Debt isn't the big problem for Canadian households, it's income

CIBC Capital Markets economist Benjamin Tal says income isn’t rising fast enough

Debt isn't the big problem for Canadian households, it's income
Steve Randall

Concern over the levels of debt held by Canadian households belies a bigger issue, lagging income growth.

That’s the view of Benjamin Tal, deputy chief economist of CIBC Capital Markets, who told BNN Bloomberg that it’s the inflows to Canadian households that should be sounding the alarm.

“I don’t think that the issue in Canada – especially now, (and) over the past five, seven years – is debt. The issue is income,” he said in the interview Monday.

He said that income in Canada is not rising fast enough given the strength of the labour market, due to the quality and type of the jobs that are being created.

Setting aside the higher taxes paid in Canada compared to the US, due to greater benefits such as health care and education, Tal says that the debt-to-income ratio in Canada should be around 150 not its current 170, had income growth matched that of the US over the past 4 decades.

Tal says that the ratio is not rising because of fast escalating debt levels but because of lagging income growth.

This is partly because Canada has created more part-time and self-employed jobs with the composition of full-time jobs weaker than those south of the border.

But Tal added that small businesses are not supported enough to enable growth.

“The vast majority of those small businesses in Canada, start small and stay small,” he said, meaning they don’t employ people and they don’t take risks. These businesses often remain as one-person businesses.

The answer, he says, is to encourage small businesses to take risks and grow their business; and they need more capital.

Corporate wealth

Asked how the rising profits of Canadian corporates can be shared with those further down the chain, Tal pointed to the demise of the wage mechanism,

He said that rebalancing the labour market with quality jobs would help increase wages and restore the wage mechanism that would see more roles enjoying income growth as well as boosting productivity.