Australia’s debt crisis in a global context; is it as bad as they say?

13 September 2018 Authored by Consultancy.com.au

A new analysis by McKinsey Global Institute puts 51 countries’ debt into perspective in terms of government, household and non-financial corporate debt. Whilst the focus for the past decade has been on the Australian Government’s budget crisis, the McKinsey & Company report shows that Australian Government debt sits at a manageable level while household debt is among the highest on the planet.

Australia’s two political parties have long vied for the title of ‘champion of the economy’. As it is commonly put, ‘Liberals earn the money and Labor spends it’, or at least that’s the simplest way to explain Australian economics. This came out at the fray during the election of Tony Abbott, who accused the opposition of severe economic mismanagement.

Abbott's rhetoric built a national narrative which associated high levels of debt with economic stagnation. The incoming Liberal Party cabinet back in 2013 said that the country was paying over 'a billion dollars a month' in interest on the national debt, crippling the economy. They again blamed this on their counterparts sitting across parliament house, saying that they inherited a “record” amount of debt from Labor.

Total Debt All Nations

Fast forward to 2016 and the government had changed their tune, after a brief sparring match with the IMF over Abbott’s comments regarding government spending and a threat to downgrade Australia’s AAA credit rating. Some debt was now good and other debt bad. Presumably, Liberal debt was good and Labor debt was bad. The political tactic to differentiate debt marked the beginning of the end of the budget blowout.

But what does returning to surplus actually mean for a nation? There are very few nations with a budget surplus. The majority either have vast natural resource reserves such as Qatar and the United Arab Emirates, are small financial centres for offshore banking e.g. Macau and the Seychelles, or are island nations including Kiribati, Tonga or Tuvalu.

Government Debt - All Nations

Almost all developed nations have government debt, including Japan, Italy, Belgium, Singapore, France, the UK and USA. Each of these nations have a government budget deficit of roughly 100% or more of annual GDP. In comparison, Australia’s government debt, according to McKinsey is 40% of GDP – on par with Norway and South Korea. The countries with the lowest levels of public debt in the rankings are Nigeria, Saudi Arabia and Russia.

Australia however is a nation in debt. Whilst the nation sits just above the global average, Australia’s debt reaches 240% of the annual GDP when taking into account all three criteria. That debt is split into 40% government debt as previously stated, 78% of non-financial corporate debt, and 122% household debt.

Australia’s household debt is the second highest in the world, only trailing Switzerland. “Having a debt is a reality for most Australian households,” stated the ABS in July this year. According to the ABS report, household debt in Australia remains constant, with 74% of Australian households holding debt. The average debt over the past 12 years to 2016 has however almost doubled, increasing from $94,100 in 2003-04 to $168,600 in 2015-16. 

Household Debt

“This growth in household debt was larger than the growth in income and assets over the same period. The mean household debt has increased by 79% in real terms since 2003-04. By comparison, the mean asset value increased by 51% and gross income by 38%,” says the ABS.

In a response to the report, John Adams, chief economist at As Good as Gold Australia states, “Such debt levels still have the ability to cause immense economic damage throughout the Australian economy." He suggests that the sentiment should be focused on reducing these high levels of household debt as opposed to focusing on the level of government debt. The level of damage which high household debt could do to the Australian economy – such as heavy defaulting on loans or the housing bubble collapsing – could have an effect that increases government spending to stabilise the country. The IMF has even warned that a growing household debt could restrict real GDP growth.

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