Saving a nation from debt

In the western world, fuelled by asset price appreciation and particularly in relation to real estate, an unhealthy appetite gained momentum over many decades for credit as householders leveraged that increased equity in their homes by borrowing for both current consumption and investment. Lending institutions became less concerned about the ability of borrowers to repay their loan, whether it is housing, consumer or commercially related. The idea you should have sufficient deposit to support any loan application and had demonstrated a prior saving ability sufficient to reasonably repay the loan almost disappeared.
Hence, in the period leading up to the global financial crisis, western countries collectively reduced their savings to zero and in some cases it become negative. Given the aftermath of the GFC there has been a mild reversal to saving, but this has been thwarted by the prolonged use of quantitative easing, which acts as disincentive to savers with negative distortions to asset price inflation.

 

But private debt in Australia remains at very high levels which should demand a national narrative to explain the future risks, such as the adverse impact on overburdened indebted households, and lending institutions once interest rates revert to higher long term median rates. What is missing is an understanding of how voluntary real private savings are such a critical funding source of sustainable capital to achieve advancements in productivity and higher income.

In Australia, we have now come to the “end” as far as any further options are available for households and businesses’ to borrow more to sustain their living standards. This was previously made possible due to increased leverages in the provisions of debt. What sustained the system and “bought” time was increases in debt, often inappropriately funding consumption, with typically the source of this increase in debt levels from a lowering of deposits in housing, counting the double income for couples to increase borrowing capacity and borrowing from asset price inflation. This debt culture was further fuelled by poor policy which is “anti-saving”.   

Hence what is needed is incentives for savers and to end the present anti-saving policies. One of the distortions of the Australian economy is “negative gearing “where an investor borrowings interest cost exceeds gross income of the asset acquired. The favourable tax allowance afforded negative gearing not only reduces tax income but distorts the allocation of capital and results in inflated asset prices, particularly in property, to be kept artificiality high.

Putting more emphasis on savings requires a fundamental change in policy mix, to ensure there are tax incentives for savers and to phase out negative gearing over time. There is no reason why, over several decades ahead, we could not reduce private debts by 50%, and encourage more investment in long term infrastructure bonds and with less spending on consumption. In this regard government debt should increase, with the issuance of new securities but offset by the savings of the private savers who invest in national assets that deliver future productivity gains in excess of the interest rates paid to savers.