The IMF recently cheered us up with the news that New Zealand is one of the best countries in the world when it comes to fiscal prudence. Sure our government debt levels have risen recently as surpluses have turned to deficits, but compared with most other nations in the world, we are not too bad.
(T)he IMF staff report released yesterday found New Zealand had the second smallest government debt out of the 23 advanced economies it analysed, suggesting the country's budget would be well-placed to deal with future shocks.
The Washington-based institution examined a country's "debt limit" based on its historical track record and its current debt level, which it describes as the "fiscal space".
"Among the advanced economies, Australia, Denmark, Korea, New Zealand and Norway generally have the most fiscal space to deal with unexpected shocks," the report said.
But the picture darkens when personal debt is taken into account. In macro-economics parlance there are three segments making up national debt: government (or fiscal); corporate; and personal. Relatively speaking NZ government debt is not too bad. Corporate balance sheets also are relatively strong, with debt levels generally quite constrained. But personal debt exposure is another story.
The NZIER has reported that on average Kiwis are spending $45 per week less than they were: apparently it is going into reducing house mortgages and other personal debts. This is a good sign, although as the NZIER points out, it is not so positive for retailers. Bernard Hickey informs us that NZ household debt to disposable income hit an extravagant peak of 159% in 2008. It has since come back down somewhat--although we are a long way from being out of the danger zone.
New Zealand's household debt to disposable income hit a peak of 159 per cent in the fourth quarter of 2008, right at the time of the Global Financial Crisis. Since then it has been trending down as New Zealanders chose either not to take on any more debt or chose to repay debt.
Reserve Bank figures show many New Zealanders either left their mortgage repayments at relatively high levels, even though interest rates had fallen, or 'downsized' their houses and repaid debt. Leverage is reducing. It has a long way to get back to 'normal' levels of around 100 per cent, which is widely seen as the sustainable maximum for any government or household.
To get back to around 100 per cent, New Zealand's household sector would have to repay around NZ$45 billion of debt over the next five to seven years.
The Reserve Bank has a graphic of the rapid increase in household debt over the past twenty years which is worth a thousand words.
Households moved from debt levels of 60% as a percentage of disposable income in 1991 to 160% in 2008. This is dangerous territory.
The question is, why have household debt levels risen so rapidly and so dangerously? We believe there have been at least three fundamental drivers. Firstly, a steady diet of media pablum from the US and the UK, coupled with New Zealanders travelling in those countries, has painted the picture of the "good life" and what "living the dream" really means. New Zealanders living standard expectations rose completely out of step with our economic productivity.
Secondly, a deep, pervasive sense of entitlement. This is now so deeply ingrained in New Zealand culture that it will take over thirty years to eradicate it and replace it with something more honourable and civilized.
Thirdly, buttressing this ingrained sense of entitlement is the belief that if one falls short on the living standards to which one is entitled then "others" must provide. In some places this is called socialism. In others, envy. Expecting others to provide what we believe we are entitled to is found in almost every segment of society. In government circles it is manifested in our national defence doctrine: we expect that other nations will come to defend us if we face any military threat. The government actively encourages the idea that it will organise society so that the "rich" will sustain the "poor"--thereby encouraging everyone to look to others as a way to get ahead. Business constantly looks to government for regulation, help, assistance, and support so that it can prosper in the way to which believes it is entitled. Employees get very restive when jobs are not available: what is wrong with a society that does not have on-tap the position to which I am entitled by dint of study, qualifications, or sheer existence?
But governments can only provide so much. When our window on the world painted a picture of a living standard significantly beyond our own, and government failed to deliver the "good life" as we now defined it and measured it in comparison with other countries, then the next-best application of the "others" doctrine undergirding our sense of entitlement was to borrow. Debt became the short cut to realising our perceived lifestyle entitlements. So New Zealand households borrowed way beyond their abilities to service and repay out of disposable income in the nineties and noughties.
The follies and dangers of this course was disguised by the fact that almost everybody was doing it. It was not just the effect of a herd instinct; it was also that a pyrrhic perception of wealth was conjured up due to borrowed money being translated into rising house prices, which sustained an appearance of wealth. Borrowing seemed like a no-risk path to wealth. Borrowing to buy houses which inevitably and constantly increase in price gave the appearance of prosperity--for a time. But no longer.
Is our household de-leveraging permanent? Not at all. The ethic of entitlement is as strong as ever. The implicit envy of the "others" doctrine is unchanged. Successive socialist governments will ensure that it stays n the forefront. "Normal service" will resume shortly. We expect that within two or three years we will return to the borrowing-to-consume lifestyle with a vengeance. Households will feel the need to make up for lost time. The only thing to prevent this, in our view, is for the rest of the world to realise just how much our economy is on a knife-edge. If overseas savers decide to fund us no longer and our currency plunges to more rational levels, then interest rates will rise substantially and a consumption or lifestyle recession with a big "R" will be upon us.
Our pick would be for the former outcome. But the wise will be warned. They will decline, this time, to join the herd and will continue to reduce debt as fast as they can. As they said after the Christchurch earthquake, sooner or later the big one will hit.
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