In the next few months, the federal government’s gross debt is expected to hit $1 trillion. This big number is bound to get lots of political attention – the Coalition has even set up a dedicated online “debt clock” to mark the occasion.
It’s striking, however, that the investors who are lending our government the money aren’t really fussed about this milestone.
Government debt has gone up everywhere in the world and, compared with many countries, ours isn’t that high. Even as the bond markets have become more jittery lately, the concern has been more about the global threat of rising inflation, as opposed to anything specific to Australia.
So, should the rest of us be as nonchalant about the government’s debt heading to $1 trillion as the markets? Or should we be a bit more concerned about government debt, given taxpayers are ultimately on the hook for it, after all?
That $1 trillion dollar figure is financed by the government issuing IOUs – bonds – to the world. To the bond markets, $1 trillion is just another number. It needs to be compared with something to make it meaningful, just as a bank compares a mortgage to the income of the borrower.
One way to do this is to compare government debt against our economy’s size – gross domestic product (GDP). On this basis, our gross debt is 34 per cent of GDP, making our government less indebted than those of other wealthy countries. In the US, for example, political dysfunction has meant government debt has blown out to more than 120 per cent of GDP, an amount that’s expected to hit 145 per cent by 2035.
Another way to look at the situation is “net debt”, which takes into account financial assets held by the government such as the Future Fund (an investment fund for future public servant pensions). Our net debt as a share of GDP is close to where it was before the COVID-19 pandemic, at 19.9 per cent of GDP for the coming financial year, though it’s forecast to increase to almost 22 per cent by later this decade.
While the trillion-dollar debt is a classic “big number” that will grab political attention, the reaction in markets has been more muted. This month’s budget forecast some improvement in our future budget position, which was welcome news to markets.
This is reflected in a shrinking premium that Australia has faced to borrow in the bond markets, compared with the US, since the budget. Commonwealth Bank’s head of market strategy and rates research, Adam Donaldson, points out that the gap between the yield on Australian 10-year government bonds, compared with US 10-year bonds, has narrowed since the budget. He says that suggests reforms to the budget’s structural (or underlying) position were “well received” by the market.
One reason bond markets aren’t too worried is that the rest of the world is borrowing a lot, too. As explained in a paper from TCorp last week, public debt has ballooned around the world since the pandemic.
It’s common for public spending and debt to surge when governments support their economies during shocks but, in the past, the spending has returned to lower levels once the shock has passed. That hasn’t happened this time around.
There are legitimate reasons why: governments are spending more on defence and the green energy transition, while an ageing population also puts a greater demand on the public purse.
For the big money managers who fund our government debt, the fact most other countries have also run up big debts is important, because investing is a relative game. Investors have to put their money somewhere, and often there’ll be a “mandate” that says a certain amount must be in bonds. So if every other country is borrowing even more than us, making us look relatively prudent, the markets will keep financing us.
However, that doesn’t mean we can just ignore the government debt. Even if the bond markets may be comfortable enough with Australia’s public debt, there are still real drawbacks to having as much as we do.
It’s striking that the investors who are lending our government the money aren’t really fussed about this milestone.
Most obviously, all that borrowed money racks up interest. There’s nothing wrong with borrowing to fund long-term assets, or to shield the economy through a downturn. But we shouldn’t ignore that interest payments are becoming a growing demand on the government, leaving less capacity for spending on other things.
Budget papers show that, over the medium term, our interest bill will grow faster than spending on hospitals, defence, childcare subsidies or aged care. If bond yields rise – as they have lately because of global inflation fears– that only adds to the interest cost.
And the people who end up paying more of that interest will be future taxpayers – including younger generations. Independent economist Chris Richardson says that, given the budget’s focus on intergenerational fairness, he thinks younger generations should be focusing on this debt issue more than they are.
“My generation has seen stunning increases in Australian living standards and wealth, and yet we’re passing on rather more in debt than we should, and that’s a bit of an embarrassing fail,” he says.
Finally, having more debt gives governments less room to respond with fiscal spending during an economic crisis. Before the 2008 global financial crisis, for example, the federal government had no net debt, allowing plenty of capacity for the government to shield the economy from the shockwaves. For most of the time since, barring a couple of small surpluses, we’ve had deficits, which need to be financed by borrowing. As AMP chief economist Shane Oliver puts it: “It means there’s less money put aside for a rainy day. Other countries may be worse, but we shouldn’t necessarily compare ourselves to a bad bunch.”
The $1 trillion gross debt figure may just be a big number that is not particularly meaningful on its own. But that debt pile still has a cost, and it’s one that will be borne by future taxpayers.
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Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via X or email.