-to-GDP ratio was 8%. In the Great Depression, it was 6%. In the great global recession it was 4%. In other words, our deficit as a share of the economy and adjusted for inflation is currently twice what it was at its peak in World War I, three times what it was at its peak in the Great Depression and four times what it was in the great global recession. Only in the Second World War was it bigger, and our ancestors, when they came back from the war, immediately began repaying that debt, running the biggest surpluses ever in 1947, and then increasing the size of our economy elevenfold in the two-and-a-half decades that followed, which allowed them to pay it off quickly. Nobody is suggesting that we will come anywhere near to those kinds of surpluses or growth rates in the post-COVID era, which means that our debt situation is arguably more ominous for the country than it was even back then. Thus, on that criterion, the second standard leading indicator of a sustained buildup of debt, Canada meets that criterion as well.
We move on to household debt levels. Canada has the highest level of household debt as a ratio of disposable income in the G7. In fact, recently, our level of household debt grew to bigger than the entire Canadian economy, again setting records. These ratios mean that our households are carrying more debt than our economy can reasonably be expected to support.
According to the president and CEO of CMHC, “Canadians are among world leaders in household debt. Pre-COVID, the ratio of ... debt to GDP for Canada was at 99 per cent.... These ratios are well in excess of the 80 per cent threshold above which the Bank of International Settlements has shown that national debt intensifies the drag on GDP growth.” In other words, an international body like the Bank for International Settlements says that countries should not go above 80%, and yet pre-COVID we were at nearly 100%. Since that time, debt levels have risen even higher.
That is the third criterion for a forthcoming debt crisis, rising household leverage. Now we move onto the next one, which is asset inflation.
In Canada today, the assets that Canadians own in the country are worth 17 times the size of the Canadian economy. The historic average is 12 times. In other words, our asset values are quickly outpacing our economy. That cannot go on for long, because, of course, assets can only be purchased out of the income generated in the economy. Those assets break down into two parts: financial assets and real estate assets, more or less.
With financial assets, we look at the S&P/TSX, the broadest index in the country. Until a few years ago, the market value of that index had never exceeded the size of our economy. It was always smaller than GDP. That changed in the last 24 months, and has suddenly rocketed up to 120%, according to Rosenberg Research, a leading economic research firm. That one index is now worth 120% of GDP. That has never happened before. The companies in that index need to generate their profits from the economy, and therefore the value of the stocks on the index cannot get completely out of touch with the ability of the economy to generate income and support those stock prices.
Then we move on to real estate, where prices are up $65,000 this year. Can members imagine that in a year when our economy has lost over $100 billion in economic output and hundreds of thousands of people have lost their paycheques and been forced into their homes that somehow we found all of this money to buy real estate? In fact, from the beginning of 2019 to mid-2020, the inflation of our assets in this country has been worth more than our entire economy. There has been $2.7 trillion of asset inflation in an economy worth just over $2 trillion. That would be like someone making more money every year from the appreciation of their house than the salary they take home from work.
It would be nice if it could happen forever and we could simply float on a bubble up to prosperity, but we know that in the end our assets are only worth what we can afford to pay for them. Can Canadians afford the real estate they have right now? Members can ask RBC and the CMHC. The CMHC says that for a home to be affordable for a family, the family should not have to spend more than 30% of its income on housing. According to RBC, the average right now is 50%. That means that for the average person to afford the average house, 20 percentage points more from their family budgets has to go to housing. That is with record low interest rates. When rates rise, those payments will only become more expensive.
Do we have asset inflation in Canada? We have it like we have perhaps never seen before. Asset inflation is the fourth leading indicator of a forthcoming debt crisis.
This brings us to the final leading indicator that these Harvard economists developed through studying 800 years of history of debt crises, which is current account deficits.
To oversimplify this for the purpose of saving us some time, current account deficits are basically the amounts someone buys in excess of what they sell. In essence, Canada buys imports and sells exports. The truth is that we buy a lot more from the rest of the world than we sell to it.
Since 2015 to the present, Canada has run current account deficits of approximately $300 billion. In other words, we bought $300 billion more from the world than we sold to it, and we borrowed to make up the difference. How else would we do it? If we buy more than we are selling, there are only two ways to do it: we drain our savings or we rack up debt. We have been doing a little of both, but most of all, we have been adding debt. The result is that we are taking on more and more obligations for our prior consumption.
I would like to say that all of this debt has been used to invest in productive assets like factories, software, patents and other things that will generate income to pay off that debt, but the evidence shows that the overwhelming preponderance of the new debt has been going to immediate consumption. In fact, data from after the government's programs came in, programs that I believe were meritorious and had to happen, showed that much of the money leaked out of the country because, as Canadians, we were all buying or importing things from abroad more than we were producing and sending abroad. That means that last year we were again running a large trade deficit and adding to our overall debt load in the process.
In the months of April and May 2020, Canadians borrowed an extra $80 billion from foreigners according to David Dodge, who published a recent piece on this for the Public Policy Forum. He specifically asked how long it will be possible for Canadians, for our country, to borrow from the world in order to buy from the world before the world gets tired of lending us money. The bottom line is that we have a large and consistent current account deficit, the second largest in the G7, second only to Japan's. That is an unavoidable problem that we will need to confront because the world is not going to view our economy as a charity case. The lenders of the world will expect to be paid interest on all of the debt that we carry forward.
In fact, the only way to pay off that debt is to generate powerful incomes. Unfortunately, since 2012, Canada has exported more investment than it has brought in by a net amount of $800 billion. In other words, we are sending our investment to productive assets in other parts of the world while they are sending us debt. They get factories, software, patents or pipelines, and we get large-scale debt. That is the fifth measurement of whether or not a debt crisis will strike, and we can say definitively that with our $300 billion in current account deficits the last five years, Canada indeed meets this standard leading indicator that is necessary to trigger a debt crisis.
There are five indicators and we check every single box. What can we do about it? The answer is that we need to unleash the power of our productive economy to clear the way for job creation.
This is red tape week. Let us eliminate the red tape that prevents businesses from hiring. Let us approve large-scale projects like the Teck Frontier mine in Alberta, or the LNG facility in Saguenay. These are tens of billions of dollars in economic activity. Let us make this the fastest place in the world to get a construction permit. Right now we rank 34th out of 35 OECD nations on that. Let us be the fastest place to build a factory or build a pipeline or some other economic infrastructure that pays wages and can reimburse our debts and support our prosperity. Let us change the tax and regulatory rules that get in the way of first nation communities trying to develop commerce and resources on their reserves. Let us remove the penalties for low-income people to get off social assistance so that they can get back to work. Let us allow our newcomers as immigrants use their qualifications by giving them permits to work in fields they are qualified in, like the professions and the trades. Let us replace what has become a credit card economy with a paycheque economy, and in that way alone, we will secure our future.
