Dick Smith Fair Go (DSFG) has published a paper on Australian Debt, written in an easy to read form – Australia’s Debt: an Honest Debate.”
The document walks through the various types of debt, and homes in on household debt as the biggest risk to our economic future, despite the political football that public debt has become. They discuss high household debt levels, the inflated housing sector, banks which are too big to fail and the risks from interest rate rises. All themes which those who follow the DFA blog will find only too familiar.
There are plenty of people who’ve bought into the frenzy, borrowed to the hilt, and given themselves little room to move in the event of a rise in interest rates.
In the 1990s when mortgage interest rates peaked at 17%, lots of typical Australians lost everything. It could happen again, and interest rates don’t need to go anywhere near as high to start causing financial strife.
Work by the Grattan Institute shows that if interest rates went up just 2 percentage points, stress levels would be the highest on record but for that 1990s 17% squeeze.
If this were to happen while wages growth remains as flat as it’s been, borrowers might not be able to afford their loan repayments. When this happens en-mass it puts our banks in dire straits.
Higher loan costs would lead to less spending, which would affect employment rates, hit the government’s budget, and plunge us into a recession.
The paper also makes the link to high migration.
There is one final aspect of Australia’s debt debate that is rarely discussed and not widely understood: the link between the federal government’s 200,000 strong ‘Big Australia’ immigration program and private debt.
The lion’s share of Australia’s export revenue comes from commodities and from Western Australia and Queensland. But the majority of Australia’s imports and indeed private debt flows to our biggest states (and cities), New South Wales (Sydney) and Victoria (Melbourne). Sydney and Melbourne also happen to be the key magnets for migrants.
Increasing the number of people via mass immigration does not materially boost Australia’s exports but does significantly increase imports (think flat screen TVs, imported cars, etc). These imports must be paid for – either by accumulating foreign debt, or by selling-off the nation’s assets. We’ve been doing both.
So basically high immigration is affecting the trade balance via more people coming in each year (mostly to Sydney and Melbourne) because of the additional imports purchased, as well as driving Australia’s external vulnerability via the build-up in non-productive private debt.
And ends in a simple conclusion:
After the claims propagated by the Howard debt truck of 1996, the county’s debt load is now the highest it has ever been.
When they are in opposition the major political parties are keen to simplify and weaponise the idea of debt in the political battle against their opponents – but when they’re in power there’s suddenly a difference between good debt and bad debt.
While it may be more politically astute to focus on the government debt (because they can more easily blame their opponents for it), it will be better for the country if the Australian people, the voters, are informed that it’s private and household debt that is most likely going to cause major problems in the future and that our record high immigration-fuelled population growth is making the problem worse.
To put it simply, we need to live within our means!
