Study: Household spending and debt

Canadian households have been spending more and saving less during the past two decades, according to a new study.

As a result almost one-half, or 47% of all households were spending more than their pre-tax income in 2001, up from 39% in 1982. And households in the pre-retirement years experienced the greatest shift in spending habits.

In 1982, 34% of households in the pre-retirement years (45 to 64) outspent their income, compared with 45% in 2001. The incidence of "spenders" also increased among younger and older households but by smaller amounts.

Household deficit spending may be financed by drawing down savings or selling financial assets, but data indicate that borrowing is most closely tied to the increase in spending.

Between 1982 and 2001, per capita debt doubled, stemming from dramatic increases in both mortgage and consumer debt.

Borrowing tends to follow a life cycle pattern in which the young take out loans to finance education and the formation of households. As income increases, debt is paid down and saving for retirement becomes the focus.

Fully half of younger households (with a reference person under 45 years old) spent more than their income in 2001, compared with 44% in 1982. However, greater spending increases among pre-retirement and senior households resulted in a less distinct life cycle pattern in 2001 compared with the earlier period.

Low income is another key factor related to spending. In 2001, nearly 66% of households with annual income of less than $20,000 were spending more than their pre-tax income, up from 57% two decades earlier.

The proportion also increased across other income levels, as did the gap between spending and income. For example, at the low end of the scale, households with incomes of less than $20,000 spent 54% more than their income in 2001, compared with only 34% more in 1982.

Households that spent more than their pre-tax income were also more likely to be renters or homeowners with a mortgage.

In general, households that spent more than their pre-tax income had similar levels of expenditures to households that saved money, that is, those whose spending was equal to or less than their income.

The big difference occurred in spending on automobiles. Households that spent more than their pre-tax income dished out thousands of dollars more per year on car purchases.

In 1982, households that were net spenders spent 43% more on transportation than did households that were net savers. By 2001, the differential had grown to 54%.

In 2001, households that were net spenders spent an average of $15,200 on car purchases, compared with only $9,000 for households that were net savers.

Net spending households bought more of most types of goods and services than did saving households, but the differences were much smaller than for automobile expenses.

The study suggests that a number of factors contributed to the increase in debt-financed spending. Interest rates fell dramatically over this period (the bank rate plunged from 13.96% in 1982 to 4.31% in 2001) creating an "easy credit" environment. At the same time, income taxes and Canada/Quebec Pension Plan and Employment Insurance premiums took a larger bite out of pre-tax income, squeezing the amount of income available for personal consumption and savings.

Other studies show that increasing financial wealth, particularly home equity, stimulates household spending. So the recent run-up in real estate values in many areas of the country may have helped to loosen the purse strings of homeowners.

Interestingly, national accounts estimates show that the ratio of household debt to assets remained in a narrow band of 16% to 19% over the past 14 years, even as the debt-to-income ratio climbed to unprecedented heights.

Definitions, data sources and methods: survey number 3508.

The article "Spenders and savers" is available in the March 2005 online issue of Perspectives on Labour and Income, Vol. 6, no. 3 (75-001-XIE, $6/$52).

For more information, or to enquire about the concepts, methods or data quality of this release, contact Ted Wannell (613-951-3546; ted.wannell@statcan.gc.ca) or Raj Chawla (613-951-6901; raj.chawla@statcan.gc.ca), Labour and Household Surveys Analysis Division.