‘The warning signs are all there’

In a speech to Parliament on Tuesday night, Mr Wilson echoed warnings from former Coalition adviser John Adams about Australia’s “alarming” rates of public and private debt spurred by record low interest rates, inflated asset prices and excessive public spending.

Mr Wilson said the upcoming Federal Budget in May must confront the “serious economic risks on the horizon and the structural imbalances in our economy”. “The warning signs are all there,” he said.

He highlighted the Reserve Bank’s record low cash rate of 1.5 per cent, pointing out that from April 1990 to September 2008, the average cash rate was 6.29 per cent. “In response to the low rates, Australians have borrowed strongly and are heavily leveraged,” he said.

“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 directed at the business sector or to other personal expenses remained stable as a proportion of GDP.”

Mr Wilson said the results of money-printing policies by central banks, known as quantitative easing, had been “particularly disastrous” in pushing up the price of stocks and real estate, benefiting those who already hold assets.

Australian household debt is at record levels.

Australian household debt is at record levels.Source:Supplied

“Quantitative easing has shamefully amounted to direct wealth transfer from the young and working to the established and well-off,” he said.

According to the RBA, Australia’s household debt as a proportion of disposable income now sits just shy of 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,” Mr Wilson said.

“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.”

He pointed to a warning earlier this month from William White, chairman of the economic and development review committee at the OECD, who in an opinion piece for the Financial Times urged policymakers to “start preparing for the next financial crisis now”.

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

Mr Wilson said the upcoming budget must cut spending “significantly” and create policy settings to progressively raise interest rates. That would require “comprehensive” tax reform introducing “broader, consistent, flatter and lower” tax rates to boost the economy.

“Money is too cheap, and it’s time we did something about it,” he said.

It comes after controversial US demographer and long-time doomsayer Harry Dent predicted Australian property prices could halve in a looming global crisis tipped to be worse than the 2008 GFC and possibly even the Great Depression.

frank.chung@news.com.au

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