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Tuesday, 27 February 2018
Page: 2144


Mr TIM WILSON (Goldstein) (19:55): This parliament must confront the serious economic risks on our horizon and the structural imbalances in our economy. The warning signs are all there. We have alarming rates of public and private debt, low interest rates, inflated asset prices and excessive public spending. As economist John Adams argued:

Australian household debt has never been higher—now at nearly 200 per cent as a proportion of disposable income—household savings have slumped, the US share market is now in a bigger bubble than 1929, risky derivatives are now being sold in significant quantities and global debt is $US80 trillion more than it was in 2008.

Australia is completely exposed to global economic shocks. Many households are now inadvertently exposed to international markets and foreign policymakers. Last year, 12 Australian banks, six major Canadian banks and China's sovereign debt were downgraded by Moody's Investors Service. In addition, S&P has downgraded 23 small to medium Australian financial institutions at the risk of falling property prices. Debt has gone from an advanced economy problem to a global problem.

There are a number of warning signs that we need to wake up to. First, we have record low interest rates. Australia has the lowest official rates on record with the Reserve Bank of Australia's cash rate sitting at 1.5 per cent. From April 1990 to September 2008, the average RBA cash rate was 6.29 per cent. The long-term cash rate average since the last recession is around 5.2 per cent. In response to the low rates, Australians have borrowed strongly and are heavily leveraged.

Second, we have overvalued housing assets, and the expansion of cheap credit by the RBA has been thrust into the housing prices over the last 25 years. Credit to housing as a proportion of Australia's GDP rose from 21.07 per cent in 1991 to 95.33 per cent last year. Over the same period, credit which has been directed at the business sector or to other personal expenses remained stable as a proportion of GDP. The influence of American quantitative easing has been particularly disastrous. As Rupert Murdoch said in his 2014 speech to G20 finance ministers:

Quantitative easing increased the price of assets, such as stocks and real estate, and that helped first and foremost those who already have assets.

Quantitative easing has shamefully amounted to direct wealth transfer from the young and working to the established and well-off.

Third, we have record Australian household debt. As RBA Governor Philip Lowe stated last year, 'a continuing source of uncertainty is the outlook for household consumption' as a consequence of household debt. Unsurprisingly, households with mortgages are the most likely to be over-indebted, particularly those with investment property finance. The average household mortgage debt to income ratio rose from around 120 per cent in 2012 to 140 per cent at the end of 2017. Interest-only loans have skyrocketed over recent years. By early 2017, 40 per cent of the debt did not require principal repayments—though we need to acknowledge that regulators have made an effort to address this. This isn't just a property investor problem; it also includes owner-occupiers. The RBA puts Australia's household debt as a proportion of disposable income at a record of almost 200 per cent. Household debt is at a record high and now surpasses the levels of the 1880s and the 1920s—the two periods which preceded the two great economic depressions experienced in Australian history.

Fourth, record net Australian foreign debt is sitting at just shy of $1 trillion, or more than 56 per cent of GDP. As a country, that leaves us dangerously exposed, particularly against a global backdrop of huge amounts of debt across the United States and China.

In short, things are hotting up. The reality is our current policy settings are not adequate to deal with the economic downturn that may come. William White, the chair of the Economic and Development Review Committee of the OECD, wrote in the Financial Times:

Continuing on the current monetary path is ineffective and increasingly dangerous. But any reversal also involves great risks. It follows that the odds of another crisis blowing up continue to rise.

The forthcoming budget provides us with an opportunity for reform. First, we need to cut spending—and we need to cut it very significantly, because it is being driven by an unsustainable position in the budget into the future, particularly as a consequence of the ageing population. Second, we need to create the policy settings to progressively increase interest rates. I agree with former Treasurer Peter Costello, who said last year:

We have to normalise interest rates, and the longer you leave it the more unbalanced your economy is going to get.

Money is too cheap, and it's time we did something about it around the policy framework.

Critical to that is the third. We need comprehensive tax reform—broader, consistent, flatter, lower tax rates, to shift the economy into gear and to make us more productive. We also need tax reform to shift the burden which predominantly falls on younger Australians and working people, so that we can confront the issues ahead of us and so that we can have an economy that can deliver for the Australian people. As former US President Ronald Reagan said:

If not now, when? If not us, who?

House adjourned at 20:00