Government debt is low, but private debt is high
By historical standards, Australia’s debt is still very low. The problem is private debt. As government debt drops, the private sector has to pay for more stuff, so we go into more debt.
Especially household debt
And when I say “we”, I mean households.
Especially in the lower income brackets
And guess what? Although the rich have more debt, proportionally, debt is worse the poorer you get. Take credit card debt, for instance. It’s higher as a % of income the less you earn.
Same story when you look at total debt (not just credit card). The following chart shows households with debt 3 x their income. See that it’s worse for the 2nd and 3rd quintiles than the 4th and 5th.
Sure, when debt is higher, tax tends to be higher too
Yes, if the government pays for more stuff, there tends to be higher tax:
But the rich pay more of it
Both in absolute terms…
…and as a percentage of their income
Which is exactly how tax is designed to work.
Summary
In other words, when the government talks about reducing debt, it’s the poor and middle classes that pick up the tab.
Remember that on Saturday, and don’t vote for a party that’s spinning tales about debt.
Great summary and beautifully illustrated. And welcome to the group 🙂
Thanks Iain. Much appreciated. And, yeah, looking forward to reading some great posts on the group. (If you’re reading this and you don’t know what group we’re talking about, it’s this: https://www.facebook.com/groups/520023444868205/.)
Good to hear from you again, Glenn…
Thanks Brett. I knew I could bash this one out quickly. It’s simple logic, and the evidence is clear. I’m not sure whether to be pleased about that (that it was quick to do) or demoralised (that both Liberal and Labor continue to get away with their misinformation).
Nicely done Glen. Jan
Thanks Jan. 🙂
All very nice Glen, but I don’t really see the correlation. What are you implying – that the Government should take on more debt by giving money to every household so they don’t have to go into debt to buy what they need? Kevin Rudd did that and it was great for every household.
That really did boost the economy because, most of the money given directly to households was spent. It increased consumption, which in turn led to increased employment, and of course, about 30% of that money going back to the Government in the form of taxes.
In truth, for a monetary sovereign country, such as Australia actually is, the Government can create as much credit as they need to fulfill any approved programs they wish to pursue. They don’t have to borrow a cent from anyone, and as we all know, or should know, every dollar the Government spends directly increases the savings capacity of the private sector.
As long as the Government spending is related to the productive capacity of the nation, and that capacity is related to the consumption capacity, whether externally or internally, then inflation cannot be a problem related to Government spending.
In the majority of cases, inflation is related to the improperly managed creation of private credit that is unrelated to any national productive and consumption factors. For example, credit that is created and used for speculative gambling in any market, is totally divorced from real production of goods and services that can be consumed. That’s what causes inflationary bubbles, not Government spending.
But, of course, that doesn’t absolve the government of their responsibility. The Constitution say it’s the Government’s responsibility to make the laws covering all banking practices, hence if a Government is going to let the private bankers create more than 90% of a nations money supply, then the Government has to shoulder a lot of the blame.
And who in their right mind, could possibly accept the sheer stupidity of “quantitative easing” in bailing out the badly managed banks in the hope it might, somehow, revive a sick economy?
So, tell me Glen, what is the correlation between Government debt and household debt, I can’t be the only person who is too dumb to see it??
Hi Guggzie. Thanks for your comment. It comes back to this equation:
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0(From http://www.businessinsider.com.au/the-growing-government-deficit-actually-means-savings-for-the-private-sector-2011-2?r=US&IR=T)
The explanation is a can of worms that I’m still trying to put into plain English. :-\
Actually, this is a much better article. It uses easy-to-understand examples (which I needed!) to show why a government surplus NECESSARILY means more private debt, and vice-versa.
http://www.forbes.com/sites/johntharvey/2012/07/18/why-you-should-love-government-deficits/#502a057e1351