Banks are now starting to lift their fixed interest rates in anticipation of inflation pushing variable rates up in the years ahead. Because responsible lending laws were eased in the wake of the pandemic, more Australians are loading up on debt than policy makers should be comfortable with. This is one of the factors fuelling the housing bubble.
The primary goal of most governments during the pandemic has been to boost economic growth rather than worry about unsustainable debt. However, the years ahead may see policy makers rue their decision to prioritise economic growth ahead of responsible lending and borrowing.
Perhaps the policy levers never should have been seen as binary?
To be sure, governments are uniquely placed to load up on debt relatively safely, making comparisons with individuals less useful. Im short it’s like comparing apples with oranges. National economies are everlasting. That is, they are eternally living. Unlike individuals they don’t need to plan for a day when their earning capacity ends. New generations emerge to pay new taxes. Individuals, in contrast, have primary earning years ahead of retirement, and with the ageing of the population more older people are living longer into retirement. Relying on the state or savings to do so.
That increases the importance of saving for ones retirement. Interestingly if interest rates do tick upwards, that is a good thing for the generations of retirees living off of savings at that time.
But for those of us still working, with debt, rising inflation means rising interest rates, which means a bigger squeeze on home finances. That in turn can reduce the capacity of generations of working Australians to save for their retirement. And even though governments are eternally living, the debt burden being taken on by governments around the world is such that higher interest rates might make servicing interest payments on government bonds too much to bear.
Which is just one reason why the government is trying to lock in longer term government bonds each time it borrows. Thus locking in lower interest rates for longer as a protection against future inflation.
This all needs to be remembered as we watch our government continue to use debt to fund all manner of recurrent spending. The sooner a political motive to bring the budget back under control is realised the better off we will be in the long term.
It is a national conversation that needs to start.
Yes, by world standards Australia’s economy is doing very well. The AAA credit rating is secure, unemployment is low and falling further. The latest GDP growth figures are exceptional. But all of the spending by government designed to prop up a Covid ravaged economy is also fuelling inflation. A day of reckoning on that front might still be years away, but it is coming.
Peter van Onselen is a professor of politics and public policy at the University of Western Australia and Griffith University.
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The early signs of inflation on the horizon should worry anyone loaded up with debt. Homeowners, investors, indeed governments the world over need to consider what they might do if interest rates do head north, because that day is coming.