In 2016, the ratio of Australia’s gross household debt to income before tax passed
a staggering 200%.
This means that on average households are taking on twice as much debt in comparison
to the income they are bringing in.
This debt ratio is the second highest household debt burden in the world.
But how did Australian households become so indebted and what will this mean in the coming
months and years?
As explored in a previous video, governments running fiscal surpluses hurt the private
economy by taking money out of our pockets, leading households and businesses to rely
more on private debt to drive their spending needs.
This could be a young couple signing a mortgage or a business taking out a loan, or a teacher
becoming increasingly reliant on their credit card to service their bills.
Ultimately, by taking on more debt, the private sector is rarely in a position to save overall,
because they’re almost always paying off their loans and their credit cards.
This means that when the downturn comes, the private sector cannot lean on its savings
to pay off debt and the system buckles, leading to a recession or worse.
Even those individual households that did manage to save will face the impact of the
inevitable downturn and may struggle to keep those savings secure.
Research from the Reserve Bank of Australia shows that households that have a higher level
of debt, even if they have the same level of wealth overall, are going to have lower
levels of consumption.
In other words, they are spending less into the economy.
This is already at crisis point in Australia with average personal debt more than doubling
from $106,000 in 2001, to $350,000 in 2019.
While this private debt might be good for the banks and other lenders, it’s bad for
everyone else in the economy.
Lower private cash flow means a stagnating or declining economy, which if it is extreme
and sustained enough, can tip the economy into a recession or even a depression.
The towering private debt burden Australians have also has other disastrous effects.
Average mortgage debt among older Australians has blown out by 600 per cent since the late
1980s, and that’s after accounting for inflation.
This means that these elderly Australians are having to stay in the workforce longer
than they would choose to otherwise, which is leading to less job opportunities for everyone
else, as they’re not creating the vacancies that would be expected.
The oversupply of workers relative to employment opportunities has led to stagnant wage growth.
Wage growth is as low as it’s been since records began, and it passed this record in
2016.
So these lower wages only feed back into our reliance on more private debt, and we can
start to see how our economy has become so unstable.
So what is the solution?
Since the 1980s, Australia has been conditioned to believe that government debt is just as
dangerous for a currency-issuing government as debt is for the private sector.
With this idea etched in our collective subconscious, successive governments on both sides of the
aisle have championed surpluses under the assumption that the government needs to provision
itself for tougher economic times by spending less into the private sector and more into
paying down the government’s debt.
This assumption is deeply flawed and has seen private savings eroded exponentially.
In fact, evidence shows that the tougher economic times the government is always said to fear,
are very likely caused or exacerbated by reduced government spending in the form of self-imposed
austerity or surplus measures that strangle productivity and suppress growth.
Throughout the 19th and 20th centuries, there is a strikingly observable trend in the lead
up to depressions and recessions.
They have always been closely preceded by consecutive government surpluses and governments
trying to ‘pay down the debt’.
What we must understand is that when the government deficit spends into the economy (that is,
spends more than it takes back out in taxes) this is what drives growth and productivity,
and enables business, households and the rest of the private sector to save.
There was a time in Australia during the so-called golden age of capitalism, where Governments,
no matter their political persuasion, would pursue a full employment agenda, and go as
far as championing the size of their fiscal deficits, which would create the money they
were allowing the private sector to save through their deficit spending.
Backed by a legacy of record high employment, it was conservative Liberal Party Prime Minister
Sir Robert Menzies who once boasted in 1962 that “too few people realise that a cash
deficit of 120 million… will of itself have a most expansionary effect”.
In other words, a deficit usually equals growth.
With this in mind, we should not allow ourselves to forget that in practice, the government
taking a larger share of the debt burden has led to better outcomes for the Australian
people than austerity principles that heap the debt burden onto households, and businesses.
It is hard to say that the government is effectively serving the people when now, more than ever,
Australian families are suffering under the weight of unsustainable private debt.
The security provided by the government deficit approach enables a brighter future for Australian
households, families and businesses.