Budget dramas are all theatrics

At just 10 per cent of GDP and falling, Australia's net government debt is low enough to trigger concerns about future bond market liquidity. Calls to cut debt faster hold no water.

One of the biggest furphies doing the rounds is the significance of the increase in Australia’s government debt in the wake of the global financial crisis.

The level of net Commonwealth government debt in Australia is trivial. As at June 2012, it was $147.3 billion or just 10 per cent of GDP. So small is the level of debt that there is ongoing concern that it is too low to maintain liquidity in the bond market as the government’s fiscal consolidation continues.

Government debt is a critical element in all credit rating agencies’ assessments of the sovereign risks. Australia currently enjoys a triple-A credit rating from Moody's, Standard & Poor's and Fitch Ratings, which is a sign that they have little or no concern about the level of government debt. When Fitch upgraded Australia to triple-A at the end of 2011, it was the first time that Australia had ever achieved the highest possible assessment from all three agencies.

This has not stopped some scaremongering about the level of government debt. Andrew Robb, Shadow Minister for Finance, Deregulation and Debt Reduction said last year that "growth in the nation’s level of indebtedness since Labor came to power has been outstripped only by global financial crisis casualties Iceland and Ireland; it [the Coalition has] warned of a European-style budget crisis here.”

Gina Rinehart, mining tycoon and one of the richest people in the world, also noted Australia risks becoming another "Greece, Spain or Portugal" unless it cuts government debt and lifts its competitiveness.

These comments don’t hold any water.

Before the GFC hit the government’s finances, Australia had negative net government debt (financial assets) of 3.8 per cent of GDP. In 2011-12, net government debt peaked at 10.0 per cent of GDP, a widening of 13.8 per cent of GDP. The fiscal consolidation underway will see net government fall over the next few years and on current estimates, it will be around 8 per cent of GDP in 2014-15.

According to International Monetary Fund data, the average government debt-to-GDP ratio in the world economy rose 33.2 per cent of GDP between 2007 to 2013, from 45.9 per cent to 79.1 per cent of GDP. That is a widening more than twice that recorded in Australia and from a significantly worse starting point. In dollar terms, if Australia’s net debt was the average of the world’s major economies, it would be around $1.1 trillion and not under $150 billion as it is now.

In terms of some specifics of other countries, in Ireland net government debt rose from 11.1 per cent of GDP in 2007 to 107.6 per cent in 2013, a rise 96.5 per cent of GDP. Over the same time, net government debt in Iceland rose from 10.8 per cent of GDP to 64.4 per cent, a jump of 53.6 per cent.

Recall that Australia’s net government debt position widened by just 13.8 per cent of GDP and is peaking at 10 per cent.

The IMF data shows just how dramatic the fiscal and net government debt deterioration has been in other rich industrialised economies. In the US, the level of net government debt has widened by 39.5 per cent of GDP between 2007 and 2013, rising from 48.2 per cent to 87.7 per cent. Over the same time, net debt has risen by 26.3 per cent of GDP in France, 64.7 per cent of GDP in Japan, 50.2 per cent in the UK, but only 7.0 per cent of GDP in Germany (to 57.5 per cent) and 14.6 per cent of GDP in Canada (to 37.5 per cent).

Any sober analysis of Australia’s debt position in absolute terms and in comparison to the rest of the world shows how trivial the level of debt is in Australia.

The other issue to recall, it should go without saying, is what the debt has been used for. A range of fiscal stimulus measures during the GFC saw Australia avoid a recession, unlike most other comparable countries and the unemployment rate topped out below 6 per cent, again unlike most other countries. This stimulus was added to by a sharp fall in tax revenue as the automatic stabilisers kept money in the private sector as the expense of the government coffers.

It is also worth noting that because of the stimulus measures, over 1 million extra houses have insulation and every school has additional buildings or other infrastructure – long-term benefits from the stimulus.

Another issue to recall is that with fiscal consolidation now underway, the net debt-to-GDP ratio is starting to fall, even without a surplus in 2012-13.

Australia’s debt problem is no problem at all. If it is the biggest economic issue Australia is confronting at the moment, the outlook is better than good. It is time the economic debate switched to something more constructive rather than worrying about the spec of dust that is government net debt.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles