Households owe more
Rising household debt has been one of the most enduring and widespread economic trends of the past 30 years. Evidence for G7 countries presented in Table 4-2 suggests that this phenomenon began around 1975. Before this date, the ratio of household debt to annual disposable income within countries remained fairly stable over time and rarely rose above 75%. By the year 2000, household debt in Canada, Germany, the UK and the USA was equivalent to at least 12 months’ income, and in Japan it equated to 15 months’ income. Household debt in France and Italy started from a much lower base, but the gap narrowed considerably between 1980 and 2000, with the debt to income ratio approximately doubling in France and rising even faster in Italy.
In most G7 countries, these trends continued until the financial crisis, and then moderated or reversed. When the debt to income ratio peaked, it was two times higher than the level in the early 1980s in Canada, France and the USA, it was three times higher than the earlier level in the UK, and ten times higher in Italy. In contrast, the debt-income ratio in Japan has been fairly flat since 1990 and around 2000, it even began to decline slightly in Germany and Japan. While the financial crisis prompted major debt reductions in the UK and the USA after 2007, the trend towards greater indebtedness has carried on regardless in Canada and Italy. Given its history and reputation for prudent economic policies, it is worth noting that Canada currently has the highest household debt-income ratio among G7 countries.
Estimates of household debt are available for all countries since the year 2000.
Our calculations suggest that the recent experience of G7 countries was widely replicated elsewhere. Adjusted for exchange rate fluctuations, Table 4-3 shows that total global household debt grew by 8% per annum in 2000–07, and then flattened out. For the entire period 2000–12, aggregate debt rose by 81%, equivalent to 5% growth per annum. A rising global population accounts for part of the increase: debt per adult grew just 45% for the entire period. Currency appreciation against the US dollar has tended to operate in the opposite direction. At prevailing exchange rates, total household debt more than doubled before the financial crisis, rising from USD 18.8 trillion in 2000 to 38.8 trillion in 2007, before flattening out. The current level is USD 39.4 trillion.
Regional patterns of household debt
Table 4-3 indicates that the regional composition of household debt is dominated by North America, Europe and Asia-Pacific countries (excluding China and India), which together account for 94% of the global total. Latin America and Africa, along with China and India, have low levels of aggregate debt and rank even lower in terms of debt per adult. For example, in 2012, the average figure is USD 427 for Africa and USD 162 for India compared to USD 57,063 for North America. However, the pattern is slowly changing. Based on constant exchange rates, debt per adult grew by 150% in China and Africa between 2000 and 2012, by 200% in Latin America, and by almost 250% in India, compared to 45% for the world as a whole and just 7% for the Asia-Pacific region.
Household debt per adult in developed countries
Average debt per adult shows even greater variation across countries than average income or average wealth. The highest levels of debt per adult are found in developed countries with well functioning institutions and sophisticated credit markets. Based on average USD exchange rates since 2000, Denmark, Norway and Switzerland top the league table for household debt per adult in 2012, with values above USD 100,000 (Table 4-4). This is roughly twice the level seen in Canada, Sweden, the USA, the UK and Singapore, with Ireland and the Netherlands sitting between the two groups. By these standards, the average debt per adult in Spain (USD 31,200), Portugal (USD 25,800), Italy (USD 23,900) and Greece (USD 19,000) looks quite modest.
Table 4-4 shows that average debt per adult increased during 2000–07 in all the high debt countries apart from Germany, where average debt has been flat, and Japan, where household debt has declined – possibly due in part to the ageing population, given the negative relationship between debt and age. Countries with the highest debt per adult showed little tendency towards debt reduction in the aftermath of the financial crisis: Ireland, the USA and Hong Kong are the main exceptions. Apart from Germany and Japan, only Hong Kong and Singapore have debt levels in 2012 which are close to the levels recorded at the start of the millennium.
Debt in proportion to wealth
Expressed as a fraction of net worth, household debt is typically 20%−30% of wealth in advanced economies, but much higher levels are sometimes recorded, for example in Ireland (44%), the Netherlands (45%) and Denmark (51%). The reasons lie with both the numerator and the denominator in the ratio of debt to assets. Countries that have a strong welfare state with generous public pensions provide less of a stimulus for households to accumulate financial assets. Public housing has a similar effect on the non-financial side, although its share of the total housing stock has been declining in most countries in recent decades, which makes this argument less compelling. Nevertheless, in Scandinavia and elsewhere, these forces make the debt to assets ratio higher by depressing the denominator.
Sophisticated financial institutions and easy access to credit are further reasons why debt is sometimes high. The impact of government policies can also be seen, for instance in high levels of student debt accompanied by a relaxed schedule for student debt repayment. Taking all of these factors into consideration, it is not so surprising that debt can amount to one-third of gross assets – and hence one half of net assets – in a country like Denmark.
The burden attached to the rise in household debt needs to be evaluated in the context of the substantial increase in personal wealth during the past decade. Despite the rise in wealth, in most countries where household debt exceeds USD 1 trillion, the ratio of debt to net worth rose on average by about 50% during the period 2000–08. Debt in the USA increased from 18.7% of net worth in 2000 to peak at 30.5% in 2008 before falling back to 21.7% in 2011. The UK exhibited a very similar pattern, with the debt ratio climbing from 15.2% to 23.4% between 2000 and 2008, subsequently dropping to 20% in 2012.The rise in the debt-wealth ratio was even more precipitous in the Netherlands and Spain, and although the increase abated slightly to 71% in the Netherlands, no reduction is evident in Spain, whose ratio is now 90% higher than it was in 2000.
Debt growth was also high in Italy, but started from a much lower base, with the result that the debt-wealth ratio of 11.1% in 2012 is not just the lowest for a developed nation in Table 4-4, but also below the average for the world as a whole, which is 17.7%. France (12.8%), Germany (16.4%) and Japan (16.6%) have now also fallen below the global average, with wealth in France growing robustly enough to reduce the debt ratio by about 10% during the past decade, and Germany managing to reduce the ratio by one-third, from 24.3% in 2000 to 16.4% in 2012. Singapore almost matched Germany’s performance in reducing the debt burden. Our estimates indicate that Malaysia and the Philippines may have done even better, although the data for these countries are less reliable.
Household debt in developing and transition countries
Because personal debt is often a sensitive issue, collecting data on debt poses special difficulties for household surveys. This, together with the greater prevalence of informal debt, may help explain why measured household debt is typically low in developing countries – less than 10% of net assets overall. But immature financial markets (and weak property rights) also mean that household demand for credit is often not satisfied. In addition, demand for credit may be constrained by the fact that even small amounts of debt can be a considerable burden for the very poor in developing countries, especially when usurious interest rates are charged.
In the developing world, the absolute level of debt is seldom more than USD 1,000 per adult, but exceptionally high levels – above USD 5,000 per adult – are evident in Brazil, Chile and South Africa (see Table 4-4). Similar levels of household debt are also associated with transition countries that have entered the European Union (EU), such as the Czech Republic, Hungary, Poland, Romania and Slovakia, as well as some that have not, such as Ukraine. At the bottom of the range, we estimate average debt to be below USD 300 in Indonesia, and around USD 200 in India and Vietnam. China (about USD 600) and Russia (about USD 1,300) are examples of intermediate countries.
Low absolute levels of debt make it sometimes appear that developing countries have escaped the trend towards rising household debt in recent years. Exactly the opposite is true. According to the estimates we report in Table 4-5, Malaysia and the Philippines are the only two developing countries for which debt per adult is likely to have grown less than the global average of 45% during 2000–12. Debt per adult more than doubled in Argentina, the Czech Republic, Mexico, Morocco and Uruguay, and more than trebled in Chile, Colombia, India and South Africa. In Indonesia and Slovakia, average debt rose by a factor of five, and in Hungary, Poland, Turkey and Vietnam by a factor of eight. But the biggest changes were recorded in other transition countries: Russia, where average debt increased by a factor of 20 between 2000 and 2007; and Romania and Ukraine, where average debt has seen a fiftyfold increase since 2000.
Are household debt levels sustainable?
The fact that the wealthiest and most economically successful countries tend to have relatively high levels of household debt suggests that debt is both a blessing and a curse. The problem is understanding how much household debt is needed to oil the wheels of economic progress without precipitating the crises of confidence seen recently in several European nations. Table 4-1 attempts to cast some light on this issue based on the cross-classification of countries according to their debt-wealth ratio and growth in debt per adult.
Several patterns are evident. First, high-income economies congregate in the upper left section of the table: in other words, they tend to have medium or high levels of household debt relative to assets, and low to medium debt growth in recent years. The Nordic region is firmly located within the high debt-medium debt growth category, and the Asian Tigers are typically located in the medium debt-low debt growth section, with Korea an outlier in this respect. The four upper left cells contain all of the G7 countries but, interestingly, no nation from Latin America.
A second feature is the high growth in debt witnessed in most transition countries in recent years. This is not surprising given the lack of investment opportunities and credit and mortgage facilities in the pre-reform era. What is perhaps unexpected is the speed at which Hungary, Poland, Slovakia and Ukraine have joined the group of countries for which household debt exceeds 20% of net worth. Many Eastern European countries experienced a debt-financed housing boom in the post-reform era, which, when it went into reverse, meant that lower levels of property assets were supporting high levels of mortgage debt. Also, in the high debt ratio-high debt growth category are two of the emerging market leaders – Brazil and South Africa – with Russia close by.
The cross-classification in Table 4-1 is too simplistic to provide a solid basis for policy lessons. Nevertheless, a high ratio of debt to net worth is not itself a negative signal for a country. Indeed, it is close to being a prerequisite for economic success. What is problematic is the speedy growth in household debt. It is worth noting that Greece, Hungary and the United Arab Emirates all appear in the upper right-hand section and all have made headlines in recent years with regard to debt problems. While these headline issues have not been directly linked to household borrowing, the high speed at which household debt has grown is perhaps indicative of a relaxed credit culture that can have further repercussions.
The household burden of government debt
The recent concern over debt sustainability has focused almost exclusively on sovereign debt and the vulnerability of the banking sector. Yet the degree to which governments can finance external debt in times of difficulty depends in part on the net assets of the household sector. More importantly, when considering whether their assets are sufficient to meet future consumption needs and emergencies, households should take account of the debt that governments are accumulating on their behalf.
We have assembled data on government financial assets and debt for the period 2000-11 for 26 countries: Australia, Austria, Belgium, Bulgaria, Canada, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Lithuania, the Netherlands, Norway, Poland, Portugal, Romania, Spain, Sweden, the United Kingdom and the United States. Although these data exclude off-balance sheet items such as non-funded state pensions, they nevertheless provide some indication of the net liabilities of governments, how these compare with household net worth, and how the position has changed over time, particularly after the financial crisis.
The overall situation is summarized in Table 4-6. In almost all countries, government liabilities exceeded government financial assets in 2011, leaving the government a net debtor. However, the governments of Bulgaria, Finland and Sweden are all net creditors, and Norway’s stabilization fund gives it a huge surplus, amounting to USD 199,000 per adult in 2011, equivalent to 15 times the net financial assets of households. The fact that Nordic countries have a high level of household debt is one of the reasons why government debt tends to be negatively correlated with household debt. Denmark, for example, has the highest household debt to wealth ratio in the world, yet net government debt amounts to just 3% of the net financial wealth of households. In contrast, Japan has moderate household debt, but this is offset by net government debt of USD 77,000 per adult, the highest of any country in our sample.
The negative relationship between government debt and household debt (shown in Figure 4.1) is consistent with so-called Ricardian equivalence, , much discussed since 1974 when Barro revived an idea first aired by Ricardo in 1820 (see Barro, 1974; 1979; and Ricardo, 1888). Ricardian Equivalence claims that forward-looking taxpayers will understand that an increase government debt must be paid for in the future through higher taxes. They will therefore save more or reduce their debts when government debt increases. In theory, under idealized conditions (including perfect foresight and a perfect capital market), each dollar rise in government debt would stimulate a dollar increase in household net worth.
As documented by Elmendorf and Mankiw (1999), Ricardian Equivalence has been subjected to extensive empirical testing. While these tests have been inconclusive overall, they have not highlighted the relationship between government debt and household debt across countries. Our finding of a significant negative relationship may well prompt further examination of the relationship between government debt and household liabilities based on international data.
Changes over time
Excluding the Nordic region, government net debt averaged 41% of household net financial assets in 2011. Countries with worse-than-average positions are Italy (49%), Japan (56%), Spain (56%), Poland (57%), Hungary (71%), Ireland (92%) and Greece (112%). With the exception of the Nordic countries (Norway, Finland, Denmark and Sweden), Table 4-7 shows that the government’s financial position worsened relative to household assets in all countries between 2000 and 2011, particularly after the 2008 financial crisis. Bulgaria, the Czech Republic, Lithuania and Romania all moved from a government surplus in 2000 to a deficit in 2011. The deterioration in Romania has been particularly severe, equivalent to wiping out all financial assets owned by households. In Australia, the government’s net financial position was relatively flat and close to being balanced until 2008, but it has since climbed to 18% of household net financial assets. Relative government debt has grown by 18% in the USA (from 14% to 32%) and by a similar amount in Hungary, Poland, Portugal, Spain and the UK. The rise was slightly higher in Japan (from 28% to 56%), and considerably higher in Ireland (17% to 92%) and Greece (59% to 112%).
Which countries have the greatest problems with government debt?
Among the countries with the highest levels of net government debt relative to household financial assets, the situation in Japan, Poland and Spain appears to be manageable, at least based on the evidence until 2011. In Hungary, government debt rose between 2000 and 2010, almost wiping out the total value of household financial assets, but it pulled back from the brink in 2011. Ireland appears more problematic. Net government debt was close to zero in 2007, but it has since grown at a faster rate than any other country, reaching 92% of household net financial assets in 2011. The equity market in Ireland was buoyant over the past year, which means that the situation may have eased in 2012. However, the overall signs remain worrisome for Irish citizens.
While the problems facing Hungary and Ireland are serious, they pale in comparison to those facing Greece. Household debt in Greece saw an almost six fold increase between 2000 and 2009, and afterwards edged lower to USD 20,400 per adult in 2011. The increase in debt was much faster than growth in financial assets. As a consequence, household debt rose from 12% of financial assets in 2000 to 57% in 2011. Government net debt per adult also increased over the period, rising 190% to USD 53,600 between 2000 and 2009, before declining to USD 32,500 in 2011. Greece is the only country whose net government debt exceeds total household financial assets, and this has been the case every year since 2008. Assigning government debt to households would have resulted in the Greek population having negative financial assets averaging USD 13,000 in 2008–10. While the situation has eased a little since then, it still results in negative net financial assets averaging USD 4,800 in 2011.
With the regular occurrence of sovereign debt crises, relatively little attention has been given to the parallel issue of personal debt. Yet household debt has transformed over the past 30 years from low-level borrowing mostly securitized on housing assets into wholesale credit seemingly available to anyone for any purpose. As a consequence, household debt as a proportion of income has doubled almost everywhere, and has on occasion exploded by a factor of ten or more.
Our analysis of household debt highlights a number of facts that may come as a surprise. For example, Canada now has the highest debt to income ratio among G7 countries, and Italy has the lowest. The countries with the highest levels of household debt per adult – Denmark, Norway and Switzerland – are among the wealthiest and most successful; the average debt in Greece, Italy, Portugal and Spain is much lower. Debt has risen significantly in developed countries over the past decade, but it is nowhere near the scale of the developing world, where almost every country has surpassed the global average of 45% growth during 2000-12.
While a high ratio of debt to net worth does not itself signify a problem for a country, it does appear to send a warning signal when combined with rapid growth in household debt. Greece, Hungary and the United Arab Emirates fall within this category and all have had problems with debt in recent years. These problems were not directly related to household debt, but rapid growth in personal debt in a highly indebted country is perhaps indicative of a relaxed credit environment that may have wider implications.
Contagion in the Eurozone links Ireland, Italy, Portugal and Spain with the problems in Greece. Our estimates of household assets and debts suggest that Greece is an outlier among Eurozone countries, and that the other countries are better placed to absorb the rise in government debt. However, the deterioration in Ireland’s position since 2008 remains a source of serious concern. Beyond the Eurozone, Hungary and Romania are the countries that need to be most carefully monitored.