27 January 2016
by John Kelly

We are Governed by Idiots.

After several interest rate reductions over the past two years, a tool used by the Reserve Bank to stimulate activity, not much has happened. Business has not been prompted to invest and consumer spending is flat. So one might well ask, what’s going on behind the scenes?

One would think that with interest rates so low, both businesses and consumers would take advantage of the moment and expand. But a couple of other factors not broadly explained, give us a clue as to why this isn’t happening.

One is private debt, the other is the fear that when interest rates start to climb again, as they surely will, the ability to service those debt levels will become a major problem for consumers and companies.

Currently private debt, comprising business borrowings, home mortgages, other loans and credit cards accounts for $2.5 trillion (AUD), or 156% ratio to GDP.

Of that, $1.5 trillion is home mortgage debt, or 93% of GDP. Add $48 billion of credit card debt to that and it’s not hard to see that with flat wages growth as currently exists, in personal terms, Australian households are maxed out of any wiggle room to borrow or spend more.

By contrast, our public debt of $400 billion is barely 25% of GDP.

The other part of the private sector, the business community, is in a similar position with current debt at $822 billion. This debt is not like the debt carried by a currency issuer like the Commonwealth Government who, despite what politicians tell you, can always meet its debt obligations.

Private sector debt, if not repaid, can bring a nation to its knees, causing widespread unemployment, hardship and serious health issues across all sectors, even food shortages. And here we are, a nation with a small and easily managed public debt ignoring the precarious position private debt now threatens to place us.

In the face of this, Treasurer Scott Morrison wants to increase the GST to 15% on everything, including food. This is important to understand. The Treasurer wants to further tax the most vulnerable and indebted, not just by a further 5% but, in the case of food, a full 15%.

He thinks that as a nation, we only have a spending problem, so he wants to take more money out of circulation at one end by increasing taxes, and even more at the other end by cutting spending, something that will make it even harder for the private sector to function.

Reading between the lines of the latest Essential poll released this week, one wonders if it is the seasonal factor, or if something more substantial has happened within the electorate’s psyche.

The two party preferred result shows the Coalition at 51% and Labor at 49% and one might ask, has Malcolm Turnbull’s “I’m not Tony Abbott” attraction begun to fade or has all this talk of an increase in the GST begun to resonate.

Australia largely sat on the sidelines after 2008 when most of the western world went into an economic tailspin. Problems associated with the way the banks conducted their affairs caused people to take on debt that could not be repaid.

The reason we avoided that disaster was the quick response by the Rudd government to put money into the bank accounts of all taxpayers, the majority of whom spent that money and in the process, kept business afloat avoiding mass unemployment.

That may seem a somewhat simplistic explanation but it’s an accurate one. The 51/49% result suggests the difference between the two major parties is closer than most people think.

But even if it is out by one or two percent, say 53/47%, what it tells us is that more than half of Australian voters do not understand what their government is doing and where it is leading us. And you can safely bet that those who support the government are the ones most heavily mortgaged and maxed out on their credit cards.

Doesn’t it seem logical that if the government understood the position the private sector now finds itself, it would want to alleviate that financial stress by taking up some of the slack? That is, by spending more, not less and by taxing less not more?

This can only lead to the conclusion that we are being governed by idiots who have no idea where they are leading us.