Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 202

Government debt: how much is too much?

The 2017 Federal Budget has turned attention as usual to the issue of government debt. Commonwealth governments ran a surplus during the mining boom from 2003-2008 but it has run deficits since the GFC to prop up employment and growth. The deficits have been funded by running up $500 billion (and rising) in debt. Is this too high? Can we afford it?

The first chart shows the history of annual Commonwealth government balances since Federation. The bars in the top section shows the annual government balance each year. We can see that surpluses (green bars) have been rare indeed. The pink bars in the lower section show debt as a percentage of national output (GDP) each year. The current level of debt at 25% of national output is higher than it has been since 1959.

The government ran rare surpluses during the mining boom from 2003-2008 thanks to high commodities prices but since the GFC a succession of big-spending governments have run up deficits to prop up employment and growth. Strategically timed spending sprees on ‘pink bats’ and ‘school halls’ meant we narrowly avoided an economic recession (arbitrarily defined as two consecutive quarters of negative national output growth), but the cost was a build-up of national debt that will take decades to repay.

 

Is the current debt to GDP ratio too high?

The main debt build-ups were due to the massive deficit spending in the two World Wars. The ratio of debt to national output also increased during the 1930s depression but it was not because of big spending and borrowing, it was because of the massive contraction in national output.

In the first half of the 20th century, Australia was seen as a high-risk borrower in global debt markets, suffering a default and full-scale Greece-style debt restructure in 1931. Australia regained respectability as a borrower in global debt markets after the post-war economic boom reduced debt in the 1950s.

The current level of Commonwealth government debt relative to national income is not high in historical terms but it is high in post-war terms. It is lower than almost every other country in the world today - but that doesn’t make it right. The current $500 billion pile of federal government debt is costing tax-payers $16 billion per year, or $44 million every day, or $1.70 per person per day. This sounds a lot but there is more to the story.

More important than the level of the debt is the affordability of the debt. The second chart shows the cost of servicing government debt in the upper section of the chart.

Government debt Click to enlarge

Here we see the cost of interest on this debt as a percentage of national income (GDP) in the red line and also as a percentage of government receipts (mainly tax revenues) in the black line.

The current interest burden is modest and affordable, at 4% of government revenues and just 1% of national income. This is lower than almost any other time since before World War 1, and lower than almost every other country in the world today. Market yields on government bonds have been rising since the middle of 2016 after the Brexit vote but are still at low levels. Rising bond yields don’t translate into higher interest payments until each bond matures in the future and is re-financed by another bond at a higher rate, which in some cases is 30 years into the future. Even if bond yields rise rapidly the interest cost will remain low for many years.

 

Based on affordability, the current debt is manageable

If the Commonwealth government were a company the board would be sacked for having a ‘lazy balance sheet’ and not borrowing enough to invest in productive assets for future growth.

But here’s the problem. Investing for the long-term future requires coherent vision, long term commitment and willingness to make tough decisions. These critical qualities have been sadly lacking in the recent succession of short-term revolving door governments in Canberra.

I don’t see this improving any time soon. Voting power continues to drift in favour of the aging population of people who have not saved enough for their retirement, at the expense of the young who will have to pay for the deficits for decades to come. The current addiction to debt and fear of electoral backlashes from painful reforms will probably continue. But why worry? About every 30 years, a mining boom comes along that delivers freakish commodities prices and windfall revenue gains.

The windfall revenue gains from the last mining boom were squandered on middle class welfare that is proving extremely hard to wind back. Let’s hope our kids and grand-kids handle the next one better.

 

Ashley Owen is Chief Investment Officer at privately-owned advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.

  •   18 May 2017
  • 3
  •      
  •   
banner

Most viewed in recent weeks

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

How inflation is quietly moving the goalposts on retirement

Inflation doesn’t just raise today’s bills - it quietly increases the amount needed to retire, while simultaneously making it harder to save. Three steps to take before June 30th to improve retirement outcomes.

Back to the future - Why indexing CGT is a good idea

A return to indexation of capital gains would be a fairer way to compensate households for the effects of inflation than the current discount. Importantly, it opens the door to future, broader reforms to stop the taxation of inflation.

Latest Updates

Investment strategies

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

Investment strategies

The whirlwind is upon us

Something unusual is happening in markets. The winners are pulling further ahead at an extraordinary pace. As return dispersion hits extreme levels, volatility is rising and the investing landscape is becoming harder to navigate.

Strategy

Inequality destabilises economies

Extreme wealth concentration is no longer just a side effect of growth. As inequality deepens, its consequences are shifting from a social concern to a broader threat to economic stability and democratic resilience.

Investment strategies

Have AI’s four horsemen arrived?

AI exuberance is colliding with economic reality. Cracks are emerging as spending surges, ROI remains uncertain and enterprise behaviour shifts. The next phase may look less like an expansion and more like a reckoning.

Taxation

Budget tax changes only scratch the surface. Here are 4 reforms Australia needs next

The 2026 budget has reignited Australia’s tax reform debate, but more work remains. Beneath the surface lies a harder question: what structural reforms are needed to make the country's tax system fit for the future?

Taxation

Negative gearing: quarantined, not killed

The Budget's negative gearing changes defer deductions rather than deny them, yet a worked example shows quarantining can halve the tax benefit's present value for buyers of established dwellings.

Investment strategies

Family offices have quietly taken over Australian private capital

In just four years, Australia's private capital landscape has transformed. We are seeing changes across who deploys capital, how deals are structured and why new platforms and investor pathways are rapidly emerging.

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.