Economic inequality in Canada has reached the biggest gap between the richest and poorest households since 2015.
According to a TD Bank report, high interest rates and growing household debt are squeezing middle- and lower-income families, leading to a more cautious approach to spending.
The household savings for the lowest income quintile in Canada decreased by about $30,000 between 2015 and 2023, from -$72,707 to -$102,952. Meanwhile, household savings increased by almost $100,000 in the highest income quintile, reaching almost $230,000, according to Statistics Canada.
This increase in savings came despite net income only increasing by about $28,000 in the highest income quintile between 2015 and 2023. In the lowest income quintile, income increased by less than $9,000 between the two years.
For the second- and third-income quintiles, disposable income increased at a lower rate than inflation since 2019, suggesting that their real income has decreased since pre-pandemic levels.
“Inflation on necessities forced low- and middle-income households to rely on their savings to make ends meet. This will have direct implications on future spending as these families will have fewer liquid resources to tap into,” read the report.
True North previously reported that inflation rates continue to rise month over month.
Middle-income households saw the largest increase in their debt-to-income ratio since 2019, as they became more indebted than before the pandemic.
True North previously reported that Canada has the highest debt-to-income ratio in the G7 despite households being the second wealthiest. For every dollar a Canadian household spent in 2021, they owed about $1.85 in debt. Conversely, the lowest debt-to-income ratio in the G7 is held by Italy, where residents spend about 90% of what they owe.
“Higher-income households benefited relatively more due to their larger holdings of financial assets, which were the main wealth drivers last year,” said Maria Solovieva, an economist with TD Bank and author of the report.
The disposable income of a household increased by over $200,000 for Canada’s highest income quintile between 2015 and 2023. In the lowest income quintile, this increase was only about $38,000.
“Income inequality worsened in 2023, with the largest disparity in disposable income shares between the highest and lowest income quintiles since 2015,” said Solovieva.
Despite the widening income gap, TD’s report showed that, on average, all households were better off, achieving wealth gains of 1.8-2.8%. These gains were primarily driven by the increasing value of financial assets, of which higher-income households generally have larger holdings.
The report said that real estate assets, a large portion of wealth for lower-income quintiles, depreciated due to increased mortgage debt.
Middle-income households have been the primary driver of spending that exceeded historical averages in Canada in recent years.
“With lagging growth in real incomes and high debt burdens, these families are more likely to remain liquidity-constrained in the coming years and will be forced to make more economical choices… This will create a drag on spending,” said Solovieva.
The report concluded that spending by Canada’s wealthiest households, who account for more than 50% of aggregate spending, is the nation’s only chance to keep the economy on course.
“The top 40% of the highest income earners who account for more than half of aggregate spending and possess greater liquid resources, will become a critical swing factor in determining the degree of economic resilience,” it added.
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