Australians are addicted to debt but we can't afford to keep borrowing at current levels forever. A new report by a leading economist has found that in just 18 months time we may be spending as much of the national income on interest payments as we were in 1990 - when interest rates were at 17 per cent.

The report also finds that Australian households are now poorer after interest payments than they were in 2002.

In his report "Deeper in Debt: Australia's Addiction to Borrowed Money" released today for the Centre for Policy Development, Associate Professor of Economic & Finance at the University of Western Sydney Dr Steve Keen reveals that the ratio of Australia's private debt to GDP has grown by 4.2 per cent every year since 1964 and is currently 156 Per cent of GDP - exponential growth which cannot be sustained indefinitely.

"The sheer size of national private debt means that our economy currently relies on increased borrowing, rather than on actual income, for a sixth of its total activity. This is a big proportion and continues to grow," Dr Keen said.

Australia's level of irresponsible lending isn't as high as that which brought on the US subprime crisis, but because our rate of increase in debt is so much higher, the impact of any slowdown will be more severe here - and the pain will be much more widely spread, Dr Keen found.

"We cannot afford to reduce our borrowing without economic pain, but we simply have no other choice if we are to bring debt under control.

And we can't rely on higher house prices to balance the ledger - Keen finds that our houses aren't worth as much as we think they are, with prices now completely out of alignment with rental incomes and therefore highly vulnerable to an economic downturn or a further international credit crunch.

"The problem is confronting all of us - not just those who have got themselves into inappropriate debt, but all those who have assets, earn income, or live in homes. As the US subprime experience has shown, the repercussions of market failure in this area reach far beyond the unfortunate overcommitted borrowers and the dodgy lenders.

Dr Keen's report calls for a full public inquiry into Australia's household debt, taking in the impact of lending standards, housing affordability, negative gearing and capital gains tax.

Other reforms the report recommends include:

• Regulating lenders, not just deposit-takers. Regulators must uphold the principle that loans should be made based on the capacity to repay, not asset-price speculation;
• Addressing the lack of public housing and the tenuous position of renters, to reduce the incentives for people to take on loans they can't afford; and
• In the event of a debt-induced downturn, rethinking current policy approaches to inflation and government deficits.

Further information: Steve Keen - 0425 248 089 or Miriam Lyons - 0432 360 234

Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney and a fellow of the Centre for Policy Development.

Copies of the paper are available on request from the Centre for Policy Development - or download it from http://cpd.org.au/paper/deeper-debt