Abbott's not-so-golden years

If Tony Abbott wants to replicate the growth John Howard's prime ministership saw, he'll need to let private debt rise: to a 265 per cent private debt-to-GDP ratio if he spends as long in office as Howard did.

Tony Abbott recently pledged himself to restore the "Golden Age of Prosperity” that Australia enjoyed under John Howard’s prime ministership:

"That's why the longer this government lasts, the better the Howard government looks and that's why the Howard government now looks like it created a golden age of prosperity, which is lost," Abbott said in a speech to the South Australian Liberal Party.

Lost too is the Golden Age of Prosperity once enjoyed by the Rapanui people of Easter Island, which ended as the last trees were cut down. The surviving Rapanuians abandoned the Moai (monolithic ancestor statues) for the birds – literally. No-one contemplated a return to the halcyon days of erecting Malcolm Fraser lookalikes, because without the trees, it simply wasn’t possible.

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But can Australia under Abbott go "back to the future”, and reclaim those Glory Days? Yes We Can– if, that is, Abbott can persuade us to start borrowing again like there’s no tomorrow, as we did under John Howard.

Political rhetoric has always focused on public debt, and on that front John Howard’s greatest hit was that he halved Australia’s public debt, while either side of him, Labor governments let that debt blow out.

Figure 1
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As figure one shows, that’s true – but it’s not the whole story. Yes, public debt did fall under Howard — but the fall actually began in 1994, during the last two years of the Keating government. However this is not a plug for Paul Keating, because the periods of falling government debt under both Keating and Howard had something else in common: a growth in private debt that dwarfed the fall in government debt. While Howard and Peter Costello kept the public eye focused on the $20 billion reduction in public debt they achieved over their term, private debt increased by $1.3 trillion.

GDP during the Howard Golden Age increased too, but by only $600 billion, less than half as much as the increase in private debt.

Again, this is not to praise Labor, since Keating held the reins in 1993 when the private debt bubble took off. But Howard had them in 1999 when Australia’s private debt exceeded its GDP for the first time in its history.

Figure 2

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By the time Kevin Rudd had wrenched the reins from Howard, private debt had grown to 156 per cent of GDP. The Golden Age ended almost as soon as Rudd took over – Kevin-24/7 had bad timing, as well as bad time management – because that growth of debt stopped, almost as suddenly as the last tree on Easter Island fell.

Figure 3

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That sudden plunge in the growth rate of private debt (which was mirrored around the world, and far more severe in the US) is what ushered in the global financial crisis. It was also the cause of the increase in government debt under Rudd, as he – following Ken Henry’s "go early, go hard, go households” advice to the letter – countered the dramatic drop in private spending with an enormous rise in government debt.

Well, it looks enormous in figure one, but compared to the extent to which the growth in private debt tanked at the same time, the increase in public debt was relatively trivial (see figure four).

Figure 4

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But it was enough – along with some help from the First Home Vendors Boost, and the backwash from China’s massive stimulus – to stop aggregate demand plunging sufficiently to cause a recession. And now that Australia’s short memories have forgotten 'The Recession We Never Had', private debt is once again rising faster than GDP (see figure three).

Can we keep it up, and borrow enough to make Tony Abbott into the Liberal Party’s Golden Boy Mark III (let’s not forget John Howard’s hero Sir Robert Menzies)? To paraphrase Tony, "if you want John Howard’s economic performance, you have to have John Howard’s private debt performance”: to sustain Howard-like growth in aggregate demand, we’d need to emulate the rate of growth of private debt that occurred on his watch.

If we did, then as figure five shows, private debt-to-GDP ratio as recorded by the Reserve Bank would be 265 per cent by the time Tony had spent as long as prime minister as did Howard.

Figure 5

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Is that possible? Well there are clearly countries that have more private debt relative to their GDPs than Australia – the US for example, which peaked at 303 per cent of GDP. On the other hand, if Morgan Stanley’s data – which explicitly includes financial sector debt, unlike the RBA’s Table D02 – is correct, our debt ratio now is already 277 per cent, so we don’t have the debt headroom that Tony needs.

The question is, who would take that extra debt on? It can’t be the government of course – Tony’s ambition is to emulate John in this (and many other) respects, and slash government debt. The historical record implies that business can’t be relied on here – after twenty five years of see-sawing, business debt is the same percentage of GDP as it was back in on Black Tuesday 1987 (see figure six). Personal debt has also gone nowhere: it was roughly 12 per cent of GDP in the late 1980s, and it is 9.5 per cent now.

The only type of debt that had the wherewithal to grow during Howard’s day was mortgage debt, which rose from 20 per cent of GDP to 81 per cent by the time Howard’s End came about.

Figure 6

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Can households do it again? Well, stranger things have happened I suppose – as a wag once said, the difference between fact and fiction is that fiction follows a plot. But if it did, households would be carrying mortgage debt equivalent to 235 per cent of GDP the day that Tony tied with John as Australia’s second longest serving prime minister.

Figure 7

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Frankly, I think that ambition truly is for the birds. Maybe we’d be better off if we emulated the Rapanuians and founded a whole new cult, rather than continuing to worship at the Altar of Bricks and Mortar.

Steve Keen is a professor of economics and finance at the University of Western Sydney and author of Debunking Economics and the blog Debtwatch.