Are Canadians being encouraged to save or to spend?

StimulusPackage 001 (2)Yet again the spring delivery of the federal budget has proven to be a terribly exciting moment for Canadians.  Granted, it cannot distract from the nightly widescreen on-ice flourishes of the Habs, the Sens, the Jets, the Flames and the Cannots (no, not the Leafs — the other blue team, near all the saltwater), but it tries.  The media bees have swarmed around Joe Oliver’s throwaway comment about future budgetary problems being left to the Prime Minister’s granddaughter to solve.  But this little twister does bring us to the modest query of this post. Canadians now get to put $10,000 into tax free savings accounts (TFSAs) every year, $4,500 more than past annual entitlements.  What a terribly generous development, or is it?  The hope is that Canadians will be encouraged by the tax-free status of these accounts to put money into savings accounts rather than to spend money irresponsibly on $4.00 lattes or $2.00 Timmies, Cannots seasons tickets, and other such non-durables.  However, anyone who has walked into a bank or credit union lately has probably noticed that the average interest rate they will get for a $5,000 or $10,000 deposit is about 1%.  Some banks actually call their 1% offering a “high interest” rate.   Like gymnasts, words can be so flexible.  A rudimentary calculation suggests that, at the amazing high rate of 1% interest, a $10,000 TFSA will produce $100 annually.  This is about $8.33 per month, probably as much as some customers’ monthly banking administration fees, but let’s not get sidetracked.   The bank customer who gave the bank $10,000 now gets the great pleasure of not having to pay tax on a mere $100 annually.  In real terms, this benefit to the customer is virtually nil.   However, the benefit to the bank is huge because it acquired a lot more money to invest than it would have obtained otherwise, and at only a tiny cost to itself (1%). So, the wily Canadian thinks, I’m gonna beat this system:  I’m gonna put my $5,000 or $10,000 into a higher risk TFSA.  That way, if the stock-market does not throw any major curve balls in the next few years, I’ll reap greater investment rewards, all tax free!  Or better yet, because the lending rate is also below 1%, the wily Canadian thinks just like the wily American did in the early 2000s: now is the perfect time to buy a house, preferably one of those modest $1 million specials in Vancouver.  After all, the market is going crazy there.   One’s equity will double in no time flat. (Or, as it did in America in 2008, it might nosedive). Now the question returns.  Are Canadians being encouraged to save or to spend?  Persistently low lending rates and savings account interest rates strongly suggest that the federal government is encouraging Canadians to spend, and not even carefully so.   (See Jamie Sturgeon’s observation from March 18, 2015, that “[m]any Canadians have taken advantage of the unprecedented window of low-interest debt over the past decade, tilting the oft-cited debt-to-income ratio…to 163 per cent, a record high.”)  This tacit reality is premised on a long-standing economic belief that a fragile economy desperately needs investment from everyone, capitalists and average consumers alike.  The wisdom of this belief can be tested later, but for now the Canadian with very little savings to put in a bank account, whether it be a TFSA or a regular account, obtains virtually no financial benefit by doing so.  His or her bedroom mattress may be just as safe and ultimately less costly.

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