Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

The truth behind our ‘dangerous’ public debt levels

By Philip Soos - posted Friday, 12 April 2013


Currently, public debt at all levels of government is tiny by historical standards and is certainly sustainable. The fashionable idea often repeated these days that rising public debt poses a risk to the economy has little substance in reality. Compared to the pre-WWII era, governments of today are a picture of fiscal responsibility and prudence, with the rise in taxation revenue helping to offset the need for using debt.

The real debt problem Robb has ignored is the colossal levels of debt that now saturates every part of the private sector. Private debt as a proportion of GDP is overwhelmingly larger than public debt. Personal debt is 9%, mortgage debt at 84%, and non-financial business debt is at 50%, for a total of 143%. A McKinsey and Co report estimates the non-banking financial sector debt at 91%.

 

Advertisement

Private debt is different to public debt. The historic record shows it is often used to speculate on assets prices, typically stocks and real estate, creating one bubble after another. Both the 1890s and 1930s depressions were caused by bursting commercial property bubbles, reflected in the sharp rise in the business debt to GDP ratios in the decade before both depressions.

A primary cause of the mid-1970s, early 1980s and early 1990s recessions were the bursting of smaller commercial and residential bubbles, financed by rising business and mortgage debt. The total private debt to GDP ratio reached a historical high of 158% in 2008, on an immense rise in household debt (mostly mortgage debt), driving the largest housing bubble on record.

Australia's history shows increases in the public debt to GDP ratio have two causes: World Wars (1914-18 and 1939-45) and responses to economic downturns caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008.

An interesting point to note is the Coalition's criticism of the rise in public debt that occurred under the Labor governments during the early 1990s and today. If the positions were reversed, we are supposed to believe Coalition governments would sit on their hands during a recession and GFC while unemployment and underutilisation increases, risking votes and consequently their power. In this scenario, Labor would then be denouncing the Coalition for being bad economic managers.

Economist Stephen Koukoulas has noted almost $40 of the $96 billion in debt inherited by the Coalition in 1996 was a leftover from the Fraser government in the early 1980s, when John Howard was treasurer. The recession during this period necessitated an expansion of government debt, though it was hypocritical for the Howard government to criticise Labor for its expansion of public debt when the Coalition acted no differently during an economic downturn.

Advertisement

That public debt has risen once again by a small margin since the onset of the GFC is not sufficient grounds to label it as excessive as Robb has. Thus, these criticisms over public debt have nothing to do with either political party being good or bad economic managers, but rather, is the result of cheap political point scoring, hoping the public doesn't do its research.

Ultimately, the focus of concern should not be upon the government's historically and internationally low position of public debt, but upon the immense burden imposed upon the Australian economy by private debt. Once the housing bubble begins to deflate and citizens reduce consumption to focus on debt repayment, the federal and state governments will have no choice but to go deeply into debt to ameliorate falling taxation revenue and higher unemployment.

There is no intrinsic problem with either public or private debt. Both need to be carefully considered to ensure efficient allocations into productive activity. Public debt is not a burden if it is used to produce an income stream to pay down the resulting interest or to enhance productivity, for instance, if invested in infrastructure, health, education, or research. It becomes a problem, however, if used to finance excessive defence spending, bank bailouts, pork-barrel projects and middle-class welfare.

The same goes for private debt. As long as debt finances production, the resulting income streams will be more than enough to pay down the debt. On the other hand, if private debt is used to speculate on stocks and real estate – as has occurred many times in the past – it simply results in a zero-sum game where speculators transfer assets among themselves without enhancing productivity.

Unfortunately, the discourse over debt is almost entirely focused upon public rather than private debt. There is no reason for concern over our relatively low federal or state debt. The real problem is in the major rise in the private debt, primarily within households. This is what commentators should be focusing upon.

  1. Pages:
  2. 1
  3. 2
  4. Page 3
  5. All

This article was first published on The Conversation.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

7 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Philip Soos is co-founder of LF Economics, co-author of Bubble Economics and a PhD candidate.

Other articles by this Author

All articles by Philip Soos

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 7 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy