Meanwhile federal and provincial governments are creating more alarm over their own finances, claiming they need to reduce spending and introduce austerity measures to reduce their debt. But cuts to public sector wages and public services reduce incomes and increase costs for people, making the household debt situation worse. And if households cut back on spending, that slows down the economy, making government finances worse.
So what’s the solution to this debt quandary?
It’s important to understand that any one person’s debt is someone else’s financial asset. On the national balance sheet, financial debts and assets all balance out to zero.
From the late 1990s, low wage increases and rising house prices have meant that the household sector has gone increasingly into debt. Meanwhile the corporate sector—with high profits, lower taxes and low-wage increases for workers—has piled up ever larger surpluses. The recession forced governments to run deficits after 2007, but now their debt-GDP ratios are declining again. and the debt ratios of households have kept increasing, which is the real debt crisis.
The solution is clear: we need to rebalance our national balance sheet. Since corporations aren’t investing their surplus cash back into the economy to create jobs and increase incomes, our governments should increase corporate taxes and use the increased revenues to improve public services and reduce pressures on households.