The rising federal budget deficits have put Australia’s national debt problem back in the spotlight. Wherever we look, from personal to government debt, things only seem to be getting worse.
Today, total government debt stands at a staggering $400 billion. Household debt amounts to an even more eye-watering $1.6 trillion — the total size of Australia’s GDP.
So has it always been this bad? Sadly, it hasn’t. We’ve seen better days.
Both household and government debt levels have crept up over time, ramping up significantly in the last decade. Between 2005 and 2015, total national debt has doubled.
In a new report, Bankwest Curtin Economics Centre (BCEC) highlights just how badly things have progressed in recent decades.
Over the past 25 years, Australian households have tripled their total debts. In 1990, household debt was valued at roughly six months of annual income. That is, six months of household wages would be required to pay off all existing debt at that time.
Today, it would take the average household 18 months to pay off all outstanding debt. Remember, that’s before household’s put any food in their mouths. It’s scary to think about.
Just as concerning is the fact that BCEC’s research found that the debt-to-income ratio was worst among households approaching retirement. Aussie pensioners are taking on hefty debts into their golden years. That’s especially worrying, what with pensions paling in comparison to typical working wages.
So who’s to blame for all this? Is it down to greedy consumers living beyond their means? Or is it a reflection of the broader economy and the way it’s been (mis)managed? The answer is a bit of a mixed bag.
Some people certainly do overstretch their incomes, falling into a self-created debt trap. But it’s unfair to tar everyone with the same brush. Many Australian’s overextend themselves as a matter of necessity. How can we blame them? If we look at the fundamentals of the economy, it’s easy to see why households may feel desperate in this climate.
There are the very real issues of the high unemployment and low wage growth weighing on household wealth. Unemployment was 4% just prior to the GFC. That was the lowest level it had been in over 30 years. Since then however it’s been on an upward curve, rising to 6.1% today.
Wage growth is also a major problem adding to household debt. In the year to February 2015, wages grew by a meagre 2.5%. That’s the lowest rate on record dating back to 1997. And it means that households are increasingly relying on debt to afford the goods they need.
Ultimately, households are being squeezed at the same time as incomes stagnate and unemployment rises. They either have the choice to fold under those debts, or take on more to maintain a decent standard of living. It’s hard to blame them for opting for the latter.
Is Australia’s appetite for housing to blame for rising debt levels?
The BCEC took a relatively cynical view of homeownership and its relationship to household debt. They explain:
‘There’s a concentration of asset accumulation for all households on property. [Even with rising prices] that does expose one to risks if [the housing market] changes. There does seem to be a focus on property. But that focus is not something that is desirable in either the short or the long term’.
Is the infatuation with property really to blame on household debt? Again, it’s difficult to make general conclusions about this. After all, the property market has been equally crucial in raising household wealth in the past decade too. With the economy failing to provide a lift to household wealth, the rising property market is critical to making people feel richer.
But this emphasis on housing doesn’t really paint the whole picture. As The Daily Reckoning’s Greg Canavan explains, it’s more complicated than that. He’s been studying how and why Australia’s debt levels have managed to spiral so badly out of control. Greg explains:
‘[Household] net worth has actually fallen since the stock market peak in 2008. Even the recent recovery in house prices hasn’t been enough to make Australians wealthier on paper that they were five years ago.’
Instead of housing, Greg places the blame on missed opportunities, and government mismanagement.
The mining boom, at its peak, was the driving force behind most of the nation’s prosperity. But as Greg says, not all the proceeds of this lucrative trade made their way into Australian coffers. Instead, large percentages of resource revenues were diverted into foreign hands.
Of the earnings that did end up as government tax revenue, the government has made a mess of savings, foolishly believing the boom would last forever.
That partly explains why household liabilities roughly doubled between 2000 and 2015. The mining boom simply failed to trickle down to households to the extent that it may otherwise have. It should have provided households far more breathing room to prevent debt levels from rising so quickly.
So where do this growing household (and government) debt leave us? It’s one of the most pressing issues facing the nation in decades. But increasingly it appears as if there’s no real answer to it. At least nothing that doesn’t require taking on more debt.
As one of Australia’s leading investment analysts, Greg knows that we can only get by with rising debt levels for so long. Unfortunately, as Greg says, we’ve reached the end of the road.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why Australia faces an imminent recession this year. Unsurprisingly, rising household and government debt is a major reason for the coming meltdown.
But there’s always a silver lining for those who can plan ahead of time. Greg also wants to show how you can safeguard your wealth. He’ll take you through the steps to protect you and your family from the fallout of the recession. To find out how to download his free report right now, click here.
Contributor, The Daily Reckoning