Debtwatch gets a mention in Parliament

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It’s not yet the main top­ic of debate between Lib­er­al and Labor, but some of the argu­ments in Debt­watch have at least made their way into Hansard cour­tesy of a speech by Lau­rie Fer­gu­son. The full extract from the speech is shown below.

This makes a mock­ery of the claim by the Prime Min­is­ter that we have nev­er been bet­ter off. Whilst the Howard gov­ern­ment crows about the suc­cess in the econ­o­my, which was large­ly inher­it­ed from Labor and fuelled by the raw mate­ri­als demands of India and Chi­na, there is an alter­na­tive real­i­ty of an out-of-con­trol per­son­al debt spi­ral. Steve Keen from the Uni­ver­si­ty of West­ern Syd­ney writes:

Australia’s house­hold debt to GDP ratio has risen from 57 per cent of GDP in 2001 to over 86 per cent in 2005 or five fold from the mid 1970s. With the excep­tion of a dip in 1985–87 peri­od, when the Stock Mar­ket was the focus of a spec­u­la­tive fren­zy in Aus­tralia, the hous­ing debt to GDP ratio has been ris­ing expo­nen­tial­ly for at least 25 years. The focus of RBA con­cern today is there­fore on bor­row­ing by house­holds.

Aus­tralian house­hold debt was five and a half times high­er in 2005 than it was in 1990. The Amer­i­can growth rate of eight per cent trans­lates into 3.2 times as much house­hold debt in 2005 as in 1990.

So we see that the sit­u­a­tion of Aus­tralia has marked­ly wors­ened as com­pared with the Unit­ed States. Fur­ther­more, where­as in the US debt weighs heav­i­ly on house­holds and busi­ness­es, in Aus­tralia the pres­sure of debt is being exert­ed pre­dom­i­nant­ly on house­holds. A potent indi­ca­tor of the lev­el of finan­cial stress now being felt by Aus­tralian house­holds is a ratio to house­hold dis­pos­able after-tax income. This ratio has more than tripled since 1981. The expla­na­tion that this is due to falling inter­est rates ceased being viable about two years ago.

The rise in debt has eclipsed the impact of gen­er­al­ly low­er inter­est rates since the ear­ly 1990s so that pay­ments by house­holds now con­sume more of house­hold dis­pos­able income than they did when stan­dard home loan rates peeked at 17 per cent in 1989, even though the aver­age vari­able rate is now 7.5 per cent.

Since its elec­tion, the Howard gov­ern­ment has presided over an almost three­fold increase in per­son­al house­hold debt. The total per­son­al debt in Aus­tralia has increased from about $46 bil­lion in Jan­u­ary 1996 to a stag­ger­ing $133 bil­lion in Novem­ber 2006. The Insol­ven­cy and Trustee Ser­vice Aus­tralia reports that the Decem­ber 2006 quar­ter saw a blow-out in bank­rupt­cy num­bers in all states except West­ern Aus­tralia.

This includes a 30 per cent increase on the cor­re­spond­ing 2005-06 peri­od in New South Wales and almost 28 per cent in Vic­to­ria. Steve Keen’s analy­sis of ris­ing per­son­al house­hold debt is under­pinned by AFFCRA’s analy­sis show­ing that wide­spread use of cred­it cards for house­hold and dis­cre­tionary spend­ing, dri­ven by aggres­sive indus­try sell­ing prac­tices, has led to unhealthy finan­cial think­ing where card facil­i­ties are con­sid­ered in the con­text of avail­able cred­it rather than actu­al debt lia­bil­i­ty. Jan Pent­land writes:

In the cur­rent con­sumerist hege­mo­ny and the increas­ing gap between the haves and have nots, where mate­r­i­al goods can define self worth, eas­i­ly avail­able cred­it has been a trap for many clients of finan­cial coun­sel­lors. This bud­get clear­ly fails Aus­tralian con­sumers. The government’s pri­or­i­ties are twist­ed. The gov­ern­ment is pour­ing mil­lions of dol­lars into finan­cial lit­er­a­cy cam­paigns when it is clear indus­try is already doing so. Where mon­ey is scarce it should be direct­ed where it is most urgent­ly need­ed. Finan­cial coun­sel­lors are being increas­ing­ly called upon to deliv­er ser­vices to grad­u­al­ly more des­per­ate Aus­tralian con­sumers. These and many mil­lions of oth­er Aus­tralian con­sumers need finan­cial coun­selling around keep­ing out of debt. They do not need coun­selling on how to get rich.”

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.