You vs. Government: A Conflict of Interest
May 3, 2021
The Canadian government will encourage consumer spending with low interest rates. Individuals that have higher savings because COVID-19 reduced their spending will decide how best to use those savings.
Financial strategy of Canadians is on a collision course with the financial strategy of the federal government.
Over the last decade, the clear message from Ottawa was a warning that household debt had increased to historically dangerous highs. This posed a real risk to individuals and the government.
If interest rates increased and/or individuals had reduced earnings, more people would default on their loans. This would slow the economy and result in reduced tax revenue for the federal government.
Unfortunately, to promote economic activity to keep the economy strong, the federal government relies on consumer spending.
So, the feds preached the message of managing household debt, but also lowered interest rates to encourage more consumer spending which provides the government with higher tax revenue.
Welcome to the Conflict of Interest 2.0.
COVID-19 restrictions and lockdowns have curtailed our ability to spend. Savings have skyrocketed.
According to BMO Economics, Canadians saved $150 billion more than normal in 2020. Savings increased to 7 per cent of our country economic activity versus the past levels of 2-3 per cent.
With increased savings, now Canadians can decrease debt and increase investments. Except for that nagging conflict of interest.
The federal purse strings are in shambles. When we emerge from the pandemic, the government will attempt to reboot the economy so it can collect tax revenue.
Finance Minister Chrystia Freeland has referred to increased household savings as “preloaded stimulus.”
Money available to be spent to create jobs and produce tax revenue.
That might be the objective of the government. It does not have to be your objective.
Manage your finances in a manner that is best for you and your family.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com