Debt's pall over the Lucky Country

Australian unemployment is low, the currency is strong, rates are falling and growth is solid – but excessive debt levels are threatening everything.

Can there ever have been a country in such good shape as ours that’s as miserable as Australia is?

The government is in disarray: unpopular, turning on itself, throwing good sense out of the coach as if pursued by a pack of wolves.

Businesses are laying off staff and whingeing about everything. Consumers are stressed, not spending, turning on the government and the banks.

Yet unemployment is low, the currency is strong, interest rates are coming down, national savings are bulging, economic growth is solid and there’s a mining boom on.

What’s going on? Why is Australia in such a wretched state of mind despite being in such good physical shape?

Well of course, not everyone is miserable. I met a dozen or so entrepreneurs and innovators yesterday and they were all feeling great. And it’s certainly true that not everything is roses: there is a painful transition taking place because of the high exchange rate, which is putting pressure on manufacturing, tourism and retailing (because of online shopping from overseas).

And there’s plenty of doom and gloom to depress us on the foreign news bulletins: the tragedy of Greece, Europe in recession, Syria’s president killing his citizens, Israel and Iran facing off, the hollow mendacity of America’s presidential election, monks immolating themselves in China.

But still, are we really going to sack another prime minister via the opinion polls? It looks like it.

I’ve been wondering for a while whether there is any underlying problem in this country, or just lots of little things with the exchange rate among the biggest of them.

The only thing that makes sense as a single cause of Australia’s misery is excessive debt.

Australia’s household debt as a percentage of disposable income has been stuck at 150 per cent – the highest in the world – for about five years. Twenty years ago it was 50 per cent. In other countries it has come down, albeit painfully. Interest paid as a percentage of income has doubled in 20 years.

And the underlying cause of this is the high price of land in Australia. It is one of the mostly sparsely populated nations on earth, yet the cost of land is among the highest in the world, crippling the citizens with massive debts and leading to hugely profitable banks.

The combination of rising population, a lack of arable land and artificial restrictions on residential development in cities has led to a six-fold rise in the median house price since 1986, from $93,000 to $550,000 now. Over the same period, average household incomes have risen 3.5 times.

It’s true, as ANZ Bank’s economists pointed out in a recent paper, that mortgage rates have halved over the same period, but that doesn’t account for the psychological impact of debt that is 1.5 times income, on average, nor, more importantly, the fact that averages like these imply that many people are above average, and deep in the poo.

The result is that it’s a major problem to means test the 30 per cent health insurance rebate so that individuals earning $124,000 and families on $248,000 won’t get any help. All of a sudden lots of people on that sort of money are battlers now. Why? Because of debt.

Successive governments have been using the tax proceeds of the mining boom to reduce personal income tax rates, to the dismay of economists and rational commentators. But the politicians have simply been responding to the insistent demands of the electorate to do that.

Other countries in Australia’s position build massive sovereign wealth funds. Australia has a relatively small one (the Future Fund) with a specific purpose: to provide for unfunded public service pensions.

Even if they had wanted to, Australia’s politicians couldn’t have done that because of the pressure to reduce personal taxes and not increase the consumption tax and not impose death duties or other wealth taxes.

And now there is widespread terror that house prices will eventually collapse and leave millions with no equity, as happened in the United States. As a result the savings rate has skyrocketed and consumers are on strike, putting money aside for Armageddon.

Debt is making everyone grumpy and hypersensitive. When ANZ put up its mortgage rate by just 6 basis points last week – 0.06 per cent for heaven’s sake! – there was national outrage and attacks in parliament.

The government’s success in dealing with the GFC and holding unemployment at 5.2 per cent is nothing compared to its failure to bring down mortgage rates.

Follow @AlanKohler on Twitter

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