I never planned to work so much in economic and financial crisis management.
I studied economics, specialising in macroeconomics and banking and finance, in the heady days of the early and mid 1980s, as many markets in Australia were opened up to domestic and foreign competition, restrictions removed, and many firms went in search of balance sheet growth. I worked at Westpac in Tokyo in 1989 as a credit analyst in one of the headiest of speculative booms, then later at the Reserve Bank in the early 1990s in the clean up of our own boom to be followed in the later 1990s by the Asian financial crisis, and then for PMs Rudd and Gillard on the global financial crisis and its aftermath from 2008 to 2013. I have worked on three crises in three decades – broadly in line with the view that there is a crisis a decade – not always, but sometimes, of your own making. And there are ways to make it better or much worse.
There is a huge literature on economic and financial crisis prevention, management and resolution. The best observation – and the one that matches my own experience – was by Rudi Dornbusch that crises start with a balance sheet problem. A crisis is most spectacular when the problem lies with bank or government balance sheets but it is still serious when it is household and business balance sheets, as the UK and Australia learnt in the early 1990s. Debt-heavy balance sheets are like sticky fly paper on economic growth, making the downturn deeper and recovery much slower because income has to be used to repair the balance sheet, which can take years, and not for spending.
I say this because the quality of Australia’s household and government sheets has deteriorated and it makes us more vulnerable in what is a more complex and risky world, even with our strong macro-prudential frameworks and institutions.
The Bank for International Settlement’s measure of Australian household debt is 123 per cent of GDP, well above the 75% average in the developed world. There is a smell in the housing market now of the Australian corporate world of the 1980s: you can’t have too many assets, balance sheets can’t be too big, and prices can only go up. There’s froth around.
In recent decades, the government’s balance sheet has been the counter to household debt. The unspoken social contract since financial deregulation in Australia has been that the government will keep its balance sheet small so that households do not have to (or at least not as much). This contract has been especially important for a country with an economy that chronically relies on foreign saving and has highly variable terms of trade.
But the ground under that compact is shifting.
Government debt in Australia is now around 40% of GDP on the BIS measure, well below the developed country average of around 110% but well up from under 10% of GDP a decade ago. The gap between the sum of government and household debt relative to GDP in Australia and other developed countries has fallen from 40 percentage points in the early 2000s to 20 percentage points now, with most of the narrowing of the gap occurring in the past half decade.
We are losing our insurance.
Based on Budget figures, it will take a couple of decades of surpluses to bring Commonwealth debt back to where it was before the global financial crisis, which means that it is most likely we will face the next crisis with a lot less ballast in the tank. Debt amplifies a negative shock. The unambiguous consequence of that is that the impact of a hit to our income and jobs will be deeper and the recovery from slowdown or recession will take longer.
I go through this argument because crises do happen fairly regularly in the world, about once a decade. The trigger could be anything from a sharp slowdown in China, jump in protectionism or trade war across the Pacific or the Atlantic, bank breakdown in Europe or China, conflict in north Asia or the Middle East.
Tackling our debt problem will help reduce our vulnerability. We have shown in the past that we can come to grips with economic problems, and we need to show the same foresight and action now.
This article is published with permission based on postscript notes prepared for, but not included in, outgoing Department of the Environment and Energy secretary Gordon de Brouwer’s farewell address to the ACT branch of Institute of Public Administration Australia in Canberra on September 6.
More coverage from de Brouwer’s address: Stop managing stakeholders and talk like normal people.