By Joe Montero
The proof is in. A personal debt bomb is ticking, and it has the potential to pull the Australian economy down the drain, if something is not done about it.
An inquiry by the Victorian government has found that in the last financial year alone, personal insolvencies increased by 7 percent. For the whole of Australia, the average was 5.6 percent. It is an Australia wide problem, where 31,859 Australians found that they cannot pay their debt.
Bankruptcies increased by 3 percent over the same time, and the number of new debt agreements by 9.1 percent.
Underlining these numbers is that th level of debt is rising over time.
Although there is increasing business related debt, it is the level of household debt that is the biggest problem. Even in the face of non-rising income and a rising cost of living, Australians continue to borrowing in order to maintain their standard of living.
The high cost of housing is significant, as is the absence of sufficient secure work. They fuel the debt and together form the trifecta that is behind the high level of income security stress that has become a major feature of Australian society.
The Reserve Bank of Australia has warned that on average, payment on mortgages will soon cost an extra $7,000 a year, as interests rates are pushed up, and as many as 51,500 are already at risk of defaulting on their mortgage over the next year. Over 30 percent of Australians are experiencing mortgage s tress.
Financial institutions are prone to play down the risk to the economy, by pointing out that Australian wealth as calculated by Australian Bureau of Statistics (ABS) has gone up by three times as much as debt. Although the level of personal debt is high, the ratio of debt to wealth looks much better, and stands at net debt is 18.9percent of Gross Domestic Product (GDP), compared with 120.9 percent for Japan and 96.9 percent for France in 2017.
This scenario distorts the real situation, because it does not differentiate the type of debt. In most other countries, the larger part is the public debt. In Australia it is household debt, which has a more direct and immediate impact on individual livelihoods.
The other missing parts of the equation are the specific nature of what is called wealth and its distribution through Australian society.
Wealth is usually defined as the abundance of possessions and money. But in the economy wide sense, there is more to it. Wealth is constantly in movement and changing hands. This is critical. Assessments by government agencies fail to take it into account, and consequently double count. Thus, for example, the money collected by the banks is considered as an increase in wealth, rather than merely a transfer of wealth.
An assumption is made that whatever increase in wealth occurs, it is distributed, more or less evenly, across society. This is blatantly false.
In 2017, one percent of the population owned more wealth than the bottom 70 percent., according to an Oxfam report. Using data from a Credit Suise report, it showed that the proportion being held by the one percent is growing, up from the 50 percent held two decades ago. This translates into growing income inequality.
The level of income inequality in Australia, compares badly with other countries in the Organisation for Economic Cooperation and Development (OECD), at the twenty second position out of thirty-five according to the Gini coefficient measure.
What does this have to do with debt? Quite lot. Although only a few years ago, some economists predicted that debt would work as a means of income distribution downwards, the exact opposite has happened. By 2012, the picture had become clear for the United States. There is every reason to believe that there has been a similar result for Australia, especially when the proportion of household debt is even higher, where the debt to income ratio was already at 212 percent in 2015, compared to 112 in the United States.
This means that Australia is particularly vulnerable. A change in fortunes will risks a greater a greater impact on the economy as is generally predicted.
We are already seeing the failure of incomes to rise, although productivity growth has been substantial.
If the economic growth of Australia is considered without factoring the financial sector, it is at a near standstill, and on the edge of contraction. Apart from telling us that very little, if any, new real wealth is being created, Australians are not spending on more consumption, because they cannot afford to. This is an economy in stagnation, and with a limited capacity to withstand a shock.
Retail sales, without including the impact of inflation, grew by just 0.3 percent in this year’s May quarter. This is in line with the trend in recent years. It is another indicator, showing that Australia is not too far from a precipice.
There is no doubt that the credit crisis is real and in urgent need of a resolution. Any solution is going to require several elements.
There must be significant income growth and restriction of the growth of precarious work.
Government expenditure on services, to both generate more disposable income and to act as a stimulus to the economy, is the only way to overcome what is a failure of the market.
Public revenues must be increased to provide the funds for investment into the future, and the only way to do this is to impose a progressive taxation system, based on capacity to pay and the closing of large scale tax evasion.
A substantial increase in government investment in housing, together with a staged elimination of the negative gearing provision, is required to deflate the property bubble and generate more affordable housing.
There must be much more regulation of financial institutions, which includes the use of credit. Those at a high risk of default through no fault of their own need to have a moratorium on payments, or other forms of relief.