Saturday, 4 May 2013

Bliss is a $10k Mortgage

There's been a lot of chatter on twitter recently about net government debt being quite small internationally, and at 10%, that is indeed correct.

Judtith Sloan is keen to point out that it's not just the quantity of debt that matters, but the quality.  That is, what that debt has bought, which is also correct (think credit card debt vs a mortgage).  I won't go in to that debate here.

While the debt debate continues, a much more interesting meme has appeared - the comaprison of government debt to an average householders mortgage, and it is that that I would like to dig in to a bit, as it seems to have gained more traction than either of the ideas above.

Here's a typical example of an infographic showing this (courtesy of the ACTU)
As far as analogies are concerned, its got some real flaws.  Let's dig in to it.

1. Net Debt vs Gross Debt

The most obvious thing here is that someone who has a $10,000 mortgage also owns a house. That is, their assets are going to be much larger than their debts, by a significant amount. The government debt is net debt, that is, it is not offset by assets. Perhaps a better analogy would be the fellow on $100k a year with a $10k credit card debt (but see below).
On top of that, the government isn't even spending within their income.  A further improvement of the analogy would be the fellow on $100k, with a $10k credit card debt, and spends more than he earns each month.  Even still, I'm not happy with this analogy as the government is not a person.

2. Government Income

GDP is NOT the government income.  It is the estimated total value of goods and services produced by the nation over a year.  The government's income is much less than that, something in the order of 24% of GDP.  A better comparison for our debt, then, would be10% of (24% of GDP), which is closer to 58% of the government's income each year.

3. Household Income

There's a bit of a fudge here, too.  Unlike the government, the average household has to pay tax, which reduces the money available to pay back loans, living expenses etc.  It's hard to determine exactly how much tax without knowing the mix of incomes that makes up the $100k, but a single person earning $100k, would pay approximately $26,500 in income tax and Medicare levy, leaving $73,500.

A Nice Little Mortgage

Still, a mortgage equal to 58% of $73,500, (about $43,000) would be the envy of most people.  But is even this anolgy reasonable?
The underlying assumption in the argument presented by the ACTU (and others) is that mortgages and government debt can actually be compared on a like for like basis.  How well does that assumption stack up?

An Average Mortgage

The typical new Aussie household mortgage these days can be anything up to 7 times the (pre-tax) income of a household, historically quite a large mortgage, and can be difficult to manage.  Let's consider a more typical 3.5 times (pre-tax) income.
By implying that a mortgage and government debt are comparable, those making the comparison are implying that a net government debt of 3.5 times the government's income of 24% of GDP is quite an acceptable level.
Putting this calculation in terms of debt as a % of GDP, we come to 84% of GDP, close to the net public debt of the UK government, and more than that of the US government!
So, we know what the ACTU's thoughts are on this, happy to misinform for purely political reasons.
What about the thoughts of a senior govenrment minister , who also happens to have a PhD in Economics?  Surely we could trust them to be more honest, yes?