Do your part for the economy: stay home, do not spend

Families in debt must face up to financial reality: they are in a debt danger zone and should ignore politicians and businesses urging them to go and spend in order to boost the faltering economy. They should spend a bit less, save a bit more, and pay down some old debt.

This message comes from a Canadian economist, Roger Sauvé. He recently released a report entitled "The Current State of Canadian Family Finances," an annual review he has written for the Ottawa-based Vanier Institute of the Family for the past 10 years.

Among its key findings:

Average Canadian household debt rose to $90,700 in 2008. Total household debt now amounts to 140 per cent of disposable income. That ratio is at a record high. In 1990, before the last recession, the figure was 91 per cent.

Consumer and mortgage debt last year equalled 127 per cent of disposable income in the average family. This is about the same as the U.S. rate in 2006 "just before the bubble burst," the report notes. "The recession will likely push many more Canadians over the edge."

Spending and debt have risen much faster than incomes. Between 1990 and 2008, average household income rose 11.6 per cent, while spending increased 24 per cent and debt grew sixfold. At the same time, annual savings shrank to 3 per cent of disposable income, down sharply from 13 per cent in 1990.

Average net worth (wealth), which had been on the rise, fell in 2008 as a result of plunging stock markets and housing prices and the accompanying rise in debt.

Year-over-year consumer insolvencies (including bankruptcies and proposals) jumped almost 25 percent in October. Of particular concern, he adds, is the gradual climb for those age 55 and older, who are traditionally among the least debt-laden.

Laurie Campbell, executive director of Toronto credit counselling agency Credit Canada, said families should heed Sauvé's warnings and ignore pleas to help the economy by buying.
In theory, encouraging people to spend during a recession makes sense if they have the means to do it, she said. But not this time. "When we have savings at all-time lows and debt levels at record highs, there is absolutely no wiggle room."