Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 380

Are debt and its servicing cost serious worries?

The world is swimming in debt, as high as it had been before the GFC in 2008, with government debt-bingeing establishing all-time records due to the mishandling of COVID-19 health-wise.

The world is heading for a debt level of 300% of GDP or more, Japan is nudging 400%, and four other countries are heading over 300% in 2020. Among the big 10 economies, our nearest neighbour - Indonesia - is the least indebted with less than 100% of GDP.

Australia joins the debt party

Until March 2020, Australia was relatively well-behaved, with a total debt of less than 250% of GDP. Our government debt, at 37% of GDP in 2019, was only bested in the developed world by Switzerland at 26%. The main risk was our household debt (mostly mortgage debt) at 120% of GDP.

All that changed with the announcement in the first half of 2020 that we would be spending $360 billion to fight COVID-19, despite there being less deaths from the pandemic than normal respiratory deaths (mainly the over-70s age group) in previous years.

On the Budget night, the cheque book came out again. Now we have prospects of a government debt of $1.7 trillion by end 2024, or over 80% of GDP. That would put Australia’s total debt closer to the 275% of GDP mark.

Is this serious? Yes, but not debilitating.

The economy will almost surely suffer more from the shutdowns, and general deprivation of commerce and liberty, including the controversial border closure of 2020. Around 1-in-7 businesses shut down in good years, or some 280,000 businesses of the total 2.3 million. That share may rise to 1-in-5 or 6 for a year or two.

Debt versus servicing costs

Debt is always less of an issue than its servicing cost be it as a share of government revenues, business revenues or household disposable incomes.

So, interest rates are just as important as the debt levels. The chart below provides perspective on government debt servicing costs via the 10-year government bond rates across various countries.

Australia’s bond rate means that, even if it climbed back to 2% by 2024, it would only account for 5% or less of all government revenue (taxes and other income).

The next chart shows the long history of 10-year bond interest rates, which have averaged 5.5% over the past 150 years, but are now less than 1% and seemingly at a record low.

But when converted to real interest rates, by deducting inflation, we are far from a record low. Indeed, there have been at least 15 years when the real interest rates were lower than in 2020.

What all this means is that the debt and its servicing is probably less of a problem than repairing and re-building the wrecked economy, especially in Victoria.

We can service the debt. But of course, if and when bond rates go back to 5% (a long way off it would seem), governments will pray for higher inflation for several years to dilute the debt mountain. That’s what happened in the 1950s, when inflation (including one year at 25.25% in 1953) diluted the WWII national debt of 110% of GDP to a very manageable share of GDP.

More serious than debt

The more serious problems for the next 5-10 years are:

  • How to get the economy back on its feet and restore our standard of living (GDP/capita) back to the March 2020 level before 2025.
  • What to do differently with the next pandemic, bound to arrive well before the end of this decade.
  • How to restore our international trade in the huge and fast-growing Asia region with the problems and tensions there, from COVID-19 (closed borders), trade wars and hegemony.

We need better long-term vision, innovation, reforms (I have covered the subjects of parliamentary, labour market, taxation and commerce reform previously), statesmanship and management than we have had over the past 10-15 years or more. And that goes for corporate Australia too: we are lagging well behind world best practice (WBP) innovation, performance and profitability.

That said, who of us would prefer to live elsewhere in this extraordinary and turbulent world of the third decade of this 21st century?

 

Phil Ruthven AO is Founder of the Ruthven Institute, Founder of IBISWorld and widely recognised as Australia’s leading futurist.

 

  •   21 October 2020
  • 3
  •      
  •   

RELATED ARTICLES

Australia’s default: who do you rescue?

Rising bond yields complicate the COVID recovery

Biden is stimulating an economy already enjoying a sugar hit

banner

Most viewed in recent weeks

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

13 million spare bedrooms: Rethinking Australia’s housing shortfall

We don’t have a housing shortage; we have housing misallocation. This explores why so many bedrooms go unused, what’s been tried before, and five things to unlock housing capacity – no new building required.

21 reasons we’re nearing the end of a secular bull market

Nearly all the indicators an investor would look for suggest that this secular bull market is approaching its end. My models forecast that the US is set for 0% annual returns over the next decade.

Making sense of record high markets as the world catches fire

The post-World War Two economic system is unravelling, leading to huge shifts in currency, bond and commodity markets, yet stocks seem oblivious to the chaos. This looks to history as a guide for what’s next.

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Latest Updates

Property

How cutting the CGT discount could help rebalance housing market

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers.

Investment strategies

The Ozempic moment for SaaS

Every investing cycle has its Ozempic moment, a narrative shock so compelling that the market briefly forgets that incumbents can and do adapt to transformative technology like AI.

Superannuation

Meg on SMSFs: Last word on Div 296 for a while

The best way to deal with the incoming Division 296 tax on superannuation is likely doing nothing. Earnings will be taxed regardless of where the money sits, so here are some important considerations.

Investment strategies

If people talk about a bubble, it’s unlikely to crash soon

It is almost impossible to identify a bubble in real time, and history shows they last far longer than we think, giving investors (perhaps misplaced) hope and short-sellers seemingly endless pain before the share price collapses.

Investment strategies

Seismic shifts that could drive private markets

Dealmaking appears to be on the mend, but investors could be well served to look through near-term trends toward six major themes that we think may drive private markets for years to come.

Latest from Morningstar

Corporations are winning the stock market. Here’s a new plan for everyone else

Retail investors have the worst trading record, according to a study of trading performance. Institutional investors weren't at the top either. Here are 6 ways to improve your odds.

Infrastructure

The bull case for Melbourne

A counterpoint to today’s prevailing narrative that Melbourne is the capital of a failing state defined by its strained public finances, COVID hangover and an opposition obsessed with undermining its own credibility.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.