Australians must curb debt dependence to protect our economic future

The global norm of relying on credit-based payments may have dire implications, and Australia is no exception. Perceived as an extra source of money rather than a financial obligation, cheap and accessible credit has bloated our ability to consume now rather than later. While it offers convenient flexibility for consumers, ranging from small everyday purchases to the substantial mortgage loan, the repercussions of household over-indebtedness are grave.

Although government debt is relatively healthy at 40% of our GDP, Australian household debt levels are 122%, second only to Switzerland.[1] The prolonged period of a low cash rate implemented by the RBA essentially allows for cheaper borrowing (recently further lowered from 1.50% to 1.25% and 1.00% in June and July respectively).[2] The RBA’s intention is to incentivise increased consumption and investment spending to maintain Australia’srelatively healthy economic growth. However, there is a concomitant consequence of cheaper borrowing rates: fertile grounds for consumers to exploit low-cost credit, and instantly but temporarily gratify our insatiable demand for goods and services. This very consequence has led to our high debt-to-income ratio of nearly 200%.[3]

Household debt, loans and debt securities (% of GDP).
Source: IMF DataMapper – Global Debt Database.

One of the economic implications of excessive debt includes weaker economic growth in the future. In order to repay our current debts amidst very low wage growth and subdued inflation,[4] we will inevitably forego future consumption and increase savings. The collapse of the housing bubble will undoubtedly exacerbate this issue. This is due to the wealth effect, which posits that changes in spending are often a consequence of changes in wealth – real or perceived. In this instance, lower consumer confidence due to falling house prices will further stifle consumption spending, thus negatively impacting future economic growth.[5]

High levels of debt alsothin outour protection against economic shocks. An upset to consumption spending and thus diminished income in general would only accentuate the struggle to repay our loans, and likely lead to a rise in default rates. This would result in adverse flow-on effects to banks and financial institutions – institutions which greatly profit from mortgages and loaning. Though the Australian Prudential Regulation Authority has urged banks to maintain their credit quality, that is, ensuring that borrowers are most likely able to repay debt,[6] over-indebtedness still exposes the economy to higher default risk rates and further worsens the impact and risk of an economic calamity.

Australia must attempt to mitigate these plausible consequences. The Australian Bankers Association has proposed small improvements in the regulation of credit within the banking industry. This includes prohibiting unpermitted credit card increases or mandatory notification when a defaulted loan is reported to a credit reporting entity.[7]

Though these minor changes can alleviate issues concerning more vulnerable customers of credit by amending the way that loans are marketed to susceptible consumers, it does not directly address the roots of over-indebtedness. The most viable means of alleviating our debt predicament is in fact within reach for each and every one of us: in short, be financially responsible! We should strive for frugality rather than resorting to credit at every turn, for this may lead each of us down a dark path.

It is indeed difficult for some of us to overcome impulse buying, or to engage blindly with the benefits of debt without considering the financial obligations attached to it. We can so conveniently rely on accessible credit in a society where getting a loan is easier than saving. However, in this self-made predicament, we are accountable not just for our own debts, but also for our country’s future economic stability.

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